<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) 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 1-8836
HAWAIIAN AIRLINES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Hawaii 99-0042880
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3375 Koapaka Street, Suite G-350
Honolulu, Hawaii 96819
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (808) 835-3700
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. (X) Yes ( ) No
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. (X) Yes ( ) No
As of November 1, 1998, 40,932,335 shares of Common Stock shares were
outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAWAIIAN AIRLINES, INC.
CONDENSED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 34,932 $ 15,713
Investment securities .................................................. - 4,003
Accounts receivable, net ............................................... 32,535 31,387
Inventories, net ....................................................... 9,282 9,350
Assets held for sale ................................................... 1,345 1,344
Prepaid expenses ....................................................... 1,802 4,344
--------------- ---------------
TOTAL CURRENT ASSETS ................................................ 79,896 66,141
--------------- ---------------
Property and equipment, less accumulated depreciation and
amortization of $23,543 and $17,165 in 1998 and 1997, respectively ..... 68,319 66,243
Assets held for sale ....................................................... 2,982 3,970
Other assets ............................................................... 7,305 6,920
Reorganization value in excess of amounts
allocable to identifiable assets, net ("Excess Reorganization Value") .. 47,961 57,550
--------------- ---------------
TOTAL ASSETS ........................................................ $ 206,463 $ 200,824
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ...................................... $ 2,191 $ 2,260
Current portion of capital lease obligations ........................... 4,531 4,244
Accounts payable ....................................................... 27,267 27,587
Air traffic liability .................................................. 22,114 21,169
Accrued liabilities .................................................... 15,417 14,934
--------------- ---------------
TOTAL CURRENT LIABILITIES ........................................... 71,520 70,194
--------------- ---------------
Long-Term Debt ............................................................. 3,542 3,991
Capital Lease Obligations .................................................. 7,147 10,580
Other Liabilities and Deferred Credits ..................................... 29,192 29,186
SHAREHOLDERS' EQUITY:
Common and Special Preferred Stock ..................................... 409 409
Capital in excess of par value ......................................... 99,314 99,237
Warrants ............................................................... 3,153 3,153
Notes receivable from Common Stock sales ............................... (1,581) (1,714)
Accumulated deficit .................................................... (6,233) (14,212)
Accumulated other comprehensive income (loss) .......................... - -
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY .......................................... 95,062 86,873
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......................... $ 206,463 $ 200,824
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to condensed financial statements.
2
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HAWAIIAN AIRLINES, INC.
CONDENSED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger ............................ $ 97,358 $ 88,799 $ 270,652 $ 254,316
Charter .............................. 8,416 8,054 26,519 28,723
Cargo ................................ 5,686 5,014 16,514 15,563
Other ................................ 4,072 3,490 11,096 10,383
--------- --------- --------- ---------
TOTAL ........................ 115,532 105,357 324,781 308,985
--------- --------- --------- ---------
OPERATING EXPENSES:
Wages and benefits ................... 31,486 28,589 90,412 86,179
Aircraft fuel, including taxes and oil 15,138 18,166 50,989 59,257
Maintenance materials and repairs .... 20,546 19,912 62,725 58,099
Rentals and landing fees ............. 8,357 8,125 23,016 25,856
Sales commissions .................... 2,574 3,469 8,712 10,392
Depreciation and amortization ........ 3,317 2,584 9,442 7,848
Other ................................ 22,604 19,259 63,824 58,606
--------- --------- --------- ---------
TOTAL ........................ 104,022 100,104 309,120 306,237
--------- --------- --------- ---------
OPERATING INCOME ......................... 11,510 5,253 15,661 2,748
--------- --------- --------- ---------
NONOPERATING EXPENSE:
Interest expense, net ................ (31) (61) (392) (240)
Loss on disposition of equipment ..... (83) (53) (142) (53)
Other, net ........................... (31) (231) (78) (816)
--------- --------- --------- ---------
TOTAL ........................ (145) (345) (612) (1,109)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES ............... 11,365 4,908 15,049 1,639
INCOME TAX PROVISION ..................... (5,231) (3,469) (7,070) (1,394)
--------- --------- --------- ---------
NET INCOME ............................... 6,134 1,439 7,979 245
OTHER COMPREHENSIVE INCOME ............... - - - -
--------- --------- --------- ---------
COMPREHENSIVE INCOME ..................... $ 6,134 $ 1,439 $ 7,979 $ 245
--------- --------- --------- ---------
--------- --------- --------- ---------
NET INCOME PER COMMON STOCK SHARE:
Basic ................................ $ 0.15 $ 0.04 $ 0.20 $ 0.01
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted .............................. $ 0.15 $ 0.03 $ 0.19 $ 0.01
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
SHARES OUTSTANDING:
Basic ................................ 40,932 40,454 40,906 40,197
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted .............................. 42,045 41,436 42,182 41,436
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to condensed financial statements.
