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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            .
Commission file number 1-31443
HAWAIIAN HOLDINGS INC
(Exact name of registrant as specified in its charter)
Delaware
 
71-0879698
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
3375 Koapaka Street,
Suite G-350
 
 
Honolulu,
HI
 
96819
(Address of Principal Executive Offices)
 
(Zip Code)
(808) 835-3700
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock ($0.01 par value)
 
HA
 
NASDAQ Stock Market, LLC
 
 
 
 
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes     No 
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. Yes   No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
Accelerated filer 
 
 
Non-accelerated filer 
 
Smaller reporting company 
 
 
 
 
 
Emerging growth company 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Rule Act 12b-2). Yes     No 
The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was approximately $1.3 billion, computed by reference to the closing sale price of the Common Stock on the NASDAQ Global Select Market, on June 28, 2019, the last business day of the registrant's most recently completed second fiscal quarter.

As of February 7, 2020, 45,873,904 shares of Common Stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant's fiscal year ended December 31, 2019.
 


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views with respect to certain current and future events and financial performance. Such forward-looking statements include, without limitation, statements related to our financial statements and results of operations; any expectations of operating expenses, deferred revenue, interest rates, tax rates, income taxes, deferred tax assets, valuation allowances or other financial items; expectations regarding our operating performance for the first quarter and full year of 2020; statements regarding factors that may affect our operating results; statements regarding our goals, mission and areas of focus; statements regarding our working capital, and capital expenditures; statements related to funding our aircraft orders, growth strategy and market opportunities; statements regarding the effect of fleet changes on our business, operations and cost structure; statements regarding our ability to pay taxes with working capital; estimates of fair value measurements; statements related to aircraft maintenance and repair; statements related to cash flow from operations and seasonality; statements regarding our intention to pay quarterly dividends and the amounts thereof, if any; statements regarding our ability and intention to repurchase our shares; estimates of required funding of and contributions to our defined benefit pension and disability plans; estimates of annual fuel expenses and measure of the effects of fuel prices on our business; statements regarding our wages and benefits and labor costs and agreements; statements regarding the status and effects of federal and state legislation and regulations promulgated by the Federal Aviation Administration (FAA), U.S. Department of Transportation (DOT) and other regulatory agencies; statements related to airport rent rates and landing fees; statements related to our lease of the cargo and maintenance hangar at the Daniel K. Inouye International Airport; statements regarding a joint venture with Japan Airlines; statements regarding aircraft rent expense; statements regarding our total capacity and yields on routes; statements regarding potential dilution of our securities; statements related to our frequent flyer program; statements related to our hedging program and the effects of our fuel and currency risk hedging policies; statements concerning accounting principles, policies, standards, estimates, and the effect of the adoption thereof; statements regarding our net operating loss carryforwards; statements regarding our credit card holdback; statements regarding our debt or lease obligations and financing arrangements; statements regarding our financing needs; statements related to risk management, credit risks, and air traffic liability; statements related to future U.S. and global economic conditions or performance; statements related to changes in our fleet plan and related cash outlays; statements related to expected delivery of new aircraft and associated costs; statements related to the effects of any litigation on our operations or business; statements related to competition on our routes; statements related to continuous investments in technology and systems; and statements as to other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Words such as "expects," "anticipates," "projects," "intends," "plans," "believes," "estimates," "could," "would," "will," "might," "may," variations of such words, and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties, and assumptions relating to our operations and business environment, all of which may cause our actual results to be materially different from any future results, expressed or implied, in these forward-looking statements.
Factors that could affect such forward-looking statements include, but are not limited to: our ability to accurately forecast quarterly and annual results; global economic volatility; macroeconomic developments; political developments; our dependence on the tourism industry; the price and availability of fuel; foreign currency exchange rate fluctuations; competitive pressures, including the impact of increasing industry capacity in the markets in which we compete; fluctuations in demand for transportation in the markets in which we operate, including due to the occurrence of natural disasters, such as hurricanes, volcanic eruptions, earthquakes, and tsunamis; maintenance of privacy and security of customer-related information and compliance with applicable federal and foreign privacy or data security regulations or standards; our dependence on technology and automated systems; our reliance on third-party contractors; satisfactory labor relations; our ability to attract and retain qualified personnel and key executives; successful implementation of growth strategy and cost reduction goals; adverse publicity; risks related to the airline industry; our ability to obtain and maintain adequate facilities and infrastructure; seasonal and cyclical volatility; the effect of applicable state, federal and foreign laws and regulations; increases in insurance costs or reductions in coverage; the limited number of suppliers for aircraft, aircraft engines and parts; our existing aircraft purchase agreements; delays in aircraft or engine deliveries or other loss of fleet capacity; our ability to continue to generate sufficient cash flow to support the payment of a quarterly dividend; changes in our future capital needs; fluctuations in our share price; our financial liquidity; and our ability to implement our growth strategy. The risks, uncertainties, and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements also include those discussed under the heading "Risk Factors" in Item 1A in this Annual Report on Form 10-K and the risks, uncertainties and assumptions discussed from time to time in our public filings and public announcements. All forward-looking statements included in this report are based on information available to us as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date hereof.


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PART I
ITEM 1.    BUSINESS.
Overview
Hawaiian Holdings, Inc. (the Company, Holdings, we, us, and our) is a holding company incorporated in the State of Delaware. The Company's primary asset is sole ownership of all issued and outstanding shares of common stock of Hawaiian Airlines, Inc. (Hawaiian). Hawaiian was originally incorporated in January 1929 under the laws of the Territory of Hawai'i and became our indirect wholly-owned subsidiary pursuant to a corporate restructuring that was consummated in August 2002. Hawaiian became a Delaware corporation and the Company's direct wholly-owned subsidiary concurrent with its reorganization and reacquisition by the Company in June 2005.
Our Business
We are engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the Neighbor Island routes) and between the Hawaiian Islands and certain cities in the United States (the North America routes together with the Neighbor Island routes, the Domestic routes), and between the Hawaiian Islands and the South Pacific, Australia, New Zealand and Asia (the International routes), collectively referred to as our Scheduled Operations. We offer non-stop service to Hawai'i from more U.S. gateway cities (13) than any other airline, and also provide approximately 170 daily flights between the Hawaiian Islands. In addition, we operate various charter flights.
We are the longest serving airline, as well as the largest airline headquartered, in the State of Hawai'i, and the 10th largest domestic airline in the United States based on revenue passenger miles (RPMs) reported by the Research and Innovative Technology Administration Bureau of Transportation Services as of October 2019, the latest data available.
At December 31, 2019, our fleet consisted of 20 Boeing 717-200 aircraft for the Neighbor Island routes and 24 Airbus A330-200 aircraft and 17 Airbus A321-200 for the North America and International routes (inclusive of charter flights). We also own four ATR42 aircraft for the "Ohana by Hawaiian" Neighbor Island service and three ATR72 aircraft for our Neighbor Island cargo operations. During the first quarter of 2019, we retired the last of our Boeing 767-300 fleet, completing the transition to our A321 aircraft, and allowing for optimization of our products and better management of capacity.
Our goal is to be the number one destination carrier serving Hawai'i. We are devoted to the travel needs of the residents of and visitors to Hawai'i and we offer a unique travel experience. We are strongly rooted in the culture and people of Hawai'i and we seek to provide high quality service to our customers that exemplifies the spirit of Aloha.
Outlook
Our mission is to continue to grow a profitable airline with a passion for excellence, our customers, our people and the spirit of Hawai'i. In 2020, we will continue to focus on strengthening our competitive position in the markets that we serve primarily by continuing to mature the routes we launched over the past decade, improving our long term competitive cost structure, improving the guest experience by making travel effortless and furthering our segmentation efforts through our offering of additional value-added products and services.
Flight Operations
Our flight operations are based in Honolulu, Hawai'i. At December 31, 2019, we operated 260 scheduled flights with:
Daily service on our North America routes between the State of Hawai'i and Long Beach, Los Angeles, Oakland, Sacramento, San Diego, San Francisco, and San Jose, California; Las Vegas, Nevada; Phoenix, Arizona; Portland, Oregon; Seattle, Washington; and New York City, New York; and scheduled service between the State of Hawai'i and Boston, Massachusetts.
Daily service on our Neighbor Island routes among the six major islands of the State of Hawai'i.
Daily service on our International routes between the State of Hawai'i and Sydney, Australia; Tokyo (Haneda and Narita) and Osaka, Japan; and scheduled service between the State of Hawai'i and Pago Pago, American Samoa; Papeete, Tahiti; Brisbane, Australia; Auckland, New Zealand; Sapporo, Japan; Fukuoka, Japan; and Seoul, South Korea.
Various ad hoc charters.

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Fuel
Our results of operations are significantly impacted by changes in the price and availability of aircraft fuel. The following table shows our aircraft fuel consumption and costs:
Year
Gallons
consumed
 
Total cost,
including taxes
 
Average cost
per gallon
 
Percent of
operating expenses
 
(in thousands)
 
 
 
 
2019
270,001

 
$
542,573

 
$
2.01

 
21.7
%
2018
273,783

 
$
599,544

 
$
2.19

 
23.8
%
2017
259,915

 
$
440,383

 
$
1.69

 
19.9
%
As illustrated by the table above, fuel costs constitute a significant portion of our operating expenses. We purchase aircraft fuel at prevailing market prices, and seek to manage economic risks associated with fluctuations in aircraft fuel prices by entering into various derivative financial instruments.
Aircraft Maintenance
Our aircraft maintenance programs consist of a series of phased or continuous checks for each aircraft type. These checks are performed at specified intervals measured by calendar months, time flown, and by the number of takeoffs and landings, or cycles operated. In addition, we perform inspections, repairs, and modifications of our aircraft in response to Federal Aviation Administration (FAA) directives. We perform checks ranging from "walk around" inspections by our pilots before each flight's departure to major overhauls of the airframes which can take several weeks to complete. Aircraft engines are subject to phased maintenance programs designed to detect and remedy potential problems before they occur. Certain airframe and engine parts and components, whose service lives are time or cycle controlled, are replaced or refurbished prior to the expiration of their time or cycle limits. We have contracts with third parties to provide certain maintenance on our aircraft and aircraft engines.
Marketing and Ticket Distribution
We utilize various distribution channels for marketing and ticket distribution including our website www.hawaiianairlines.com, primarily for our North America and Neighbor Island routes, and travel agencies and wholesale distributors primarily for our International routes.
Our website is available in English, Japanese, Korean, and Chinese and offers our customers information on our flight schedules, information on our HawaiianMiles frequent flyer program, the ability to book reservations on our flights or connecting flights with any of our code-share partners, the status of our flights as well as the ability to purchase hotel, car and vacation packages. We also distribute our fares through online travel agencies.
Frequent Flyer Program
The HawaiianMiles frequent flyer program was initiated in 1983 to encourage and develop customer loyalty. HawaiianMiles allows passengers to earn mileage credits by flying with us and our partner carriers. In addition, members earn mileage credits for patronage with our other program partners, including credit card issuers, hotels, car rental firms, and general merchants pursuant to our exchange partnership agreements. We also sell mileage credits to other companies participating in the program.
HawaiianMiles members have a choice of various awards based on accumulated mileage credits, with most of the awards being redeemed for free air travel on Hawaiian.
HawaiianMiles accounts with no activity (frequent flyer miles earned or redeemed) for 18 months automatically expire. The number of free travel awards used for travel on Hawaiian was approximately 720,000 in 2019. The number of free travel awards as a percentage of total revenue passengers was approximately 6% in 2019. We believe displacement of revenue passengers by passengers using free travel awards is minimal due to our ability to manage frequent flyer seat inventory, and the relatively low ratio of free award usage to total revenue passengers.
Code-Share and Other Alliances
Together with Japan Airlines, we filed an application with the U.S. Department of Transportation (DOT) and Japan's Ministry of Land, Infrastructure, Transport and Tourism (MLIT) seeking antitrust immunity (ATI) to create a joint venture that promises significant consumer benefits and the opportunity for service expansion. The initial partnership launched in March 2018 with code-share (one carrier placing its name and flight numbers, or code, on flights operated by the other carrier) flights between Japan and Hawai'i. We further enhanced our comprehensive partnership with Japan Airlines with the announcement of reciprocal frequent flyer benefits for HawaiianMiles and JAL Mileage Bank members in October 2018. In September 2019, we received a tentative ruling from DOT to approve our joint venture excluding antitrust immunity. In November 2019, we

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submitted a substantive response to the tentative DOT ruling addressing their areas of concern and seeking reconsideration of their preliminary determination regarding ATI. If our revised application results in approval of ATI by the DOT, we anticipate that operations under the joint venture, including all of the expected benefits thereunder, will commence in late 2020 or early 2021.

We also have marketing alliances with other airlines that provide reciprocal frequent flyer mileage accrual and redemption privileges and code-shares on certain flights. These programs enhance our revenue opportunities by:
increasing value to our customers by providing easier access to more travel destinations and better mileage accrual/redemption opportunities;
giving customers access to more connecting traffic from other airlines; and
providing members of our alliance partners' frequent flyer programs an opportunity to travel on our system while earning mileage credit in the alliance partners' programs.
Our marketing alliances with other airlines as of December 31, 2019 were as follows:
 
Hawaiian Miles
Frequent Flyer
Agreement
 
Other Airline
Frequent Flyer
Agreement
 
Code-share—Hawaiian
Flight # on Flights
Operated by Other
Airline
 
Code-share—Other
Airline Flight # on
Flights Operated by
Hawaiian
Air China
No
 
No
 
No
 
Yes
American Airlines
No
 
Yes
 
No
 
Yes
China Airlines
Yes
 
Yes
 
Yes
 
Yes
Delta Air Lines
No
 
Yes
 
No
 
Yes
Japan Airlines
Yes
 
Yes
 
Yes
 
Yes
JetBlue
Yes
 
Yes
 
Yes
 
Yes
Korean Air
Yes
 
Yes
 
Yes
 
Yes
Philippine Airlines
No
 
No
 
No
 
Yes
Turkish Airlines
No
 
No
 
No
 
Yes
United Airlines
No
 
Yes
 
No
 
Yes
Virgin Atlantic Airways
Yes
 
Yes
 
Yes
 
No
Virgin Australia
Yes
 
Yes
 
No
 
Yes
Competition
The airline industry is highly competitive. We believe that the principal competitive factors in the airline industry are:
Fares;
Flight frequency and schedule;
Customer service;
On-time performance and reliability;
Name recognition;
Marketing affiliations;
Frequent flyer benefits;
Aircraft type;
Safety record; and
In-flight services.
Domestic—We face multiple competitors on our North America routes including major network carriers such as Alaska (AS), American Airlines (AA), United Airlines (UA), and Delta Airlines (DL). In addition, Southwest Airlines (WN) launched service to, from and within the islands of Hawai'i in 2019 and is expected to significantly expand capacity in 2020. Various charter companies also provide non-scheduled service to Hawai'i, mostly under public charter arrangements. Our Neighbor Island competitors consist of intra-island carriers, which include Mokulele Airlines and a number of other "air taxi" companies.
International—Currently, we are the only provider of direct service between Honolulu and each of Sapporo, Japan; Fukuoka, Japan; Pago Pago, American Samoa; and Papeete, Tahiti. However, we face multiple competitors from both domestic and foreign carriers on our other international routes.