3
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HAWAIIAN AIRLINES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 7,979 $ 245
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................... 9,442 7,848
Net periodic postretirement benefit cost ........ 1,071 963
Loss on disposition of equipment ................ 142 53
Income tax provision recognized as a reduction to
Excess Reorganization Value ................... 7,070 1,289
Increase in accounts receivable ................. (1,148) (7,471)
Decrease (increase) in inventories .............. 68 (2,297)
Decrease (increase) in prepaid expenses ......... 2,542 (331)
Decrease in accounts payable .................... (320) (36)
Increase in air traffic liability ............... 945 6,860
Increase in accrued liabilities ................. 483 3,795
Other, net ...................................... (1,273) (875)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .... 27,001 10,043
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of investment securities ...................... 4,001 -
Purchase of property and equipment ................. (9,291) (11,499)
Net proceeds from disposition of equipment ......... 871 985
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ........ (4,419) (10,514)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock ............. 77 2,013
Proceeds on notes receivable from Common Stock sales 133 -
Proceeds from issuance of long-term debt ........... 563 651
Repayment of long-term debt ........................ (990) (2,807)
Repayment of capital lease obligations ............. (3,146) (3,851)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES ........ (3,363) (3,994)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................... 19,219 (4,465)
Cash and cash equivalents - Beginning of Period ....... 15,713 37,237
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD ............. $ 34,932 $ 32,772
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed financial statements.
4
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HAWAIIAN AIRLINES, INC.
STATISTICAL DATA (IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED) (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
SCHEDULED OPERATIONS:
Revenue passengers flown ..................... 1,333 1,307 3,786 3,791
Revenue passenger miles ("RPM") .............. 992,615 950,239 2,748,244 2,689,046
Available seat miles ("ASM") ................. 1,268,422 1,206,390 3,699,817 3,556,389
Passenger load factor ........................ 78.3% 78.8% 74.3% 75.6%
Passenger revenue per passenger mile ("Yield") 9.8CENTS 9.3CENTS 9.8CENTS 9.5CENTS
OVERSEAS CHARTER OPERATIONS:
Revenue passengers flown ..................... 60 54 187 195
RPM .......................................... 166,061 147,042 515,167 523,578
ASM .......................................... 177,454 154,474 548,693 570,594
TOTAL OPERATIONS:
Revenue passengers flown ..................... 1,393 1,361 3,973 3,986
RPM .......................................... 1,158,676 1,097,281 3,263,411 3,212,624
ASM .......................................... 1,445,876 1,360,864 4,248,510 4,126,983
</TABLE>
5
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the unaudited condensed financial statements
included in this report contain all adjustments necessary for a fair
presentation of the results of operations and statements of cash flows for the
interim periods covered and the financial condition of Hawaiian Airlines, Inc.
("Hawaiian Airlines" or the "Company") as of September 30, 1998 and December 31,
1997. The operating results for the interim period are not necessarily
indicative of the results to be expected for the full fiscal year.
The accompanying financial statements should be read in conjunction with the
financial statements and the notes thereto contained in Hawaiian Airlines'
Annual Report on Form 10-K for the year ended December 31, 1997, which are
incorporated herein by reference.
Certain reclassifications have been made to conform prior year's data to current
year's presentation.
2. INCOME TAXES
The Company's reorganization and the associated implementation of fresh start
reporting in September 1994 gave rise to significant items of expense for
financial reporting purposes that are not deductible for income tax purposes. In
large measure, it is these nondeductible expenses that result in an effective
tax rate (for financial reporting purposes) significantly different than the
current United States ("U.S.") corporate statutory rate of 35.0%. The Company
presently expects that its full year 1998 results will require a provision for
income taxes. For third quarter 1998 and for the nine month period ended
September 30, 1998, estimated interperiod tax provisions of $5.2 million and
$7.1 million, respectively, have been reflected in the accompanying condensed
statements of income.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. SFAS requires reclassification of financial statements for
earlier periods provided for comparative purposes.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 requires restatement of comparative information
presented for earlier periods.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which amends the disclosure
requirements of SFAS No. 87, "Employer's Accounting for Pensions," No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits" and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." SFAS No. 132 addresses
disclosure only and does not change any of the measurement or recognition
provisions provided for in
6
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SFAS Nos. 87, 88 or 106. SFAS No. 132 requires restatement of comparative
information presented for earlier periods.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities.