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Employees
As of December 31, 2019, we had 7,437 active employees, of whom approximately 83% were covered by labor agreements with the following organized labor groups:
Employee Group
 
Represented by
 
Number of Employees
 
Agreement amendable on (*)
Flight deck crew members
 
Air Line Pilots Association (ALPA)
 
869

 
July 1, 2022
Cabin crew members
 
Association of Flight Attendants (AFA)
 
2,151

 
January 1, 2017 (**)
Maintenance and engineering personnel
 
International Association of Machinists and Aerospace Workers (IAM-M)
 
1,128

 
January 1, 2021
Clerical
 
IAM-C
 
1,991

 
January 1, 2021
Flight dispatch personnel
 
Transport Workers Union (TWU)
 
54

 
August 1, 2021
(*) Our relations with labor unions representing our airline employees are governed by the Railway Labor Act of 1926. Under the Railway Labor Act, a collective bargaining agreement between us and the labor unions does not expire, but instead becomes amendable as of a stated date if either party wishes to modify the terms of the agreement.
(**) As of December 31, 2019, contract negotiations are ongoing with the AFA.
Seasonality
Hawai'i is a popular vacation destination for travelers. For that reason, our operations and financial results are subject to substantial seasonal and cyclical volatility, primarily due to leisure and holiday travel patterns. Demand levels are typically weaker in the first quarter of the year with stronger demand periods occurring during June, July, August, and December. We may adjust our pricing or the availability of particular fares to obtain an optimal passenger load factor depending on seasonal demand differences.
Customers
Our business is not dependent upon any single customer or a few customers. The loss of any one customer would not have a material adverse effect on our business.
Regulation
Our business is subject to extensive and evolving international, federal, state and local laws and regulations. Many governmental agencies regularly examine our operations to monitor compliance with applicable laws and regulations. Governmental authorities can enforce compliance with applicable laws and regulations and obtain injunctions or impose civil or criminal penalties or modify, suspend, or revoke our operating certificates in case of violations.
Industry Regulations
We are subject to the regulatory jurisdiction of the DOT and the Federal Aviation Administration (FAA). The DOT has jurisdiction over international routes and fares for some countries (based upon treaty relations with those countries), consumer protection policies including baggage liability, denied boarding compensation, and unfair competitive practices as set forth in the Airline Deregulation Act of 1978. The FAA has regulatory jurisdiction over flight operations, including equipment, ground facilities, security systems, maintenance, and other safety matters. Pursuant to these regulations, we have established, and the FAA has approved, a maintenance program for each type of aircraft we operate that provides for the ongoing maintenance of our aircraft, ranging from frequent routine inspections to major overhauls.
Maintenance Directives
The FAA approves all airline maintenance programs and modifications to such programs. In addition, the FAA licenses the repair stations and mechanics that perform inspections, repairs and overhauls, as well as the inspectors who monitor the work.
The FAA frequently issues airworthiness directives in response to specific incidents or reports by operators or manufacturers, requiring operators of specified equipment types to perform prescribed inspections, repairs or modifications within stated time periods or numbers of cycles.

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Airport Security
The Aviation and Transportation Security Act (ATSA) mandates that the Transportation Security Administration (TSA) provide screening of all passengers and property, including mail, cargo, carry-on and checked baggage, and other articles that will be carried aboard a passenger aircraft. Under the ATSA, substantially all security screeners at airports are federal employees and airline and airport security is overseen and performed by federal employees, including security managers, law enforcement officers, and Federal Air Marshals. The ATSA also provides for increased security on flight decks of aircraft (and requires Federal Air Marshals to be present on certain flights), improved airport perimeter access security, airline crew security training, enhanced security screening of passengers, baggage, cargo, mail, employees and vendors, enhanced training and qualifications of security screening personnel, provision of passenger data to U.S. Customs and Border Protection and enhanced background checks.
The TSA also has the authority to impose additional fees on air carriers, if necessary, to cover additional federal aviation security costs.
Environmental and Employee Safety and Health
We are subject to various laws and regulations concerning environmental matters and employee safety and health in the U.S. and other countries in which we do business. Many aspects of airlines' operations are subject to increasingly stringent federal, state, local, and foreign laws protecting the environment. U.S. federal laws that have a particular impact on us include the Airport Noise and Capacity Act of 1990, the Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation, and Liability Act. Certain of our operations are also subject to the oversight of the Occupational Safety and Health Administration (OSHA) concerning employee safety and health matters. The U.S. Environmental Protection Agency (EPA), OSHA, and other federal agencies have been authorized to promulgate regulations that affect our operations. In addition to these federal activities, states have been delegated certain authority under the aforementioned federal statutes. Many state and local governments have adopted environmental and employee safety and health laws and regulations, some of which are similar to or stricter than federal requirements, such as California.
The EPA is authorized to regulate aircraft emissions and has historically implemented emissions control standards previously adopted by the International Civil Aviation Organization. Our aircraft comply with the existing EPA standards as applicable by engine design date.
We seek to minimize the impact of carbon emissions from our operations through reductions in our fuel consumption and other efforts. We have reduced the fuel needs of our aircraft fleet through the retirement and replacement of certain aircraft in our fleet with newer, more fuel efficient aircraft. In addition, we have implemented fuel saving procedures in our flight and ground support operations that further reduce carbon emissions. We are also supporting initiatives to develop alternative fuels and efforts to modernize the air traffic control system in the U.S. as part of our efforts to reduce our emissions and minimize our impact on the environment.
Noise Abatement
Under the Airport Noise and Capacity Act, the DOT allows local airport authorities to implement procedures designed to abate special noise problems, provided such procedures do not unreasonably interfere with interstate and foreign commerce, or the national transportation system. Certain airports, including the major airports at Los Angeles, San Diego, San Francisco, and San Jose, California; Sydney, Australia; and Tokyo, Japan, have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of such operations. Local authorities at other airports could consider adopting similar noise restrictions. In some instances, these restrictions have caused curtailments in services or increases in operating costs, and such restrictions could limit our ability to expand our operations.
Civil Reserve Air Fleet Program
The U.S. Department of Defense regulates the Civil Reserve Air Fleet (CRAF) and government charters. We have elected to participate in the CRAF program by agreeing to make aircraft available to the federal government for use by the U.S. military under certain stages of readiness related to national emergencies. The program is a standby arrangement that allows the U.S. Department of Defense U.S. Transportation Command to call on as many as 12 contractually committed Hawaiian aircraft and crews to supplement military airlift capabilities. None of our aircraft are presently mobilized under this program.
Other Regulations
The State of Hawai'i is uniquely dependent upon air transportation. The Hawai'i state legislature has enacted legislation that addresses this concern.

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Other aspects of airline operations are subject to regulation or oversight by federal agencies other than the FAA and the DOT. Federal antitrust laws are enforced by the U.S. Department of Justice. The U.S. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services provided by our cargo services. Labor relations in the air transportation industry are generally regulated under the Railway Labor Act. We and other airlines certificated prior to October 24, 1978 are also subject to preferential hiring rights granted by the Airline Deregulation Act to certain airline employees who have been furloughed or terminated (other than for cause). The Federal Communications Commission issues licenses and regulates the use of all communications frequencies assigned to us and other airlines. There is increased focus on consumer protection both on the federal and state level. We cannot always accurately predict the cost of such requirements on our operations.
Additional laws and regulations are proposed from time to time, which could significantly increase the cost of airline operations by imposing additional requirements or restrictions. U.S. law restricts the ownership of U.S. airlines to corporations where no more than 25% of the voting stock may be held by non-U.S. citizens and the airline must be under the actual control of U.S. citizens. The President and two thirds of the Board of Directors and other managing officers must also be U.S. citizens. Regulations also have been considered from time to time that would prohibit or restrict the ownership and/or transfer of airline routes or takeoff and landing slots and authorizations. Also, the award of international routes to U.S. carriers (and their retention) is regulated by treaties and related agreements between the U.S. and foreign governments, which are amended from time to time. We cannot predict what laws and regulations will be adopted or what changes to international air transportation treaties will be adopted, if any, or how we will be affected by those changes.
Available Information
General information about us, including the charters for the committees of our Board of Directors can be found at https://www.hawaiianairlines.com. 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 that we file with the Securities and Exchange Commission (SEC) are available for download, free of charge, on our website. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, which can be found at http://www.sec.gov.
We also use the investor relations section of our website https://newsroom.hawaiianairlines.com/investor-relations and our website (https://www.hawaiianairlines.com) as a means of disclosing material information and for complying with our disclosure obligations under Regulation FD.
Information on our website is not incorporated into this Annual Report on Form 10-K or our other securities filings and is not a part of such filings.
ITEM 1A.    RISK FACTORS.
In addition to the risks identified elsewhere in this report, the following risk factors apply to our business, results of operations, and financial conditions.
ECONOMIC RISKS
Our business is affected by global economic volatility.
Our business and results of operations are significantly impacted by general world-wide economic conditions. Demand for discretionary purchases including air travel and vacations to, from and within the Hawaiian Islands remains unpredictable. Deterioration in demand resulting from economic uncertainty or another recession may result in a reduction in our passenger traffic and/or increased competitive pressure on fares in the markets we serve, which would negatively impact our results of operations and financial condition. We cannot assure that we would be able to offset such revenue reductions by reducing our costs.

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Our business is highly dependent on tourism to, from, and amongst the Hawaiian Islands and our financial results could suffer if there is a downturn in tourism levels.
Our principal base of operations is in Hawai'i and our revenue is linked primarily to the number of travelers (mainly tourists) to, from and amongst the Hawaiian Islands. Hawai'i tourism levels are affected by the political and economic climate in Hawai'i's main tourism markets, the availability of hotel accommodations, the popularity of Hawai'i as a tourist destination relative to other vacation destinations, and other global factors, including natural disasters, safety, and security. From time to time, various events and industry specific problems such as labor strikes have had a negative impact on tourism in Hawai'i. The occurrence of natural disasters, such as hurricanes, earthquakes, volcanic eruptions, and tsunamis, in Hawai'i or other parts of the world, could also have a material adverse effect on Hawai'i tourism. In addition, the potential or actual occurrence of terrorist attacks, wars, and the threat of other negative world events have had, and may in the future have, a material adverse effect on Hawai'i tourism. A decline in the level of Hawai'i passenger traffic could have a material adverse effect on our results of operations and financial condition.
Our business is highly dependent on the price and availability of fuel.
Our results and operations are heavily impacted by the price and availability of jet fuel. The cost and availability of jet fuel remains volatile and is subject to political, economic, and market factors that are generally outside of our control. Prices may be affected by many factors including, without limitation, the impact of political instability, crude oil production and refining capacity, unexpected changes in the availability of petroleum products due to disruptions to distribution systems or refineries, unpredicted increases in demand due to weather or the pace of global economic growth, inventory reserve levels of crude oil and other petroleum products, the relative fluctuation between the U.S. dollar and other major currencies, and the actions of speculators in commodity markets. Because of the effects of these factors on the price and availability of jet fuel, the cost and future availability of fuel cannot be predicted with any degree of certainty. Also, due to the competitive nature of the airline industry, there can be no assurance that we will be able to increase our fares or other fees to sufficiently offset any increase in fuel prices.
While, we enter into derivative agreements to protect against the volatility of fuel costs, there is no assurance that such agreements will protect us during unfavorable market conditions or that our counterparties will be able to perform under these hedge arrangements.
See Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for further information regarding our exposure to the price of fuel.
Our business is exposed to foreign currency exchange rate fluctuations.
Our business is expanding internationally with an increasing percentage of our passenger revenue generated from our International routes. The fluctuation of the U.S. dollar relative to foreign currencies can significantly affect our results of operations and financial condition. To manage the effects of fluctuating exchange rates, we periodically enter into foreign currency forward contracts and execute payment of expenditures in those locations in local currency. We entered into Japanese Yen denominated debt agreements totaling $227.9 million and $86.5 million in 2019 and 2018, respectively. There is no assurance that such agreements will protect us against foreign currency exchange rate fluctuations during unfavorable market conditions or that our counterparties will be able to perform under these hedge arrangements.
See Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for further information regarding our exposure to foreign currency exchange rates.
COMPETITIVE ENVIRONMENT RISKS
We operate in an extremely competitive environment.
The airline industry is characterized by low profit margins, high fixed costs, and significant price competition. We compete with other airlines on all of our Domestic and International routes. The commencement of, or increase in, service on our routes by existing or new carriers at competitive prices could negatively impact our operating results. Many of our competitors on our North America and International routes are much larger and have greater financial resources and brand recognition than we do. Aggressive marketing tactics or a prolonged fare competition initiated by one or more of these competitors could adversely affect our financial resources and our ability to compete in these markets. Since airline markets have few natural barriers to entry, we also face the constant threat of new entrants in all of our markets.

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Additional capacity to or within Hawai'i, whether from network carriers or LCCs, could decrease our share of the markets in which we operate, could cause a decline in our yields, or both, which could have a material adverse effect on our results of operations and financial condition.
The concentration of our business within Hawai'i, and between Hawai'i and the U.S. mainland, provides little diversification of our revenue.
During 2019, approximately 74% of our passenger revenue was generated from our Domestic routes. Many of our competitors, particularly major network carriers with whom we compete on our North America routes, enjoy greater geographical diversification of their revenue. A reduction in the level of demand for travel to, from, and within Hawai'i, or an increase in the level of industry capacity on these routes, may reduce the revenue we are able to generate and adversely affect our financial results. As these routes account for a significantly higher proportion of our revenue than they do for many of our competitors, such a reduction would have a relatively greater adverse effect on our financial results.
Our business is affected by the competitive advantages held by network carriers in the North America market.
During 2019, approximately 54% of our passenger revenue was generated from our North America routes. The majority of competition on our North America routes is from network carriers such as Alaska Airlines, American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines, all of whom have a number of competitive advantages. Primarily, network carriers generate passenger traffic from and throughout the U.S. mainland, which enables them to attract higher customer traffic levels as compared to us.
In contrast, we lack a comparable direct network to feed passengers to our North America flights and are therefore more reliant on passenger demand in the specific cities we serve. We also rely on our code-share partner agreements (e.g. with JetBlue) to provide customers access to and from North American destinations currently unserved by us. Most network carriers operate from hubs, which can provide a built-in market of passengers depending on the economic strength of the hub city and the size of the customer group that frequents the airline. Our Honolulu and Maui hubs do not originate a large proportion of North American travel, nor do they have the population or potential customer franchise of a larger city to provide us with a built-in market. Passengers in the North American market, for the most part, do not originate in Honolulu, but on the U.S. mainland, making Honolulu primarily a destination rather than an origin of passenger traffic.
Our Neighbor Island routes are affected by increased capacity provided by our competitors.
During 2019, approximately 20% of our passenger revenue was generated from our Neighbor Island routes. Although we enjoy a strong competitive position on our Neighbor Island routes, our competitors could increase capacity to and within Hawai'i either by introducing new routes or increasing the frequency of existing routes from North America to the Neighbor Islands or by the introduction of additional flights within the Neighbor Islands. This additional capacity could have the effect of decreasing our share of traffic on our Neighbor Island routes, which could have a material adverse effect on our results of operations and financial condition.
Our International routes are affected by competition from domestic and foreign carriers.
During 2019, approximately 26% of our passenger revenue was generated from our International routes. Our competitors on these routes include both domestic and foreign carriers. Both domestic and foreign competitors have a number of competitive advantages that may enable them to attract higher customer traffic levels as compared to us.
Many of our domestic competitors are members of airline alliances, which provide customers access to each participating airline's international network, allowing for convenience and connectivity to their destinations. These alliances formed by our domestic competitors have increased in recent years. In some instances, our domestic competitors have been granted antitrust exemptions to form joint venture arrangements in certain geographies, further deepening their cooperation on certain routes. To mitigate this risk, we rely on code-share agreements with partner airlines to provide customers access to international destinations currently unserved by us.
Many of our foreign competitors are network carriers that benefit from network feed to support International routes on which we compete. In contrast, we lack a comparable direct network to feed passengers to our International flights, and are therefore more reliant on passenger demand in the specific destinations that we serve. Most network carriers operate from hubs, which can provide a built-in home base market of passengers. Passengers on our International routes, for the most part, do not originate in Hawai'i, but rather internationally, in these foreign carriers' home bases. We also rely on our code-share agreements

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and our relationships with travel agencies and wholesale distributors to provide customers access to and from International destinations currently unserved by us.
INFORMATION TECHNOLOGY AND THIRD-PARTY RISKS
If we do not maintain the privacy and security of personal information or other information relating to our customers or others, or fail to comply with applicable U.S. and foreign privacy, data protection, or data security laws or security standards imposed by our commercial partners, our reputation could be damaged, we could incur substantial additional costs, and we could become subject to litigation or regulatory penalties.
We receive, retain, transmit and otherwise process personal information and other information about our customers and other individuals, including our employees and contractors, and we are subject to increasing legislative, regulatory and customer focus on privacy, data protection, and data security both domestically and internationally. Numerous laws and regulations in the U.S. and in various other jurisdictions in which we operate relate to privacy, data protection, and security, including laws and regulations regarding the collection, processing, storage, sharing, disclosure, use and security of personal information and other data from and about our customers and other individuals. The scope of these laws and regulations is changing, subject to differing interpretations, may be costly to comply with, and may be inconsistent among countries and jurisdictions or conflict with other obligations of ours.
A number of our commercial partners, including credit card companies, have imposed data security standards or other obligations relating to privacy, data protection, or data security upon us. We strive to comply with applicable laws, regulations, policies, and contractual and other legal obligations relating to privacy, data protection, and data security. However, these legal, contractual, and other obligations may be interpreted and applied in new ways and/or in manners that are inconsistent, and may conflict with other rules or our practices. Data privacy, data protection, and data security are active areas, with laws and regulations in these areas being frequently proposed, enacted, and amended, and existing laws and regulations subject to differing and evolving interpretations. New laws and regulations in these areas likely will be enacted.
Any failure or perceived failure by us to comply with laws or regulations, our privacy or data protection policies, or other privacy-, data protection-, or information security-related obligations to customers, or other third parties, or any compromise of security that results in the unauthorized disclosure, transfer or use of personal or other information, may result in governmental investigations and enforcement actions, governmental or private litigation, other liability, our loss of the ability to process credit card transactions, or us becoming subject to higher costs for such transactions, or public statements critical of us by consumer advocacy groups, competitors, the media or others that could cause our current or prospective customers to lose trust in us, any of which could have an adverse effect on our business. Additionally, if third-party business partners that we work with, such as vendors, violate applicable laws, our applicable policies or other privacy-, data protection-, or security-related obligations, such violations may also put our customers’ or others’ information at risk and could in turn have an adverse effect on our business. Governmental agencies may also request or take customer data for national security or informational purposes, and also can make data requests in connection with criminal or civil investigations or other matters, which could harm our reputation and our business.
We will continue our efforts to comply with new and increasing privacy, data protection, and information security obligations; however, it is possible that such obligations may require us to expend additional resources, and may be difficult or impossible for us to meet. Any failure to comply with applicable U.S. or foreign privacy, data protection, or data security laws or regulations, any privacy or security standards imposed by our commercial partners, or any other obligations we are or may be become subject to relating to privacy, data protection, or information security, or any allegation or assertion relating to any of the foregoing may result in claims, regulatory investigations and proceedings, private litigation and proceedings, and other liability, all of which may adversely affect our reputation, business, results of operations and financial condition.
Our actual or perceived failure to protect customer information or other personal information or confidential information could result in harm to our business.

Our business and operations involve the storage, transmission and processing of information about our customers, our employees and contractors, our business partners, and others, as well as our own confidential information. We may become the target of cyber-attacks by third parties seeking unauthorized access to any of these types of information or to disrupt our business or operations. Computer malware, viruses, fraudulent sales of frequent flier miles, and general hacking have become more prevalent in our industry. While we have taken steps to protect customer information and other confidential information that we have access to, there can be no assurance that any security measures that we or our third-party service providers have implemented will be effective against current or future security threats. We and our third-party service providers may be unable to anticipate attempted security breaches and to implement adequate preventative measures, and our security measures or those

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of our third-party service providers could be breached, we could suffer data loss, unauthorized access to or use of the systems or networks used in our business and operations, and unauthorized, accidental, or unlawful access to, or disclosure, modification, misuse, loss or destruction of, our or our customers’ information. We may also experience security breaches or other incidents that may remain undetected for an extended period. Further, third parties may also conduct attacks designed to disrupt or deny access to the systems and networks used in our business and operations.

Actual or perceived security breaches or other security incidents could result in unauthorized use of or access to systems and networks, unauthorized, accidental, or unlawful access to, or disclosure, modification, misuse, loss or destruction of, our or our customers’ information, and may lead to litigation, indemnity obligations, regulatory investigations and other proceedings, severe reputational damage adversely affecting customer or investor confidence and causing damage to our brand, indemnity obligations, disruption to our operations, damages for contract breach, and other liability, and may adversely affect our revenues and operating results. Additionally, our service providers may suffer, or be perceived to suffer, security breaches or other incidents that may compromise data stored or processed for us that may give rise to any of the foregoing.

Any such actual or perceived security breach or other incident may lead to the expenditure of significant financial and other resources in efforts to investigate or correct a breach, address and eliminate vulnerabilities, and to prevent future security breaches or incidents, as well as significant costs for remediation that may include liability for stolen assets or information and repair of system damage that may have been caused, incentives offered to customers or other business partners in an effort to maintain business relationships after a breach, costs in connection with payment card replacement, and other liabilities. Certain breaches affecting payment card information or the environment in which it is processed may also result in a loss of our ability to process credit cards or increased costs associated with doing so. We have incurred and expect to incur ongoing expenditures in an effort to prevent information security breaches and other security incidents.

We cannot be certain that our insurance coverage will be adequate for information security liabilities actually incurred, will cover any indemnification claims against us relating to any incident, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.
We are increasingly dependent on technology and automated systems to operate our business.
We depend heavily on technology and automated systems to effectively operate our business. These systems include flight operations systems, communications systems, airport systems, reservations systems, management and accounting systems, commercial websites, including www.hawaiianairlines.com, and other systems, many of which must be able to accommodate high traffic volumes, maintain secure information and provide accurate flight information, as well as process critical financial related transactions. Any substantial, extended, or repeated failures of these systems could negatively affect our customer service, compromise the security of customer information or other information stored on, transmitted by, or otherwise processed by these systems, result in the loss of important data, loss of revenue and increased costs, and generally harm our business. Like other companies, our systems may be vulnerable to disruptions due to events beyond our control, including natural disasters, power disruptions, software or equipment failures, terrorist attacks, cybersecurity incursions, computer viruses and hackers. There can be no assurance that the measures we have taken to reduce the adverse effects of certain potential failures or disruptions are adequate to prevent or remedy disruptions of our systems. In addition, we will need to continuously make significant investments in technology to periodically upgrade and replace existing systems. If we are unable to make these investments or fail to successfully implement, upgrade or replace our systems, our business could be adversely impacted. We do not carry business interruption insurance sufficient to compensate us for the potentially significant losses, including the potential harm to our business, results of operations and financial condition that may result from interruptions in our product use as a result of system failures.

12


We are highly reliant on third-party contractors to provide certain facilities and services for our operations, and termination of our third-party agreements could have a potentially adverse effect on our financial results.
There are a limited number of qualified employees and personnel in the airline and information technology industry, especially within the Hawai'i market. Due to these limitations, we have historically relied on outside vendors for a variety of services and functions critical to our business, including aircraft maintenance and parts, code-sharing, reservations, computer services including hosting and software maintenance, accounting, frequent flyer programs, passenger processing, ground facilities, baggage and cargo handling, personnel training, and the distribution and sale of airline seats. Our reliance on outside vendors may continue to increase in the future.
The failure of any of our third-party service providers to adequately perform their service obligations, or other interruptions of services may reduce our revenues, increase expenses, and/or prevent us from operating our flights and providing other services to our customers. Our business and financial performance would be materially harmed if our customers believe that our services are unreliable or unsatisfactory.
LABOR RELATIONS AND RELATED COSTS RISKS
We are dependent on satisfactory labor relations.
Labor costs are a significant component of airline expenses and can substantially impact an airline's results of operations. A significant portion of our workforce is represented by labor unions. We may make strategic and operational decisions that may require the consent of one or more of these labor unions, and these labor unions could demand additional wages, benefits or other consideration in return for their consent.
In addition, we have entered into collective bargaining agreements with our pilots, mechanical group employees, clerical group employees, flight attendants, and dispatchers. We cannot ensure that future agreements with our employees' labor unions will be on terms in line with our expectations or comparable to agreements entered into by our competitors, and any future agreements may increase our labor costs or otherwise adversely affect our business. We are currently in labor negotiations with our flight attendants' union, AFA, whose contract became amendable on January 1, 2017. If we are unable to reach an agreement with any unionized work group, we may be subject to future work interruptions and/or stoppages, which may hamper or halt operations. In addition, the threat of future work interruptions and/or stoppages may cause a decline in our passenger traffic, negatively impacting our results of operations and financial condition.
Our operations may be adversely affected if we are unable to attract and retain qualified personnel and key executives.
We believe that our future success is dependent on the knowledge and expertise of our key executives and highly qualified management, technical, and other personnel. Attracting and retaining such personnel in the airline industry is highly competitive. We cannot be certain that we will be able to retain our key executives or attract other qualified personnel in the future. Any inability to retain our key executives, or attract and retain additional qualified executives, could have a negative impact on our operations.
In addition, as we continue to expand our operations through the acquisition of new aircraft and introduction of service to new markets, it may be challenging to attract a sufficient number of qualified personnel including pilots, mechanics and other skilled labor. As we compete with other carriers for qualified personnel, we also face the challenge of attracting individuals who embrace our team-oriented, friendly and customer-driven corporate culture. Our inability to attract and retain qualified personnel who embrace our corporate culture could have a negative impact on our reputation and overall operations.
STRATEGY AND BRAND RISKS
Our failure to successfully implement our route and network strategy could harm our business.
Our route and network strategy (how we determine to deploy our fleet) includes initiatives to increase revenue, decrease costs, mature our network, and improve distribution of our sales channels. It is critical that we execute upon our planned strategy in order for our business to attain economies of scale and to sustain or improve our results of operations. If we are unable to utilize and fill increased capacity provided by additional aircraft entering our fleet, hire and retain skilled personnel, or secure the required equipment and facilities in a cost-effective manner, we may be unable to successfully develop and grow our new and existing markets, which may adversely affect our business and operations.

13


We continue to strive toward aggressive cost-containment goals which are an important part of our business strategy to offer the best value to passengers through competitive fares while maintaining acceptable profit margins and return on capital. We believe a lower cost structure will better position us to fund our strategy and take advantage of market opportunities. If we are unable to adequately contain our non-fuel unit costs, our financial results may suffer.
Our reputation and financial results could be harmed in the event of adverse publicity, including the event of an aircraft accident or incident.
Our customer base is broad and our business activities have significant prominence, particularly in Hawai'i and other destinations we serve. Consequently, negative publicity resulting from real or perceived shortcomings in our customer service, employee relations, business conduct, third-party aircraft components or other events or circumstances affecting our operations could negatively affect the public image of our company and the willingness of customers to purchase services from us, which could affect our financial results.
Additionally, we are exposed to potential losses that may be incurred in the event of an aircraft accident or incident. Any such accident or incident involving our aircraft or an aircraft operated by one of our code-share partners could involve not only the repair or replacement of a damaged aircraft or aircraft parts, and its consequential temporary or permanent loss of revenue, but also significant claims of injured passengers and others. We are required by the DOT to carry liability insurance, and although we currently maintain liability insurance in amounts consistent with the industry, we cannot be assured that our insurance coverage will adequately cover us from all claims and we may be forced to bear substantial losses incurred with an accident. In addition, any aircraft accident or incident could cause a public perception that we are less safe or reliable than other airlines, which would harm our business.
AIRLINE INDUSTRY, REGULATION AND RELATED COSTS RISKS
The airline industry has substantial operating leverage and is affected by many conditions that are beyond its control, which could harm our financial condition and results of operations.
Due to the substantial fixed costs associated with operating an airline, there is a disproportionate relationship between the cost of operating each flight and the number of passengers carried. However, the revenue generated from a particular flight is directly related to the number of passengers carried and the respective average fares applied. Accordingly, a decrease in the number of passengers carried would cause a corresponding decrease in revenue (if not offset by higher fares), and may result in a disproportionately greater decrease in profits. Therefore, any general reduction in airline passenger traffic as a result of any of the following or other factors, which are largely outside of our control, could harm our business, financial condition, and results of operations:
decline in general economic conditions;
continued threat of terrorist attacks and conflicts overseas;
actual or threatened war and political instability;
increased security measures or breaches in security;
adverse weather and natural disasters;
changes in consumer preferences, perceptions, or spending patterns;
increased costs related to security and safety measures;
increased fares as a result of increases in fuel costs;
outbreaks of contagious diseases or fear of contagion; and
congestion or major construction at airports and actual or potential disruptions in the air traffic control system.
Our results of operations may be volatile due to the conditions identified above. We cannot ensure that our financial resources will be sufficient to absorb the effects of any of these unexpected factors should they occur.