SFAS No. 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999.
In March 1998, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee (the "AcSEC") issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which requires that certain costs
related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 also requires that costs related to the preliminary project stage and
the post-implementation/operations stage, as defined, in an internal-use
computer software development project be expensed as incurred. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-up
Activities," which requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. The provisions of SOP
98-5 are effective for fiscal years beginning after December 15, 1998.
Provisions of SFAS No. 130, 131 and 132 are effective for fiscal years or
periods beginning after December 15, 1997. Adoption of the provisions of SFAS
No. 130, 131 and 132 by the Company as of January 1, 1998 did not have a
material impact on the Company's previously reported financial information.
Further, management does not expect the adoption of SFAS No. 133, SOP 98-1 or
SOP 98-5 to have a material impact on the Company's results of operations or
reported financial information.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain statements contained in this report that are not related to historical
results, including, without limitation, statements regarding the Company's
business strategy and objectives, future financial position and estimated cost
savings, are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act and involve risks
and uncertainties. Although the Company believes that the assumptions on which
any forward-looking statements are based are reasonable, there can be no
assurance that such assumptions will prove to be accurate and actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed under Part I, Item I, Business of the Company's Form
10-K Annual Report for the year ended December 31, 1997 and heretofore, as well
as those discussed elsewhere in this Form 10-Q. All forward-looking statements
contained in this Form 10-Q are qualified in their entirety by this cautionary
statement.
It is not reasonably possible to itemize all of the many factors and specific
events that could affect the outlook of an airline operating in the global
economy. Some factors that could significantly impact capacity, load factors,
revenues, expenses and cash flows include the airline pricing environment, fuel
costs, labor union situations both at the Company and other carriers, low-fare
carrier expansion,
7
<PAGE>
capacity decisions of other carriers, actions of the U.S. and foreign
governments, foreign currency exchange rate fluctuations, inflation, the
general economic environment and other factors discussed herein.
Developments in any of these areas, as well as other risks and uncertainties
detailed from time to time in the Company's Securities and Exchange Commission
filings, could cause the Company's results to differ from results that have been
or may be projected by or on behalf of the Company. The Company cautions that
the foregoing list of important factors is not exclusive. The Company does not
undertake to update any forward-looking statements that may be made from time to
time by or on behalf of the Company.
SEGMENT INFORMATION
Due to the centralization of the Company's operations in the State of Hawaii and
the interdependence of its routes, management considers its operations to be one
industry segment. Refer to the discussion below for those certain operating
revenue products which constitute the segment.
RESULTS OF OPERATIONS
In third quarter 1998, the Company generated operating and net income of $11.5
million and $6.1 million, respectively. This represented a $6.2 million and $4.7
million increase from third quarter 1997 operating and net income of $5.3
million and $1.4 million, respectively.
For the nine months ended September 30, 1998, the Company generated operating
and net income of $15.7 million and $8.0 million, respectively, an improvement
of $13.0 million and $7.8 million over operating and net income for the nine
months ended September 30, 1997 of $2.7 million and $245,000, respectively.