14


Our financial results and operations may be negatively affected by the State of Hawai'i's airport modernization plan.
The State of Hawai'i has begun to implement a modernization plan encompassing the airports we serve within the State. Our landing fees and airport rent rates have increased to fund the modernization program. Additionally, we expect the costs for our Neighbor Island operations to increase more than the costs related to our North America and International operations due to phased adjustments of the airports' funding mechanism. Therefore, costs related to the modernization program will have a greater impact on our operations as compared to our competitors, most of whom do not have significant Neighbor Island operations. We can offer no assurance that we will be successful in offsetting these cost increases through other cost reductions or increases in our revenue and, therefore, can offer no assurance that our future financial results will not be negatively affected by them.
Our operations may be disrupted if we are unable to obtain and maintain adequate facilities and infrastructure at airports within the State of Hawai'i.
We must be able to maintain and/or obtain adequate gates, maintenance capacity, office space, operations areas, and ticketing facilities at the airports within the State of Hawai'i to be able to operate our existing and proposed flight schedules. Failure to maintain such facilities and infrastructure may adversely impact our operations and financial performance.
Our business is subject to substantial seasonal and cyclical volatility.
Our results of operations reflect the impact of seasonal volatility primarily due to passenger leisure and holiday travel patterns. As Hawai'i is a popular vacation destination, demand from North America, our largest source of visitors, is typically stronger during June, July, August and December and considerably weaker at other times of the year. Because of fluctuations in our results from seasonality, operating results for a historical period are not necessarily indicative of operating results for a future period and operating results for an interim period are not necessarily indicative of operating results for an entire year.
Terrorist attacks or international hostilities, or the fear of terrorist attacks or hostilities, even if not made directly on the airline industry, could negatively affect us and the airline industry.
Terrorist attacks, even if not made directly on the airline industry, or the fear of such attacks, hostilities or act of war, could adversely affect the airline industry, including us, and could result in a significant decrease in demand for air travel, increased security costs, increased insurance costs covering war-related risks, and increased flight operational loss due to cancellations and delays. Any future terrorist attacks or the implementation of additional security-related fees could have a material adverse effect on our business, financial condition and results of operations, and on the airline industry in general.
The airline industry is subject to extensive government regulation, new regulations, and taxes which could have an adverse effect on our financial condition and results of operations.
Airlines are subject to extensive regulatory requirements that result in significant costs. New, and modifications to existing, laws, regulations, taxes and airport rates, and charges imposed by domestic and foreign governments have been proposed from time to time that could significantly increase the cost of airline operations, restrict operations or reduce revenue. The FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures. Some FAA requirements cover, among other things, retirement of older aircraft, security measures, collision avoidance systems, airborne windshear avoidance systems, noise abatement and other environmental concerns, commuter aircraft safety and increased inspections, and maintenance procedures to be conducted on older aircraft. A failure to be in compliance, or a modification, suspension or revocation of any of our DOT/FAA authorizations or certificates, would have a material adverse impact on our operations.
We cannot predict the impact that laws or regulations may have on our operations, nor can we ensure that laws or regulations enacted in the future will not adversely affect our business. Further, we cannot guarantee that we will be able to obtain or maintain necessary governmental approvals. Once obtained, operating permits are subject to modification and revocation by the issuing agencies. Compliance with these and any future regulatory requirements could require us to incur significant capital and operating expenditures.
In addition to extensive government regulations, the airline industry is dependent on certain services provided by government agencies (DOT, FAA, CBP, TSA, etc.). Furthermore, because of significantly higher security and other costs incurred by airports since September 11, 2001, many airports have significantly increased their rates and charges to airlines, including us, and may continue to do so in the future.

15


Federal budget constraints or federally imposed furloughs due to budget negotiation deadlocks may adversely affect our industry, business, results of operations and financial position.
Many of our airline operations are regulated by governmental agencies, including the FAA, the DOT, the CBP, the TSA, and others. If the federal government operations were to experience issues in reaching budgetary consensus in the future resulting in mandatory furloughs and/or other budget constraints, or if a government shutdown were to continue for an extended period of time, our business and results of operations could be materially negatively impacted. The travel behaviors of the flying public could also be affected, which may materially adversely impact our industry and our business.
The airline industry is required to comply with various environmental laws and regulations, which could inhibit our ability to operate and could also have an adverse effect on our results of operations.
Many aspects of airlines' operations are subject to increasingly stringent federal, state, local, and foreign laws protecting the environment. U.S. federal laws that have a particular impact on us include the Airport Noise and Capacity Act of 1990, the Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Safe Drinking Water Act, the Comprehensive Environmental Response Act and the Compensation and Liability Act. Compliance with these and other environmental laws and regulations can require significant expenditures, and violations can lead to significant fines and penalties. Governments globally are increasingly focusing on the environmental impact caused by the consumption of fossil fuels and as a result have proposed or enacted legislation which may increase the cost of providing airline service or restrict its provision. We expect the focus on environmental matters to increase.
Concern about climate change and greenhouse gases may result in additional regulation of aircraft emissions in the U.S. and abroad. In addition, other legislative or regulatory action to regulate greenhouse gas emissions is possible. At this time, we cannot predict whether any such legislation or regulation would apportion costs between one or more jurisdictions in which we operate flights. We are monitoring and evaluating the potential impact of such legislative and regulatory developments.
In addition to direct costs, such regulation may have a greater effect on the airline industry through increases in fuel costs. The impact to us and our industry from such actions is likely to be adverse and could be significant, particularly if regulators were to conclude that emissions from commercial aircraft cause significant harm to the atmosphere or have a greater impact on climate change than other industries.
Our operations may be adversely affected by our expansion into non-U.S. jurisdictions and the related laws and regulations to which we are subject.
The expansion of our operations into non-U.S. jurisdictions has expanded the scope of the laws and regulations to which we are subject, both domestically and internationally. Compliance with the laws and regulations of foreign jurisdictions and the restrictions on operations that these laws, regulations or other government actions may impose could significantly increase the cost of airline operations or reduce revenue. For example, a number of our destinations in Asia have been revising their privacy and consumer laws and regulations. Failure to comply with these evolving laws or regulations could result in significant penalties, criminal charges, costs to defend in a foreign jurisdiction, restrictions on operations and reputational damage. In addition, we operate flights on international routes regulated by treaties and related agreements between the U.S. and foreign governments, which are subject to change as they may be amended from time to time. Modifications of these arrangements could result in an inability to obtain or retain take-off or landing slots for our routes, route authorization and necessary facilities. Any limitations, additions or modifications to government treaties, agreements, regulations, laws or policies related to our international routes could have a material adverse impact on our financial position and results of operations.
We may be party to litigation or regulatory action in the normal course of business or otherwise, which could have an adverse effect on our operations and financial results.
From time to time, we are a party to or otherwise involved in legal or regulatory proceedings, claims, government inspections, investigations or other legal matters, both domestically and in foreign jurisdictions. Resolving or defending legal matters can take months or years. The duration of such matters can be unpredictable with many variables that we do not control including adverse party or government responses. Litigation and regulatory proceedings are subject to significant uncertainty and may be expensive, time-consuming and disruptive to our operations. In addition, an adverse resolution of a lawsuit, regulatory matter, investigation or other proceeding could have a material adverse effect on our financial condition and results of operations. We may be required to change or restrict our operations or be subject to injunctive relief, significant compensatory damages, punitive damages, penalties, fines or disgorgement of profits, none of which may be covered by insurance. We may have to pay out settlements that also may not be covered by insurance. There can be no assurance that any of these payments or actions will not be material. In addition, publicity of ongoing legal and regulatory matters may adversely affect our reputation.

16


Our insurance costs are susceptible to significant increases, and further increases in insurance costs or reductions in coverage could have an adverse effect on our financial results.
We carry types and amounts of insurance customary in the airline industry, including coverage for general liability, passenger liability, property damage, aircraft loss or damage, baggage and cargo liability, and workers' compensation. We are required by the DOT to carry liability insurance on each of our aircraft. We currently maintain commercial airline insurance with a major group of independent insurers that regularly participate in world aviation insurance markets, including public liability insurance and coverage for losses resulting from the physical destruction or damage to our aircraft. However, there can be no assurance that the amount of such coverage will not change or that we will not bear substantial losses from accidents or damage to, or loss of, aircraft or other property due to other factors such as natural disasters. We could incur substantial claims resulting from an accident or damage to, or loss of, aircraft or other property due to other factors such as natural disasters in excess of related insurance coverage that could have a material adverse effect on our results of operations and financial condition.
Extended interruptions or disruptions in service could have a material adverse impact on our operations.
Our financial results may be adversely affected by factors outside our control, including, but not limited to, flight cancellations, significant delays in operations, and facility disruptions. Our principal base of operations is in Hawai'i and a significant interruption or disruption in service could have a serious impact on our business and results of operations. Natural disasters, such as hurricanes, earthquakes and tsunamis, may impact the demand for transportation in the markets in which we operate.
FLEET AND FLEET-RELATED RISKS
We are dependent on our limited number of suppliers for aircraft, aircraft engines and parts.
We are dependent on a limited number of suppliers (e.g. Airbus, Boeing, Rolls Royce, Pratt & Whitney) for aircraft, aircraft engines, and aircraft-related items. We are vulnerable to malfunction, failure or other problems associated with the supply and performance of these aircraft and parts and/or related operational disruptions, which could result in reputational harm, increased parts and maintenance costs, and adverse effects on our financial position and results of operations.
Our agreements to purchase Airbus A321neo aircraft and Boeing 787-9 aircraft represent significant future financial commitments and operating costs.
As of December 31, 2019, we had the following firm order commitments and purchase rights for additional aircraft:
Aircraft Type
Firm
Orders
 
Purchase
Rights
 
Expected Delivery Dates
A321neo aircraft
1

 
9

 
In 2020
B787-9 aircraft
10

 
10

 
Between 2021 and 2025
We have made substantial pre-delivery payments for Airbus and Boeing aircraft under existing purchase agreements and are required to continue these pre-delivery payments as well as make payments for the balance of the purchase price through delivery of each aircraft. These commitments substantially increase our future capital spending requirements and may require us to increase our level of debt in future years. In 2020, we have significant obligations in order to fund our current aircraft orders and we are continuing to evaluate our options to finance these orders via our operating cash flows and debt financing. There can be no assurance that we will be able to obtain such financing on favorable terms, or at all.
Delays in scheduled aircraft deliveries or other loss of fleet capacity may adversely impact our operations and financial results.
The success of our business depends on, among other things, the ability to effectively operate a certain number and type of aircraft. As noted above, we have contractual commitments to purchase and integrate additional Airbus aircraft or Boeing aircraft into our fleet. If for any reason we are unable to secure deliveries of the Airbus aircraft or Boeing aircraft on the contractually scheduled delivery dates and successfully introduce these aircraft into our fleet, then our business, operations, and financial performance could be negatively impacted. Delays in scheduled aircraft deliveries or our failure to integrate newly purchased aircraft into our fleet as planned may require us to utilize our existing fleet longer than expected. Such extensions may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs.

17


We may never realize the full value of our long-lived assets, resulting in impairment and other related charges that may negatively impact our financial position and results of operations.
Economic and intrinsic triggers, which include extreme fuel price volatility, an uncertain economic and credit environment, unfavorable trends in historical or forecasted results of operations and cash flows, as well as other uncertainties, may cause us to record material impairments of our long-lived assets. We could be subject to impairment charges in the future that could have an adverse effect on our financial position and results of operations in future periods.
COMMON STOCK RISKS
Our share price is subject to fluctuations.
The market price of our stock is influenced by many factors, many of which are outside of our control, and include the following:
operating results and financial condition;
changes in the competitive environment in which we operate;
fuel price volatility including the availability of fuel;
announcements concerning our competitors including bankruptcy filings, mergers, restructurings or acquisitions by other airlines;
increases or changes in government regulation;
general and industry specific market conditions;
changes in financial estimates or recommendations by securities analysts; and
sales of our common stock or other actions by investors with significant shareholdings.
In recent years the stock market has experienced volatile price and volume fluctuations that often have been unrelated to the operating performance of individual companies. These market fluctuations, as well as general economic conditions, may affect the price of our common stock.
In the past, securities class action litigation has often been instituted against a company following periods of volatility in its stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management's attention and resources. In addition, the future sale of a substantial number of shares of common stock by us or by our existing stockholders may have an adverse impact on the market price of our common stock. There can be no assurance that the trading price of our common stock will remain at or near its current level.
Certain provisions of our certificate of incorporation and bylaws may delay or prevent a change of control, which could materially adversely affect the price of our common stock.
Our certificate of incorporation and bylaws contain provisions that may make it difficult to remove our Board of Directors and management, and may discourage or delay a change of control, which could materially and adversely affect the price of our common stock. These provisions include, among others:
the ability of our Board of Directors to issue, without further action by the stockholders, series of undesignated preferred stock, or rights to acquire preferred stock, that could dilute the interest of, or impair the voting power of, holders of our common stock or could also be used as a method of discouraging, delaying or preventing a change of control;
advance notice procedures for stockholder proposals to be considered at stockholders’ meetings and for nominations of candidates for election to our Board of Directors;
the ability of our Board of Directors to fill vacancies on the board;
a prohibition against stockholders taking action by written consent;
a prohibition against stockholders calling special meetings of stockholders; and

18


super-majority voting requirements to modify or amend specified provisions of our certificate of incorporation.
Our certificate of incorporation includes a provision limiting voting and ownership by non-U.S. citizens and our bylaws include a provision specifying an exclusive forum for stockholder disputes.
To comply with restrictions imposed by federal law on foreign ownership of U.S. airlines, our certificate of incorporation restricts voting of shares of our common stock by non-U.S. citizens. Our certificate of incorporation provides that the failure of non-U.S. citizens to register their shares on a separate stock record, which we refer to as the “foreign stock record,” would result in a suspension of their voting rights in the event that the aggregate foreign ownership of the outstanding common stock exceeds the foreign ownership restrictions imposed by federal law.

Our certificate of incorporation further provides that no shares of our common stock will be registered on the foreign stock record if the amount so registered would exceed the foreign ownership restrictions imposed by federal law. If it is determined that the amount registered in the foreign stock record exceeds the foreign ownership restrictions imposed by federal law, shares will be removed from the foreign stock record in reverse chronological order based on the date of registration therein, until the number of shares registered therein does not exceed the foreign ownership restrictions imposed by federal law. As of December 31, 2019, we believe we were in compliance with the foreign ownership rules.

Our bylaws provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware or, if such court lacks jurisdiction, any other state or federal court located in the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers or other employees to us or our stockholders; (iii) any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or bylaws (as each may be amended or restated from time to time); or (iv) any action asserting a claim against us or any of our directors, officers or other employees governed by the internal affairs doctrine. Accordingly, stockholders may be limited in the forum in which they are able to pursue legal actions against us.
We cannot guarantee that we will repurchase our common stock pursuant to our share repurchase program or continue to pay dividends on our common stock.
Our intent to continue to repurchase our shares pursuant to our stock repurchase program and to continue to pay quarterly dividends is subject to capital availability, market and economic conditions, applicable legal requirements, and other relevant factors. The stock repurchase program may be limited, suspended, or discontinued at any time without prior notice.
In the fourth quarter of 2017, we initiated the quarterly issuance of dividends to our stockholders of record. We cannot provide any assurance that we will continue to declare dividends for any fixed period, and the payment of dividends may be suspended or adjusted at any time at our discretion. We will evaluate, on a quarterly basis, the amount and timing of future dividends based on our operating results, financial condition, capital requirements, and general business conditions.
LIQUIDITY RISKS
See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for further information regarding our liquidity.
Our financial liquidity could be adversely affected by credit market conditions.
Our business requires access to capital markets to finance equipment purchases, including aircraft, and to provide liquidity in seasonal or cyclical periods of weaker revenue generation. In particular, we will face specific funding requirements with respect to our obligation under purchase agreements with Airbus and Boeing to acquire new aircraft. We may finance these upcoming aircraft deliveries; however, the unpredictability of global credit market conditions may adversely affect the availability of financing or may result in unfavorable terms and conditions. We can offer no assurance that the financing we need will be available when required or that the economic terms on which it is available will not adversely affect our financial condition. If we cannot obtain financing or we cannot obtain financing on commercially reasonable terms, our business and financial condition may be adversely affected.

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Our debt could adversely affect our liquidity and financial condition, and include covenants that impose restrictions on our financial and business operations.
As of December 31, 2019, we had $610 million in outstanding debt. Our debt and related covenants could:
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for other operational purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
limit, along with the financial and other restrictive covenants in the agreements governing our debt, our ability to borrow additional funds;
place us at a competitive disadvantage compared to other less leveraged competitors and competitors with debt agreements on more favorable terms than us; and
adversely affect our ability to secure additional financing in the future on acceptable terms or at all, which would impact our ability to fund our working capital, capital expenditures, acquisitions or other general purpose needs.
These agreements require us to meet certain covenants. If we breach any of these covenants we could be in a default under these facilities, which could cause our outstanding obligations under these facilities to accelerate and become due and payable immediately, and could also cause us to default under our other debt or lease obligations and lead to an acceleration of the obligations related to such other debt or lease obligations. The existence of such a default could also preclude us from borrowing funds under our credit facilities.
Our ability to comply with the provisions of financing agreements can be affected by events beyond our control and a default under any such financing agreements if not cured or waived, could have a material adverse effect on us. In the event our debt is accelerated, we may not have sufficient liquidity to repay these obligations or to refinance our debt obligations, resulting in a material adverse effect on our financial condition.
We are required to maintain reserves under our credit card processing agreements which could adversely affect our financial and business operations.
Under our bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. As of December 31, 2019 and 2018, there were no holdbacks held with our credit card processors.
In the event of a material adverse change in our business, the holdback could incrementally increase to an amount up to 100% of the applicable credit card activity for all unflown flights, which would also cause an increase in the level of restricted cash. If we are unable to obtain a waiver, or otherwise mitigate the increase in restricted cash, it could adversely affect our liquidity and also cause a covenant violation under other debt or lease obligations and have a material adverse effect on our financial condition.
ITEM 1B.    UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.    PROPERTIES.
Aircraft
The table below summarizes our total fleet as of December 31, 2018 and 2019, and anticipated fleet as of December 31, 2020 (based on existing agreements):

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December 31, 2018
 
December 31, 2019
 
December 31, 2020
 
Seating Capacity (Per Aircraft)
 
Simple Average Age (In Years)
Aircraft Type
Leased (4)
 
Owned
 
Total
 
Leased (4)
 
Owned
 
Total
 
Leased (4)
 
Owned
 
Total
 
 
A330-200
12

 
12

 
24

 
12

 
12

 
24

 
12

 
12

 
24

 
278
 
6.5
A321-200(1)
2

 
9

 
11

 
2

 
15

 
17

 
2

 
16

 
18

 
189
 
1.1
767-300(2)
3

 
1

 
4

 

 

 

 

 

 

 
252 - 264
 
23.3
717-200
5

 
15

 
20

 
5

 
15

 
20

 
5

 
15

 
20

 
128
 
17.7
ATR 42-500(3)

 
4

 
4

 

 
4

 
4

 

 
4

 
4

 
48
 
16.7
ATR 72-200(3)

 
3

 
3

 

 
3

 
3

 

 
3

 
3

 
 
26.4
Total
22

 
44

 
66

 
19

 
49

 
68

 
19

 
50

 
69

 
 
 
 

(1)
In 2019, we took delivery of six Airbus A321-200 aircraft. We expect to take delivery of our final Airbus A321-200 aircraft in the first quarter of 2020.
(2)
In the first quarter of 2019, we retired our remaining four Boeing 767-300 aircraft, thereby completing our exit from the fleet.
(3)
The ATR 42-500 and ATR 72-200 turboprop aircraft are owned by Airline Contract Maintenance & Equipment, Inc., a wholly-owned subsidiary of the Company. The ATR 42-500 turbo prop aircraft are used for passenger operations under a Capacity Purchase Agreement (CPA) with a third-party provider. The ATR 72-200 turboprop aircraft are used for our cargo operations under a CPA.
(4)
Leased aircraft include aircraft under finance and operating leases. See Note 10 to the consolidated financial statements for further discussion regarding our aircraft leases.
At December 31, 2019, we had 11 aircraft on order scheduled for delivery through 2025:
Delivery Year
A321neo Aircraft(1)
 
B787-9 Aircraft(2)
 
Total
2020
1

 

 
1

2021

 
2

 
2

2022

 
3

 
3

2023

 
1

 
1

2024

 
3

 
3

2025

 
1

 
1

 
1

 
10

 
11


(1)
In 2013, we entered into an agreement for the purchase of 16 new Airbus A321neo aircraft with purchase rights for an additional nine aircraft with scheduled for deliveries through early 2020. The Airbus A321neo narrow-body aircraft will be used to complement Hawaiian's existing fleet of wide-body aircraft for travel to and from the West Coast on our North America routes.

(2)
In July 2018, we entered into a purchase agreement for the purchase of 10 Boeing 787-9 "Dreamliner" aircraft with purchase rights for an additional 10 aircraft with scheduled deliveries between 2021 to 2025. These fuel efficient, long-range aircraft will complement our existing fleet of wide-body for long-haul Asia/Pacific and North America routes.
Ground Facilities
Our principal terminal facilities, cargo facilities and hangar and maintenance facilities are located at the Daniel K. Inouye International Airport (HNL). The majority of the facilities at HNL are leased on a month-to-month basis. We are also charged for the use of terminal facilities at other Neighbor Island airports owned by the State of Hawai'i. Some terminal facilities, including gates and holding rooms, are considered by the State of Hawai'i to be common areas and thus are not exclusively controlled by us. We also utilize other State of Hawai'i facilities, including station manager offices, Premier Club lounges, and operations support space.    

21


The table below sets forth the airport locations we utilize pursuant to various agreements as of December 31, 2019:
Name of Airport
Location
Phoenix Sky Harbor International Airport
 
Phoenix
 
Arizona
Long Beach Airport
 
Long Beach
 
California
Los Angeles International Airport
 
Los Angeles
 
California
Oakland International Airport
 
Oakland
 
California
Sacramento International Airport
 
Sacramento
 
California
San Diego International Airport
 
San Diego
 
California
San Francisco International Airport
 
San Francisco
 
California
Norman Y. Mineta San Jose International Airport
 
San Jose
 
California
Hilo International Airport
 
Hilo
 
Hawai'i
Daniel K. Inouye International Airport
 
Honolulu
 
Hawai'i
Kahului Airport
 
Kahului
 
Hawai'i
Kapalua Airport
 
Lahaina
 
Hawai'i
Ellison Onizuka Kona International Airport
 
Kailua-Kona
 
Hawai'i
Lana'i Airport
 
Lana'i
 
Hawai'i
Lihu'e Airport
 
Lihu'e
 
Hawai'i
Moloka'i Airport
 
Moloka'i
 
Hawai'i
Boston Logan International Airport
 
Boston
 
Massachusetts
McCarran International Airport
 
Las Vegas
 
Nevada
John F. Kennedy International Airport
 
New York
 
New York
Portland International Airport
 
Portland
 
Oregon
Seattle-Tacoma International Airport
 
Seattle
 
Washington
Pago Pago International Airport
 
Pago Pago
 
American Samoa
Brisbane International Airport
 
Brisbane
 
Australia
Sydney International Airport
 
Sydney
 
Australia
Haneda International Airport
 
Tokyo
 
Japan
Fukuoka International Airport
 
Fukuoka
 
Japan
Kansai International Airport
 
Osaka
 
Japan
Narita International Airport
 
Tokyo
 
Japan
New Chitose International Airport
 
Sapporo
 
Japan
Auckland Airport
 
Auckland
 
New Zealand
Incheon International Airport
 
Seoul
 
South Korea
Faa'a International Airport
 
Papeete
 
Tahiti
Our corporate headquarters are located in leased premises adjacent to the Daniel K. Inouye International Airport.
ITEM 3.    LEGAL PROCEEDINGS.
We are subject to legal proceedings arising in the normal course of our operations. We do not anticipate that the disposition of any currently pending proceeding will have a material effect on our operations, business or financial condition.
ITEM 4.    MINE SAFETY DISCLOSURES.
Not applicable.

22


PART II
ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the NASDAQ Global Select Market under the symbol "HA."
Holders
There were 725 stockholders of record of our common stock as of February 7, 2020, which does not reflect those shares held beneficially or those shares held in "street" name.
Dividends and Other Restrictions
We paid dividends of $22.8 million to shareholders of record during 2019 and $24.2 million during 2018. In January 2020, our Board of Directors declared a quarterly cash dividend of $0.12 per share payable on February 28, 2020 to stockholders of record as of February 14, 2020.
Our dividend payments may change from time to time. We cannot provide assurance that we will continue to declare dividends for any fixed period and payment of dividends may be suspended at any time at our discretion.
United States law prohibits non-U.S. citizens from owning more than 25% of the voting interest of a U.S. air carrier or controlling a U.S. air carrier. Our certificate of incorporation prohibits the ownership or control of more than 25% (to be increased or decreased from time to time, as permitted under the laws of the U.S.) of our issued and outstanding voting capital stock by persons who are not "citizens of the U.S." As of December 31, 2019, we believe we are in compliance with the law as it relates to voting stock held by non-U.S. citizens.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table displays information with respect to our repurchases of shares of our common stock during the three months ended December 31, 2019:
Period
 
Total number of shares purchased (i)
 
Average price paid per share (ii)
 
Total number of shares purchased as part of publicly announced plans or programs (i)
 
Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) (i)
October 1, 2019 - October 31, 2019
 
260,102

 
$
27.55

 
260,102

 
 
November 1, 2019 - November 30, 2019
 
173,441

 
29.87

 
173,441

 
 
December 1, 2019 - December 31, 2019
 
190,895

 
30.04

 
190,895

 
 
Total
 
624,438

 
 
 
624,438

 
$
28.7


(i)
In November 2018, our Board of Directors approved the repurchase of $100 million of our outstanding common stock through December 2020. The stock repurchase program is subject to modification or termination at any time.

(ii)
Weighted average price paid per share is calculated on a settlement basis and excludes commission.

Stockholder Return Performance Graph
The following graph compares cumulative total stockholder return on our common stock, the S&P 500 Index and the AMEX Airline Index from December 31, 2014 to December 31, 2019. The comparison assumes $100 was invested on December 31, 2014 in our common stock and each of the foregoing indices and assumes reinvestment of dividends before consideration of income taxes.

23


CHART-7BEA32908A32534098B.JPG
The stock performance depicted in the graph above is not to be relied upon as indicative of future performance. The stock performance graph shall not be deemed to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate the same by reference, nor shall it be deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulations 14A or 14C or to the liabilities of Section 18 of the Exchange Act.

24


ITEM 6.    SELECTED FINANCIAL DATA.
The Selected Financial Data should be read in conjunction with our accompanying audited consolidated financial statements and the notes related thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" below.
Hawaiian Holdings, Inc.
Selected Financial Data
 
Year ended December 31,
 
2019
 
2018
 
2017
 
2016
 
2015 (a)
 
(in thousands, except per share data)
Summary of Operations:
 

 
 

 
 

 
 

 
 

Operating revenue
$
2,832,228

 
$
2,837,411

 
$
2,675,145

 
$
2,432,413

 
$
2,317,467

Operating expenses
2,504,751

 
2,523,043

 
2,211,107

 
2,034,926

 
1,868,837

Operating income
327,477

 
314,368

 
464,038

 
397,487

 
448,630

Net Income
223,984

 
233,200

 
330,610

 
224,120

 
182,646

Net Income Per Common Stock Share:
 

 
 

 
 

 
 

 
 

Basic (b)
$
4.72

 
$
4.63

 
$
6.23

 
$
4.19

 
$
3.38

Diluted (b)
4.71

 
4.62

 
6.19

 
4.15

 
2.98

Cash dividends declared per common share
0.48

 
0.48

 
0.12

 
0.00

 
0.00

Balance Sheet Items as of December 31:
 

 
 

 
 

 
 

 
 

Total assets (c)
$
4,126,624

 
$
3,196,646

 
$
2,873,821

 
$
2,720,346

 
$
2,489,922

Long-term debt and noncurrent finance lease obligations
689,115

 
608,684

 
511,201

 
497,908

 
677,915


(a)
We adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (ASC 606), as of January 1, 2018, and restated the consolidated financial results as of and for the years ended December 31, 2017 and 2016. Results from periods prior to 2016 have not been restated for the adoption of this standard.

(b)
We recognized a one-time benefit of $83.0 million, or $1.55 per common stock share, during the year ended December 31, 2017 as a result of the Tax Reform Act enacted in December 2017. During the year ended December 31, 2018, we completed our accounting for the effects of the Tax Act and recorded an additional tax benefit of $9.3 million.

(c)
We adopted ASC 842, Leases (ASC 606), as of January 1, 2019 using the transition method that provides for a cumulative adjustment to retained earnings upon adoption. Results from periods prior to 2019 have not been restated. See Note 1 to the consolidated financial statements for additional information.



25


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the Company and its operations and is focused on our 2019 and 2018 financial results, including comparisons of year-over-year performance between these years. Discussion and analysis of our 2017 fiscal year, as well as the year-over-year comparison of our 2018 financial performance to 2017, are located in Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 13, 2019.
This discussion and analysis of our financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. We have based these forward-looking statements on our current expectations and projections of future events. However, our actual results could differ materially from those discussed herein as a result of the risks that we face, including but not limited to those risks stated in the "Risk Factors" section of this report. See "Cautionary Note Regarding Forward-Looking Statements" above. In addition, the following discussion should be read in conjunction with the audited consolidated financial statements and the related notes thereto included elsewhere in this report.
Year in Review
2019 Financial Highlights
Operating income of $327 million compared to $314 million in the prior-year period.

Pre-tax income of $305 million compared to $301 million in the prior-year period.

GAAP net income of $224 million or $4.71 per diluted share compared to $233 million or $4.62 per diluted share in the prior year period.

Adjusted net income of $219 million or $4.60 per diluted share compared to $275 million or $5.44 per diluted share in the prior year period.

Unrestricted cash and cash equivalents and short-term investments of $619 million compared to $501 million at the end of the prior year period.
See "Non-GAAP Financial Measures" below for our reconciliation of non-GAAP measures.
Outlook
Capacity increases in North America and parts of our International network are expected to continue to increase during the first half of 2020, putting pressure on unit results. We expect our capacity to grow between 7.5% to 10.5% in the first quarter of 2020 as compared to the first quarter of 2019. For the first quarter of 2020, we expect that the aforementioned increases in capacity will result in operating revenue per available seat mile to decrease between 4.5% to 7.5% as compared to the first quarter of 2019. We also expect our operating costs per available seat mile to range between a decrease of 1.7% and a decrease of 4.1% during the first quarter of 2020, while our operating costs per available seat mile excluding fuel will range between a decrease of 1.5% and a decrease of 4.5%.
For 2020, we expect the corporate federal tax rate will result in an all-in book tax rate for us of 26% to 28%.



26


Selected Consolidated Statistical Data
Below are the operating statistics we use to measure our operating performance.
 
Year ended December 31,
 
2019
 
2018
 
2017
 
(in thousands, except as otherwise indicated)
Scheduled Operations (a) :
 

 
 

 
 

Revenue passengers flown
11,737

 
11,830

 
11,498

Revenue passenger miles (RPM)
17,808,913

 
17,198,985

 
16,307,344

Available seat miles (ASM)
20,568,476

 
20,158,139

 
18,991,566

Passenger revenue per RPM (Yield)

14.59
¢
 

15.13
¢
 

15.25
¢
Passenger load factor (RPM/ASM)
86.6
%
 
85.3
%
 
85.9
%
Passenger revenue per ASM (PRASM)

12.63
¢
 

12.91
¢
 

13.09
¢
Total Operations (a) :
 

 
 

 
 

Revenue passengers flown
11,751

 
11,840

 
11,505

RPM
17,826,887

 
17,206,703

 
16,316,739

ASM
20,596,711

 
20,171,911

 
19,006,682

Operating revenue per ASM (RASM)

13.75
¢
 

14.07
¢
 

14.07
¢
Operating cost per ASM (CASM)

12.16
¢
 

12.51
¢
 

11.63
¢
CASM excluding aircraft fuel, gain/loss on sale of aircraft, contract terminations expense, and special items (b)

9.54
¢
 

9.36
¢
 

9.19
¢
Aircraft fuel expense per ASM (c)

2.62
¢
 

2.97
¢
 

2.32
¢
Revenue block hours operated
218,801

 
208,809

 
189,881

Gallons of jet fuel consumed
270,001

 
273,783

 
259,915

Average cost per gallon of jet fuel (actual) (c)
$
2.01

 
$
2.19

 
$
1.69

(a)
Includes the operations of our contract carrier under a CPA. Total Operations includes both scheduled and chartered operations.
(b)
Represents adjusted unit costs, a non-GAAP measure. We believe this is a useful measure because it better reflects our controllable costs. See "Non-GAAP Financial Measures" below for our reconciliation of non-GAAP measures.
(c)
Includes applicable taxes and fees.
Operating Revenue
Our revenue is derived primarily from transporting passengers on our aircraft. We record passenger revenue when the transportation is provided or upon scheduled flight for tickets expected to expire unused. We measure capacity in terms of available seat miles, which represent the number of seats available for passengers multiplied by the number of miles the seats are flown. Yield, or the average amount one passenger pays to fly one mile, is calculated by dividing passenger revenue by RPMs. We strive to increase passenger revenue primarily by increasing our yield per flight or by filling a higher proportion of available seats, which produces higher operating revenue per available seat mile. Other revenue primarily consists of cargo revenue, incidental services revenue, marketing component related to the sale of frequent flyer miles, contract services and charter services revenue.
Operating revenue was $2.83 billion, $2.84 billion and $2.68 billion for the years ended December 31, 2019, 2018 and 2017, respectively. The change in operating revenue in 2019 from 2018 was nominal, down 0.2%, and is discussed below:

27


2019 vs. 2018
Passenger Revenue
Passenger revenue decreased by $5.0 million, or 0.2%, in 2019, as compared to 2018. Details of this change is described in the table below:
 
 
 
Increase (Decrease)
vs. Year Ended December 31, 2018
 
Year Ended December 31, 2019
 
Passenger
Revenue
 
Yield
 
RPMs
 
ASM
 
PRASM
 
(in millions)
 
 
 
 
 
 
 
 
Domestic
$
1,920.9

 
$
(13.3
)
 
(6.3
)%
 
6.0
 %
 
5.2
 %
 
(5.6
)%
International
676.9

 
8.3

 
2.6

 
(1.4
)
 
(4.2
)
 
5.6

Total scheduled
$
2,597.8

 
$
(5.0
)
 
(3.6
)%
 
3.5
 %
 
2.0
 %
 
(2.2
)%
Domestic revenue decreased $13.3 million during 2019 as capacity reductions on short-haul routes outpaced capacity and passenger growth on our longer haul routes combined with a 2.8% decline in average fares. As a result, domestic RPM increased 6.0% during the year ended December 31, 2019.
Domestic ASM were up 5.2% in 2019 as a result of increased operations resulting from the delivery of six additional A321neo aircraft in 2019, bringing our total A321neo fleet to 17 aircraft as of December 31, 2019. During the year, we expanded our operations and now have direct routes between Honolulu, Hawai'i and Boston, Massachusetts (April 2019), Kahului, Hawai'i and Sacramento, California (April 2019), and Kahului, Hawai'i and Las Vegas, Nevada (December 2019). We expanded existing service with an additional daily flight between Honolulu, Hawai'i and San Francisco, California (October 2019).
International revenue increased $8.3 million during the year ended December 31, 2019 as compared to the prior year period driven by a combination of capacity reduction in lower performing routes along with improved loads and average fares.
International ASM were down 4.2% in 2019, largely due to our suspension of service to Beijing, China in late 2018. This reduction was partially offset by the expansion of our operations with a direct route between Honolulu, Hawai'i and Fukuoka, Japan in November 2019. Additionally, in 2019, we received approval from the U.S. Department of Transportation for an additional slot for service to Haneda Airport in Tokyo, Japan, which we expect will commence in 2020.
Other Operating Revenue
Other operating revenue increased by $0.2 million, or 0.1%, in 2019, as compared to 2018, primarily due to an increase in loyalty program revenue of $15.7 million related to brand usage associated with our co-brand credit card partnership with Barclays and other performance obligations through additional card acquisitions and increased spend. Refer to Note 4 in the consolidated financial statements for additional information. Other components within our Other operating revenue line include, but are not limited to, cargo, ground handling and other freight services, which collectively, declined in 2019 by approximately $15.9 million due to reduced volumes.
Operating Expenses
During the year ended December 31, 2019, total operating expense decreased $18.3 million or 0.7% to $2.5 billion as compared to the same period in 2018. The largest components of our operating expenses are wages and benefits provided to our

28


employees and aircraft fuel (including taxes and delivery). Increases (decreases) in operating expenses are detailed below.
 
Changes for the year ended December 31, 2019 as compared to year ended December 31, 2018
 
$
 
%
 
(in thousands)
 
 
Operating expense:
 

 
 

Aircraft fuel, including taxes and delivery
$
(56,971
)
 
(9.5
)%
Wages and benefits
38,937

 
5.7

Aircraft rent
(7,057
)
 
(5.6
)
Maintenance materials and repairs
10,013

 
4.2

Aircraft and passenger servicing
6,479

 
4.1

Commissions and other selling
901

 
0.7

Depreciation and amortization
19,040

 
13.6

Other rentals and landing fees
2,719

 
2.1

Purchased services
(84
)
 
(0.1
)
Contract terminations expense
(35,322
)
 
(100.0
)%
Other
3,053

 
2.0

Total
$
(18,292
)
 
(0.7
)%
Aircraft fuel
The price and availability of aircraft fuel is volatile due to global economic and geopolitical factors that we can neither control nor accurately predict. The decrease in aircraft fuel expense is illustrated in the following table:
 
Year Ended December 31,
 
 
 
2019
 
2018
 
% Change
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
$
542,573

 
$
599,544

 
(9.5
)%
Fuel gallons consumed
270,001

 
273,783

 
(1.4
)%
Average fuel price per gallon, including taxes and delivery
$
2.01

 
$
2.19

 
(8.2
)%
We believe economic fuel expense is the best measure of the effect of fuel prices on our business as it most closely approximates the net cash outflow associated with the purchase of fuel for our operations and is consistent with how management manages our business and assesses our operating performance. We define economic fuel expense as GAAP fuel expense plus (gains)/losses realized through actual cash (receipts)/payments received from or paid to hedge counterparties for fuel hedge derivative contracts settled in the period inclusive of costs related to hedging premiums.
Economic fuel expense is calculated as follows:
 
Year Ended December 31,
 
 
 
2019
 
2018
 
% Change
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
$
542,573

 
$
599,544

 
(9.5
)%
Realized losses (gains) on settlement of fuel derivative contracts
12,403

 
(25,563
)
 
(148.5
)%
Economic fuel expense
$
554,976

 
$
573,981

 
(3.3
)%
Fuel gallons consumed
270,001

 
273,783

 
(1.4
)%
Economic fuel costs per gallon
$
2.06

 
$
2.10

 
(1.9
)%
See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for additional discussion of our jet fuel costs and related derivative program.
Wages and benefits

29


Wages and benefits expense increased by $38.9 million, or 5.7%, in 2019, as compared to 2018, primarily driven by increased headcount (up 1.8% in 2019) and pay rate increases for eligible employees.
Maintenance materials and repairs
Maintenance materials and repairs increased $10.0 million, or 4.2%, in 2019, as compared to 2018. On a per ASM basis, maintenance, materials, and repairs expense increased 1.4% as compared to the prior year, primarily attributed to scheduled rate increases on our power by hour contracts.
Depreciation and amortization
Depreciation and amortization increased $19.0 million, or 13.6%, in 2019, as compared to 2018 as a result of our increased capital expenditures in recent years, including the addition of new aircraft, fleet modifications and improvements in information technology infrastructure and enhancements.
Contract terminations expense
During the year ended December 31, 2018, we terminated two contracts which incurred a total of $35.3 million in expense. The transactions are described below:

In January 2018, we entered into a transaction with a lessor to early terminate three Boeing 767-300 aircraft leases and concurrently entered into a forward sale agreement for the same three Boeing 767-300 aircraft, including two Pratt & Whitney 4060 engines for each aircraft. These aircraft were previously accounted for as operating leases. In order to exit the lease and purchase the aircraft, we agreed to pay a total of $67.1 million (net of all deposits) of which a portion was expensed immediately and recognized as a contract termination fee. The expensed amount represents the total purchase price amount over fair value of the aircraft purchased as of the date of the transaction.

In February 2018, we exercised our right to terminate the aircraft purchase agreement with Airbus for six Airbus A330-800neo aircraft and the purchase rights for an additional six Airbus A330-800neo aircraft. To terminate the purchase agreement, we were obligated to repay Airbus for concessions received relating to a prior firm order, training credits, as well as forfeit the pre-delivery progress payments made towards the flight equipment. We recorded a contract terminations expense to reflect the termination penalty within our consolidated statements of operations.
Nonoperating expense, net
Net nonoperating expense decreased by $9.3 million in 2019, as compared to 2018, primarily attributed to the loss on fuel derivatives of $6.7 million recognized in 2019 as compared to a gain of $5.6 million in 2018. This was offset by a $5.1 million reduction in interest expense and amortization of debt discounts and issuance costs. The reduction in interest expense is attributable to the paydown of our Boeing 717-200 financing obligations offset by the acquisition of $227.9 million (¥24.7 billion) in JPY denominated financing in September 2019 at fixed installment coupon rates of 0.76% and 0.65%, respectively.
Income Tax Expense
Our effective tax rate was 26.6% for 2019, compared with 22.6% for 2018. During the year ended December 31, 2018, we completed our accounting for the effects of the Tax Act providing for a one-time tax benefit, representing a 3.1% pt. decrease to the effective tax rate, and accounting for most of the change in effective tax rate.

Liquidity and Capital Resources
Our primary sources of liquidity are:
Our existing cash and cash equivalents and short-term investments of $618.7 million, and our expected cash from operations;
Our 30 unencumbered aircraft in our fleet as of December 31, 2019, that could be financed, if necessary; and
Our $235.0 million revolving credit facility with no outstanding borrowing. Information about this facility can be found in Note 9 to the consolidated financial statements.
At December 31, 2019, we had $1.4 billion of debt and lease obligations, including $158.4 million classified as current in the Consolidated Balance Sheets. As of December 31, 2019, our current liabilities exceeded current assets by approximately $200.5 million. However, approximately $606.7 million of our current liabilities are related to advanced ticket sales and frequent flyer deferred revenue, both of which largely represent revenue to be recognized for travel within the next 12 months and do not

30


represent cash outlays. The deficit in working capital does not have an adverse impact to our cash flows, liquidity, or operations.
Cash Flows
Net cash provided by operating activities was $485.1 million and $508.5 million in 2019 and 2018, respectively. Operating cash flows are primarily derived from providing air transportation to customers. The vast majority of tickets are purchased in advance of when travel is provided, and in some cases, several months before the anticipated travel date. Operating cash outflows are related to the recurring expenses of the airline operations. The operating cash flows for 2019 and 2018 were impacted primarily by our results of operations, adjusted for non-cash items as well as changes in operating assets and liabilities, including, but not limited to, Air traffic liability, Frequent flyer deferred revenue, Accounts receivables and accrued liabilities. Additionally, during 2019, we made a prepayment of $50.0 million to one of our maintenance service providers related to future power by hour services. Net cash provided by operating activities is primarily used to finance capital expenditures, including pre-delivery payments for future aircraft deliveries, repayment of debt and finance lease obligations, fund stock repurchases, pay dividends, and provide working capital.
Cash used in investing activities was $405.2 million and $316.5 million for 2019 and 2018, respectively. Investing activities in 2019 and 2018 included Capital expenditures, primarily related to aircraft and other equipment and the purchases and sales of short-term investments. During 2019, Capital expenditures were $397.4 million, the majority of which were payments for new A321 aircraft delivered to us. This compared with $486.8 million in Capital expenditures during 2018. We currently estimate our 2020 Capital expenditures will range between approximately $220 million to $260 million. During 2019, our purchases and sales of short-term investments resulted in net cash inflow of $11.1 million. During 2018, purchases and sales of short-term investments resulted in net cash outflows of $36.6 million. During 2018, we received proceeds of $46.7 million as a result of the sale of three Boeing 767-300 aircraft and $87.0 million as a result of the completion of the sale and subsequent leaseback of an A330-200 aircraft accounted for as an operating lease.
Net cash used in financing activities was $24.5 million and $115.4 million for 2019 and 2018, respectively. During 2019, we repaid $109.1 million in debt and finance lease obligations, compared with $68.2 million during 2018. During 2019 and 2018, we issued Japanese Yen denominated notes of $227.9 million and $86.5 million, respectively, which are collateralized through a combination of A330-200 and A321neo aircraft. See Note 9 to the consolidated financial statements for further information. We repurchased $68.8 million of our outstanding common stock through authorized share repurchases during 2019, compared with repurchases of $102.5 million in 2018. We also paid $22.8 million in dividends to Shareholders during 2019, compared with $24.2 million in 2018. Although we currently intend to continue paying dividends on a quarterly basis for the foreseeable future, our Board of Directors may change the timing, amount, and payment of dividends on the basis of the results of operations, financial condition, cash requirements, future prospects, and other factors deemed relevant by our Board of Directors.
Credit Card Holdbacks
Under our bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, are reported as restricted cash in our Consolidated Balance Sheets. As of December 31, 2019 and 2018, there were no holdbacks held with our credit card processors.
In the event of a material adverse change in our business, the holdback could increase to an amount up to 100% of the applicable credit card activity for all unflown tickets, which would also result in an increase in the required level of restricted cash. If we are unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material adverse impact on our operations.
Pension and Other Postretirement Benefit Plan Funding
As of December 31, 2019, the excess of the projected benefit obligations over the fair value of plan assets was approximately $207.8 million. We contributed $50.0 million and $30.2 million to our defined benefit pension plans (excluding one-time settlement payments) during 2018 and 2017, respectively. We contributed $3.8 million, $3.6 million, and $3.1 million to our disability plan for 2019, 2018 and 2017, respectively. Future funding requirements for our defined benefit and other postretirement plans are dependent upon many factors such as interest rates, funded status, applicable regulatory requirements, and the level and timing of asset returns. We have made significant contributions (above the minimum required) to our defined benefit pension and disability plans in the previous years. In 2019, we were not required to, and did not make, contributions to our defined benefit pension plan. In 2020, our minimum required contribution has been estimated to be approximately $17.8 million.
Stock Repurchase Program and Dividends

31


In November 2018, our Board of Directors approved a new stock repurchase program pursuant to which we may repurchase up to $100 million of our outstanding common stock over a two-year period through December 2020. The stock repurchase program is subject to further modification or termination at any time. We spent $68.8 million (November 2018 program) and $102.5 million (November 2017 & 2018 program) to repurchase and retire approximately 2.5 million shares and 2.8 million shares of our common stock in open market transactions during year ended December 31, 2019 and December 31, 2018, respectively.
The following table displays information with respect to our stock repurchase programs as of December 31, 2019:
(in thousands, except repurchase price)
 
Share Repurchase Authorization
(in '000s)
 
Weighted Average Repurchase Price
 
Planned Completion Date
 
Authorization Remaining
(in '000s)
April 2015 Program
 
$
100,000

 
$
25.75

 
April 2017
 
Completed April 2017
April 2017 Program
 
100,000

 
39.85

 
May 2019
 
Completed December 2017
November 2017 Program
 
100,000

 
36.71

 
December 2019
 
Completed December 2018
November 2018 Program
 
100,000

 
27.33

 
December 2020
 
$28,700

We declared and paid cash dividends of $22.8 million, $24.2 million, and $6.3 million in 2019, 2018, and 2017, respectively. In January 2020, our Board of Directors declared a $0.12 per share dividend payable on February 28, 2020 to stockholders of record as of February 14, 2020.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (i) made guarantees, (ii) retained a contingent interest in transferred assets, (iii) an obligation under derivative instruments classified as equity or (iv) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development arrangements with the company. We have no arrangements of the types described in the first three categories that we believe may have a current or future material effect on our financial condition, liquidity or results of operations. We do have obligations arising out of variable interests in unconsolidated entities related to certain aircraft leases. To the extent our leases and related guarantees are with a separate legal entity other than a governmental entity, we are not the primary beneficiary because the lease terms are consistent with market terms at the inception of the lease, and the lease does not include a residual value guarantee, fixed price purchase option, or similar feature.
Contractual Obligations
Our estimated contractual obligations as of December 31, 2019 are summarized in the following table:
Contractual Obligations
Total
 
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 Years
 
(in thousands)
Debt obligations, including principal and interest (1)
$
676,270

 
$
70,510

 
$
196,659

 
$
123,443

 
$
285,658

Finance lease obligations, including principal and interest (2)
196,600

 
28,812

 
54,462

 
44,976

 
68,350

Operating leases obligations (2)
774,986

 
108,369

 
191,485

 
162,385

 
312,747

Aircraft purchase commitments (3)
1,627,611

 
177,643

 
745,579

 
594,214

 
110,175

Other commitments(4)
492,345

 
83,130

 
155,578

 
122,372

 
131,265

Projected employee benefit contributions(5)
61,900

 
15,900

 
33,700

 
8,200

 
4,100

Total contractual obligations
$
3,829,712

 
$
484,364

 
$
1,377,463

 
$
1,055,590

 
$
912,295

(1)
Represents scheduled principal and estimated interest payments under our long-term debt based on interest rates specified in the applicable debt agreements. Principal and interest payments for debt denominated in Japanese Yen is estimated using the spot rate as of December 31, 2019.

(2)
Refer to Note 10 of the Notes to the Consolidated Financial Statements for additional information regarding finance and operating leases.

(3)
Refer to aircraft purchase commitments table in Item 2 for additional information about our future aircraft purchases.


32


(4)
Represents commitments for services provided by third-parties for aircraft maintenance, capacity purchases, IT, and reservations. Total contractual obligations do not include long-term contracts where the commitment is variable in nature (with no minimum guarantee), such as aircraft maintenance deposits due under operating leases and fees due under certain other agreements such as aircraft maintenance power-by-the-hour, computer reservation systems and credit card processing agreements, or when the agreements contain short-term cancellation provisions.

(5)
Represents estimated contributions to our defined benefit pension and disability plans based on actuarially determined estimates. Amounts are subject to change based on numerous factors, including interest rate levels, the amount and timing of asset returns and the impact of future legislation. We are currently unable to estimate the projected contributions beyond 2025. See "Critical Accounting Policies" below for a discussion of our current year assumption regarding our employee benefit plans.
Capital Commitments
As of December 31, 2019, we had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:
Aircraft Type
Firm
Orders
 
Purchase
Rights
 
Expected Delivery Dates
A321neo aircraft
1

 
9

 
In 2020
B787-9 aircraft
10

 
10

 
Between 2021 and 2025
Pratt & Whitney spare engines:
 
 
 
 
 
A321neo spare engines
0

 
2

 
N/A
General Electric GEnx spare engines:
 

 
 

 
 
B787-9 spare engines
2

 
2

 
Between 2021 and 2025
Committed expenditures for these aircraft, engines, and related flight equipment are approximately $178 million in 2020, $312 million in 2021, $433 million in 2022, $244 million in 2023, $350 million in 2024, and $110 million thereafter.
In order to complete the purchase of these aircraft and fund related costs, we may need to secure acceptable financing. We have backstop financing available from aircraft and engine manufacturers, subject to certain customary conditions. Financing may be necessary to satisfy our capital commitments for firm order aircraft and other related capital expenditures. We can provide no assurance that any financing not already in place for aircraft and spare engine deliveries will be available to us on acceptable terms when necessary or at all.
Non-GAAP Financial Measures
We believe the disclosure of non-GAAP financial measures is useful information to readers of our financial statements because:
We believe it is the basis by which we are evaluated by industry analysts and investors;
These measures are often used in management and board of directors' decision making analysis;
It improves a reader's ability to compare our results to those of other airlines; and
It is consistent with how we present information in our quarterly earnings press releases.
See table below for reconciliation between GAAP consolidated net income to adjusted consolidated net income, including per share amounts (in thousands unless otherwise indicated). The adjustments are described below:
As a result of the Tax Act, we recognized a one-time benefit of $83.0 million in the fourth quarter of 2017 from the estimated impact of the revaluation of deferred tax assets and liabilities. This tax benefit is being excluded from our results as a Special Item. We excluded the Tax Act effect (on the financial statements) in order to allow investors to better analyze our core results and allow the information to be presented on a comparative basis to the prior year.
Changes in fair value of derivative contracts, net of tax, are based on market prices for open contracts as of the end of the reporting period. This adjustment includes the unrealized gains and losses on fuel and interest rate derivatives (not designated as hedges) that will settle in future periods and the reversal of prior period unrealized amounts. Excluding the impact of these derivative adjustments allows investors to analyze our core operational performance and compare our results to other airlines in the periods presented below.

33


Change in unrealized losses on foreign debt are based on fluctuations in foreign exchanges rates related to foreign-denominated debt agreements. We believe that excluding the impact of these amounts helps investors analyze our operational performance and compare our results to other airlines in the periods presented below.
Loss (gain) on sale of aircraft is the result of adjustments to the final purchase price for three of our Boeing 767-300 aircraft included in a forward sale agreement we entered into in January 2018 and described below. During the twelve months ended December 31, 2018, we recorded a loss of $0.3 million. During the twelve months ended December 31, 2019, we recorded a gain on disposal of Boeing 767-300 aircraft equipment of $1.9 million in conjunction with the retirement of our Boeing 767-300 fleet.

2017 Special Items

In August 2017, we terminated the Hawaiian Airlines, Inc. Salaried & IAM Merged Pension Plan (the Merged Plan) and settled a portion of our pilots' other post-retirement medical plan liability. In connection with the reduction of these liabilities we recorded one-time Other nonoperating special charges of $35.2 million related to the Merged Plan termination and $10.4 million related to the other post-retirement (OPEB) medical plan partial settlement.

In April 2017, we executed a sale leaseback transaction with an independent third party for three Boeing 767-300 aircraft. The lease terms for the three aircraft commenced in April 2017 and end between November 2018 and January 2019. During the twelve months ended December 31, 2017, we recorded a loss on sale of aircraft of $4.8 million.

In February 2017, we reached a tentative agreement with ALPA, covering our pilots. In March 2017, we received notice from ALPA that the agreement was ratified by ALPA's members.  The agreement became effective April 1, 2017 and has a term of 63 months.  The agreement includes, among other various benefits, a pay adjustment and ratification bonus computed based on previous service. During the twelve months ended December 31, 2017, we expensed $18.7 million primarily related to a one-time payment to reduce our future 401K employer contribution for certain pilot groups, which is not recoverable once paid.

2018 Contract Terminations Expense
During the twelve months ended December 31, 2018, we terminated two contracts which incurred a total of $35.3 million in contract terminations expense. The transactions are described below:

In February 2018, we exercised our right to terminate our aircraft purchase agreement with Airbus for six Airbus A330-800neo aircraft and the purchase rights for an additional six Airbus A330-800neo aircraft. To terminate the purchase agreement, we were obligated to repay Airbus for concessions received relating to a prior firm order, training credits, as well as forfeit the pre-delivery progress payments made towards the flight equipment. We recorded a contract terminations expense to reflect the termination penalty in our consolidated statements of operations.
In January 2018, we entered into a transaction with our lessor to early terminate and purchase three Boeing 767-300 aircraft leases and concurrently entered into a forward sale agreement for the same three Boeing 767-300 aircraft, including two Pratt & Whitney 4060 engines for each aircraft. These aircraft were previously accounted for as operating leases. In order to exit the lease and purchase the aircraft, we agreed to pay a total of $67.1 million (net of all deposits) of which a portion was expensed immediately and recognized as a contract termination fee. The expensed amount represents the total purchase price amount over fair value of the aircraft purchased as of the date of the transaction.

We believe that excluding such special items helps investors analyze our operational performance and compare our results to other airlines in the periods presented below.

34


 
Year Ended December 31,
 
2019
 
2018
 
2017
 
Total
 
Diluted Per Share
 
Total
 
Diluted Per Share
 
Total
 
Diluted Per Share
 
(in thousands, except for per share data)
GAAP net income, as reported
$
223,984

 
$
4.71

 
$
233,200

 
$
4.62

 
$
330,610

 
$
6.19

Add: impact of tax reform

 

 

 

 
(82,978
)
 
(1.55
)
Add: changes in fair value of derivative contracts
(5,694
)
 
(0.13
)
 
19,973

 
0.39

 
(3,845
)
 
(0.07
)
Add: change in unrealized loss on foreign debt
696

 
0.02

 
380

 
0.01

 

 

Add: loss (gain) on sale of aircraft
(1,948
)
 
(0.04
)
 
309

 
0.01

 

 

Add: contract terminations expense

 

 
35,322

 
0.70

 

 

Add: special items
 
 
 
 
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
 
 
 
 
Loss on sale of aircraft

 

 

 

 
4,771

 
0.09

Collective bargaining charge

 

 

 

 
18,679

 
0.35

Nonoperating
 
 
 
 
 
 
 
 
 
 
 
Partial settlement and curtailment loss

 

 

 

 
10,384

 
0.19

Loss on plan termination

 

 

 

 
35,201

 
0.66

Tax effect of adjustments
1,845

 
0.04

 
(14,365
)
 
(0.29
)
 
(23,886
)
 
(0.45
)
Adjusted net income
$
218,883

 
$
4.60

 
$
274,819

 
$
5.44

 
$
288,936

 
$
5.41

Operating Costs per Available Seat Mile (CASM)
We have separately listed in the table below our fuel costs per ASM and non-GAAP unit costs, excluding fuel and special items. These amounts are included in CASM, but for internal purposes we consistently use cost metrics that exclude fuel and special items (if applicable) to measure and monitor its costs.

35


CASM and CASM, excluding fuel, loss (gain) on sale of aircraft, contract terminations expense, and special items, are summarized in the table below:
 
Year Ended December 31,
 
2019
 
2018
 
2017
 
(in thousands, except for CASM figures)
GAAP operating expenses
$
2,504,751

 
$
2,523,043

 
$
2,211,107

Less: aircraft fuel, including taxes and delivery
(542,573
)
 
(599,544
)
 
(440,383
)
Less: contract terminations expense

 
(35,322
)
 

Less: loss (gain) on sale of aircraft
1,948

 
(309
)
 

 Less: special items
 
 
 
 
 
Loss on sale of aircraft

 

 
(4,771
)
Collective bargaining charge

 

 
(18,679
)
Adjusted operating expenses—excluding aircraft fuel, loss on sale of aircraft, contract terminations expense, and special items
$
1,964,126

 
$
1,887,868

 
$
1,747,274

Available Seat Miles
20,596,711

 
20,171,911

 
19,006,682

CASM—GAAP

12.16
¢
 

12.51
¢
 

11.63
¢
Less: aircraft fuel, including taxes and delivery
(2.62
)
 
(2.97
)
 
(2.32
)
Less: contract terminations expense

 
(0.18
)
 

Less: loss (gain) on sale of aircraft
0.00

 
(0.00)

 

Less: special items
 
 
 
 
 
Loss on sale of aircraft

 

 
(0.02
)
Collective bargaining charge

 

 
(0.10
)
CASM—excluding aircraft fuel, loss on sale of aircraft, contract terminations expense, and special items

9.54
¢
 

9.36
¢
 

9.19
¢
Critical Accounting Policies and Estimates
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, revenue and expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates. 
Critical accounting policies and estimates are defined as those accounting policies and accounting estimates that are reflective of significant judgments and uncertainties, and that potentially result in materially different results under different assumptions and conditions. Our most critical accounting policies and estimates are described below. See the summary of significant accounting policies included in Note 1 to the consolidated financial statements for additional discussion of the application of these estimates and other accounting policies.
Revenue Recognition
Passenger revenue. We record passenger ticket sales and tickets sold by other airlines for use on Hawaiian as passenger revenue when the transportation is provided or upon scheduled flight for tickets expected to expire unused. The value of unused passenger tickets is included in current liabilities as Air Traffic Liability. Non-refundable tickets generally expire 13 months from the date of flight. We record an estimate of breakage revenue on the scheduled flight date for tickets that will expire unused. These estimates are based on the evaluation of actual historical results and forecasted trends. Ticket change fees are recorded in air traffic liability and recognized when the related transportation is provided.
Frequent flyer revenue. HawaiianMiles, Hawaiian's frequent flyer travel award program, provides a variety of awards to program members based on accumulated mileage. ASC 606 requires us to account for miles earned by passengers in the HawaiianMiles program through flight activity as a component of the passenger revenue ticket transaction at the estimated selling price of the miles. Ticket consideration received is allocated between the performance obligations, primarily travel and miles earned by passengers. The allocated value of the miles is deferred until the free travel or other award is used by the passenger, at which time it is included in passenger revenue. The value of the ticket used in the determination of the estimated selling price is based on the historical value of equivalent flights to those provided for loyalty awards and the related miles redeemed to obtain that award adjusted for breakage or fulfillment. The equivalent ticket value (ETV) includes a fulfillment

36


discount (breakage) to reflect the value of the award ticket over the number of miles that, based on historical experience, will be needed to obtain the award. On a quarterly basis, we calculate the ETV by analyzing the fares of similar tickets for the prior 12 months, considering cabin class and geographic region.

We also sell mileage credits to companies participating in our frequent flyer program. These contracts generally include multiple performance obligations, including the transportation that will ultimately be provided when the mileage credits are redeemed and marketing and brand related activities.

During the first quarter of 2018, we amended our partnership with Barclaycard US, Hawaiian's co-branded credit card partner. Management determined that the amendment should be accounted for as a termination of the existing contract and the creation of a new contract under ASC 606 and the relative selling price was determined for each performance obligation of the new agreement. The new agreement continues through 2024 and includes improved economics and enhanced product offerings for our Barclay's co-branded cardholders. The amended agreement did not change, and includes the following performance obligations; (i) transportation that will ultimately be provided when mileage credits are redeemed (transportation), (ii) the Hawaiian Airlines brand and access to its members lists (collectively, brand performance), (iii) marketing, and (iv) airline benefits to cardholders, including discounts and anniversary travel benefits, baggage waivers and inflight purchase credits. We determined the relative fair value of each performance obligation by estimating the selling prices of the deliverables by considering discounted cash flows using multiple inputs and assumptions, including: (1) the expected number of miles to be awarded and redeemed; (2) the estimated weighted average equivalent ticket value, adjusted by a fulfillment discount; (3) the estimated total annual cardholder spend; (4) an estimated royalty rate for the Hawaiian portfolio; and (5) the expected use of each of the airline benefits. The overall consideration received is allocated to the performance obligations based on their relative selling prices.

The transportation performance obligation is deferred and recognized as passenger revenue when the transportation is provided. The value to the financial institution is provided each time a new cardholder chooses the Hawaiian branded credit card and each time a cardholder chooses to use the co-branded credit card. Therefore, we recognize revenue for the brand performance obligation as members use their co-brand credit card and the resulting mileage credits are issued to them, which best correlates with our performance toward satisfying the obligation.

Accounting for frequent flyer revenue involves the use of various techniques to estimate revenue. To determine the total estimated transaction price, we forecast future credit card activity based on historical data. The relative selling price is determined using management’s estimated standalone selling price of each performance obligation. The objective of using the estimated selling price based methodology is to determine the price at which we would transact a sale if the product or service were sold on a standalone basis. Accordingly, we determine our best estimate of selling price by considering multiple inputs and methods including, but not limited to, discounted cash flows, brand value, number of miles awarded and number of miles redeemed. We estimate the selling price of miles using an ETV adjusted for a fulfillment discount as described above.

Miles expire after 18 months of member account inactivity. We review our breakage estimates annually based upon the latest available information regarding redemption and expiration patterns (e.g., credit card and non-credit card holders). Our estimate of the expected expiration of miles requires significant management judgment. Current and future changes to expiration assumptions or to the expiration policy, or to program rules and program could affect the estimated value of a mile.
Leases
In 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This ASU and subsequently issued amendments require leases with durations greater than twelve months to be recognized on the consolidated balance sheet. We adopted ASC 842 as of January 1, 2019 using the modified retrospective approach. Prior year financial statements were not recast under the new standard. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carry-forward our historical assessments of (a) whether contracts are, or contain leases, (b) lease classification, and (c) initial
direct costs. We lease property and equipment under finance and operating lease, including aircraft and related engines, real property, airport and terminal facilities, maintenance facilities, and general offices. We do not separate lease and nonlease components of contracts. Certain leases include escalation clauses, renewal options, and/or termination options. When lease renewals or termination options are considered to be reasonably assured, such periods are included in the lease term and fixed payments are included in the calculation of the lease liability and ROU asset.

When available, we utilize the rate implicit in the lease to discount lease payments to present value; however, none of our leases provide a readily determinable implicit rate. Therefore, we estimate our incremental borrowing rate to discount lease payments based on information available at lease commencement. We give consideration to our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.

37


Pension and Other Postretirement and Postemployment Benefits
The calculation of pension and other postretirement and postemployment benefit expenses and its corresponding liabilities require the use of significant assumptions, including the assumed discount rate, the expected long-term rate of return on plan assets, expected mortality rates of the plan participants, and the expected health care cost trend rate. Changes in these assumptions will impact the expense and liability amounts, and future actual experience may differ from these assumptions.
The significant assumptions as of December 31, 2019 are as follows:
Pension:
 

 
 
Discount rate to determine projected benefit obligation
3.38
%
 
 
Expected return on plan assets
6.91
%
 
^
Postretirement:
 

 
 
Discount rate to determine projected benefit obligation
3.38
%
 
 
Expected return on plan assets
N/A

 
 
Expected health care cost trend rate:
 

 
 
Initial
6.50
%
 
 
Ultimate
4.75
%
 
 
Years to reach ultimate trend rate
7

 
 
Disability:
 

 
 
Discount rate to determine projected benefit obligation
3.40
%
 
 
Expected return on plan assets
4.90
%
 
^
N/A      Not Applicable
^
Expected return on plan assets used to determine the net periodic benefit expense for 2020 is 6.76% for the pension plans and 4.90% for the disability plan.
The expected long-term rate of return assumption is developed by evaluating input from the trustee managing the plans' assets, including the trustee's review of asset class return expectations by several consultants and economists, as well as long-term inflation assumptions. Our expected long-term rate of return on plan assets is based on a target allocation of assets, which is based on our goal of earning the highest rate of return while maintaining risk at acceptable levels. The Retirement Plan for Pilots of Hawaiian Airlines, Inc. and the Pilot's Voluntary Employee Beneficiary Association Disability and Survivor's Benefit Plan strive to have assets sufficiently diversified so that adverse or unexpected results from any one security class will not have an unduly detrimental impact on the entire portfolio. We believe that our long-term asset allocation on average will approximate the targeted allocation. We periodically review our actual asset allocation and rebalance the pension plan's investments to our targeted allocation when considered appropriate. Pension expense increases as the expected rate of return on plan assets decreases. Lowering the expected long-term rate of return by 100 basis points will have the following effects on our estimated 2020 pension and disability benefit expense recorded in wages and benefits and nonoperating expense:
 
100 Basis Point Decrease
 
(in millions)
Increase in estimated 2020 pension expense
$
3.5

Increase in estimated 2020 disability benefit expense
0.4

We determine the appropriate discount rate for each of our plans based on current rates on high quality corporate bonds that would generate the cash flow necessary to pay plan benefits when due. The pension and other postretirement benefit liabilities and future expense both increase as the discount rate is reduced. Lowering the discount rate by 100 basis points would have the following effects:

38


 
100 Basis Point Decrease
 
(in millions)
Increase in pension obligation as of December 31, 2019
$
54.6

Increase in other postretirement benefit obligation as of December 31, 2019
19.7

Decrease in estimated 2020 pension expense (operating and nonoperating)
(0.6
)
Increase in estimated 2020 other postretirement benefit expense (operating and nonoperating)
1.8

The health care cost trend rate is based upon an evaluation of our historical trends and experience taking into account current and expected market conditions. Changes in the assumed current health care cost trend rate by year by 100 basis points would have the following annual effects:
 
100 Basis Point Increase
 
(in millions)
Increase in other postretirement benefit obligation as of December 31, 2019
$
10.0

Increase in estimated 2020 other postretirement benefit expense (operating and nonoperating)
1.3

 
100 Basis Point Decrease
 
(in millions)
Decrease in other postretirement benefit obligation as of December 31, 2019
$
8.5

Increase in estimated 2020 other postretirement benefit expense (operating and nonoperating)
0.9


In 2017, we recognized a one-time Other nonoperating special item expense of $10.4 million related to the settlement of a portion of our pilots' other post-retirement medical plan liability, pursuant to which the parties agreed to eliminate the post-65 post-retirement medical benefit for all active pilots and to replace the benefit with a health retirement account (HRA) managed by ALPA. We evaluated the accounting for the transaction in accordance with ASC 715-60 Compensation-Retirement Benefits - Defined Benefit Plans-Other Postretirement and determined that it represented a curtailment and partial settlement of the pilots' other post-retirement benefit plan.
Long-Lived Assets
Long-lived assets used in operations, consisting principally of property and equipment. Depreciable life is determined through economic analysis, such as reviewing existing fleet plans, obtaining appraisals and comparing estimated lives to other airlines that operate similar fleets. Residual values are estimated based on historical experience and are based on when the aircraft are acquired and typically reflect asset values that have not reached the end of their physical life.
In 2019, the Company changed its accounting estimate for the expected useful life of its Boeing 717-200 aircraft from a range of 7 to 11 years to 15 to 16 years. The change in estimate was applied prospectively effective October 1, 2019 and does not have a material impact on current and/or future reporting periods.
When testing for impairment management considers market trends, the expected useful lives of the assets, changes in economic conditions, recent transactions involving sales of similar assets and, if necessary, estimates of future undiscounted cash flows. To determine whether impairment exists for aircraft used in operations, assets are grouped at the fleet-type level (the lowest level for which there are identifiable cash flows) and future cash flows are estimated based on projections of capacity, passenger mile yield, fuel costs, labor costs and other relevant factors. If, at any time, management determines the net carrying value of an asset is not recoverable, the amount is reduced to its fair value during the period in which such determination is made. Any changes in the estimated useful lives of these assets will be accounted for prospectively.

 

39


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to market risk exposure related to commodity (fuel) prices, interest rates, and foreign currency exchange rates. The adverse effects of potential changes in these market risks are discussed below. In an effort to manage our exposure to these risks, we may enter into derivative contracts from time to time and may revise our derivative portfolio as market conditions change.
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
Aircraft fuel costs constitute a significant portion of our operating expense. Fuel costs represented 22% of our operating expenses for the year ended December 31, 2019. Approximately 70% of our fuel is based on Singapore jet fuel prices, 25% is based on U.S. West Coast jet fuel prices, and 5% on other jet fuel prices. We periodically enter into derivative financial instruments to manage our exposure to changes in the price of jet fuel. As of December 31, 2019, we hedged approximately 35% of our projected fuel requirements for 2020. A one cent increase in the cost of a gallon of jet fuel would result in approximately $2.8 million of additional annual fuel expense.
Interest Rates
Our exposure to market risk associated with changes in interest rates is primarily associated with our long-term debt obligations. At December 31, 2019, we had $774.1 million of fixed-rate debt obligations. We have no variable-rate debt outstanding as of December 31, 2019. Market risk associated with our fixed rate long-term debt relates to the potential reduction in fair value from an increase in interest rates. An increase of 100 basis points in average annual interest rates would have decreased the estimated fair value of our fixed-rate long-term debt by $52.6 million at December 31, 2019.
Foreign Currency
We have exposure to market risk associated with changes in foreign currency exchange rates because we generate sales, incur expenses, and have debt denominated and paid in foreign currencies, predominantly in Japanese Yen and to a lesser extent, the Australian Dollar.
To manage exchange rate risk, we transact our international sales and expenditures in the same foreign currency, to the extent practical. Additionally, our Yen denominated debt serves as a natural hedge against the volatility of exchange rates against cash inflows. We also have an established foreign currency derivative program, where we periodically enter into foreign currency forward contracts. At December 31, 2019, the fair value of our foreign currency forwards reflected a net asset position of $3.8 million in the consolidated balance sheet. We estimate that a 10% depreciation or appreciation in the U.S. dollar, relative to the Japanese Yen and Australian Dollar, would result in a change in annual pretax income, excluding the the impact of foreign currency hedges, of approximately $20.5 million.

40


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS

41


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Hawaiian Holdings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Hawaiian Holdings, Inc. (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the PCAOB, the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 12, 2020 expressed an unqualified opinion thereon.

Adoption of New Accounting Standards

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method for accounting for leases in 2019 due to the adoption of the new lease standard. The Company adopted the new lease standard using a modified retrospective approach.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.


42


 
 
Calculation and recognition of frequent flyer deferred revenue
Description of the Matter
 
At December 31, 2019, the frequent flyer deferred revenue liability was $350 million. Included in this obligation are revenues deferred from the sale of HawaiianMiles to partners, principally those under co-branded credit card arrangements and the value of miles earned by passengers for flights. As discussed in Note 1 to the consolidated financial statements, consideration from the sale of tickets is allocated between performance obligations; primarily travel and miles earned by passengers in the HawaiianMiles program. The allocated value of miles earned is deferred until free travel or other awards are used by the passenger, at which time, the value is recognized as revenue. The value of a ticket used in determination of the estimated selling price is based on the historical value of equivalent flights provided for loyalty awards and the related miles redeemed to obtain those awards adjusted for a breakage factor.

Auditing the frequent flyer deferred revenue was complex and highly judgmental due to significant estimation required in determining the value of loyalty awards. In particular, the amount of revenue allocated to the loyalty awards performance obligation is sensitive to estimated breakage.

How We Addressed the Matter in Our Audit
 
We tested internal controls that address the risks of material misstatement related to the measurement and valuation of the frequent flyer deferred revenue balance. For example, we tested controls over management’s review of significant assumptions and data inputs used in the calculation of estimated breakage rates.

To test the amount of revenue allocated to the loyalty performance obligation, our audit procedures included, among others, evaluating the methodology, significant assumptions, and underlying data utilized by the Company. We evaluated the methodology employed by management in their calculation of breakage for consistency with prior reporting periods and appropriateness based on the applicable accounting framework. We performed an analysis over the sensitivity of the deferred revenue balance to variations in the underlying data. For example, we modified the breakage rate to identify material fluctuations in the amount of revenue allocated to the loyalty performance obligation.

Further, we involved a valuation specialist to assist with our procedures. The procedures performed included evaluating the methodology and assumptions used by management to develop the breakage estimate using company-specific and industry information, as well as a comparison to the assumptions made in prior periods. We also tested the completeness and accuracy of the underlying data provided to management’s specialist.

/s/ ERNST & YOUNG LLP
 
 

We have served as the Company's auditor since 1999.

Honolulu, Hawai‘i
February 12, 2020

43



Hawaiian Holdings, Inc.
Consolidated Statements of Operations
For the Years ended December 31, 2019, 2018 and 2017
 
2019
 
2018
 
2017
 
(in thousands, except per share data)
Operating Revenue:
 

 
 

 
 

Passenger
$
2,597,772

 
$
2,602,793

 
$
2,486,827

Other
234,456

 
234,618

 
188,318

Total
2,832,228

 
2,837,411

 
2,675,145

Operating Expenses:
 
 
 

 
 

Wages and benefits
723,656

 
684,719

 
632,997

Aircraft fuel, including taxes and delivery
542,573

 
599,544

 
440,383

Aircraft rent
118,904

 
125,961

 
137,764

Maintenance materials and repairs
249,772

 
239,759

 
219,553

Aircraft and passenger servicing
164,275

 
157,796

 
144,853

Commissions and other selling
130,216

 
129,315

 
126,750

Depreciation and amortization
158,906

 
139,866

 
113,277

Other rentals and landing fees
129,622

 
126,903

 
116,763

Purchased services
131,567

 
131,651

 
110,787

Contract terminations expense

 
35,322

 

Special items

 

 
23,450

Other
155,260

 
152,207

 
144,530

Total
2,504,751

 
2,523,043

 
2,211,107

Operating Income
327,477

 
314,368

 
464,038

Nonoperating Income (Expense):
 
 
 

 
 

Other nonoperating special items

 

 
(45,585
)
Interest expense and amortization of debt discounts and issuance costs
(27,864
)
 
(33,001
)
 
(30,901
)
Interest income
12,583

 
9,242

 
6,132