8
<PAGE>
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998
The following table compares third quarter 1998 operating passenger revenues and
statistics to those in third quarter 1997, in thousands, except as otherwise
indicated:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
Operating Passenger ------------------------- Increase
Revenues and Statistics 1998 1997 (Decrease) %
- --------------------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C>
Interisland:
Passenger revenues .......... $ 36,616 $ 33,897 $ 2,719 8.0
Revenue passengers flown .... 982 968 14 1.4
RPM ......................... 129,580 129,150 430 0.3
ASM ......................... 240,565 220,029 20,536 9.3
Passenger load factor ....... 53.9% 58.7% (4.8) (8.2)
Yield ....................... 28.3CENTS 26.2CENTS 2.1CENTS 8.0
Transpacific ("Transpac"):
Passenger revenues .......... $ 55,020 $ 48,989 $ 6,031 12.3
Revenue passengers flown .... 332 320 12 3.8
RPM ......................... 812,675 770,504 42,171 5.5
ASM ......................... 952,202 907,531 44,671 4.9
Passenger load factor ....... 85.3% 84.9% 0.4 0.5
Yield ....................... 6.8CENTS 6.4CENTS 0.4CENTS 6.3
South Pacific ("Southpac"):
Passenger revenues .......... $ 5,722 $ 5,913 $ (191) (3.2)
Revenue passengers flown .... 19 19 - -
RPM ......................... 50,360 50,585 (225) (0.4)
ASM ......................... 75,655 78,830 (3,175) (4.0)
Passenger load factor ....... 66.6% 64.2% 2.4 3.7
Yield ....................... 11.4CENTS 11.7CENTS (0.3)CENTS (2.6)
Overseas Charter:
Charter revenues ............ $ 8,416 $ 8,054 $ 362 4.5
Revenue passengers flown .... 60 54 6 11.1
RPM ......................... 166,061 147,042 19,019 12.9
ASM ......................... 177,454 154,474 22,980 14.9
</TABLE>
Significant quarter to quarter variances were as follows:
Passenger revenues totaled $97.4 million during third quarter 1998, an increase
of $8.6 million or 9.7% over third quarter 1997 passenger revenues of $88.8
million. The Company experienced quarter over quarter increases of $2.7 million
and $6.0 million in its Interisland and Transpac passenger revenues,
respectively. Both increases were primarily driven by higher yields resulting
from (i) improved fare and inventory management through use of the Company's
relatively new yield management system; (ii) general price increases initiated
by the Company in both the Interisland and Transpac markets and (iii)
competitive pricing actions, principally in the Transpac market, taken by the
Company in third quarter 1997 to stimulate travel demand.
9
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For approximately the first two-and-a-half weeks of September 1998, Northwest
Airlines Corporation ("NWA Corp") and Northwest Airlines, Inc. ("Northwest"),
the principal wholly-owned indirect subsidiary of NWA Corp, suspended its flying
operations due to a labor contract dispute with its pilots. On average,
Northwest service to the State of Hawaii consists of five and four daily
round-trips between Hawaii and the mainland United States and Japan,
respectively, which accounts for approximately 20,000 passengers per week.
Affected Northwest passengers were accommodated on various carriers, including
Hawaiian Airlines. Management is not able to fully estimate the effects of the
Northwest pilots' strike on the Company. While the Company believes that it
benefited in some form or manner from the strike, it is not believed to be
material. Quarter over quarter, the Company billed Northwest approximately
$487,000 or 14% more for interline passenger services.
The following table compares operating expenses per ASM for third quarter 1998
with third quarter 1997 by major category:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------ Increase
Operating Expenses Per ASM 1998 1997 (Decrease) %
- ----------------------------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
Wages and benefits ...................... 2.18CENTS 2.10CENTS 0.08CENTS 3.8
Aircraft fuel, including taxes and oil .. 1.05 1.33 (0.28) (21.1)
Maintenance materials and repairs ....... 1.42 1.46 (0.04) (2.7)
Rentals and landing fees ................ 0.58 0.60 (0.02) (3.3)
Sales commissions ....................... 0.18 0.25 (0.07) (28.0)
Depreciation and amortization ........... 0.23 0.19 0.04 21.1
Other ................................... 1.56 1.42 0.14 9.9
---- ---- ------ ------
Total ......................... 7.20CENTS 7.35CENTS (0.15)CENTS (2.0)
---- ---- ------ ------
---- ---- ------ ------
</TABLE>
All fluctuations in operating expenses were affected by an overall increase in
ASM of approximately 6.2% quarter over quarter. Significant quarter to quarter
variances were as follows:
Wages and benefits per ASM increased by 0.08 CENTS or 3.8%. Quarter over
quarter, wages and benefits increased by approximately $2.9 million or 10.1%.
A majority of the increase is attributable to $2.5 million of additional
wages and benefits from increased flying operations and estimated accruals
for the Company's profit sharing program.
Aircraft fuel cost, including taxes and oil ("Aircraft Fuel Cost") per ASM
decreased quarter over quarter by 0.28 CENTS or 21.1%. The Company incurred
$3.0 million or 16.7% less in Aircraft Fuel Cost in third quarter 1998. A
6.5% increase quarter over quarter in fuel consumption was offset by a
decrease in the average cost of aircraft fuel per gallon, excluding taxes, of
14.6 CENTS or 23.4%.
Maintenance materials and repairs per ASM decreased by 0.04 CENTS or 2.7%.
The dilutive effect of increased ASM was offset by approximately $634,000 or
3.2% in additional DC-9 and DC-10 airframe and engine maintenance in third
quarter 1998 versus third quarter 1997.
Rentals and landing fees per ASM decreased by 0.2 CENTS or 3.3%. Commencing
September 1, 1997, a two-year moratorium was placed on landing fees at all
airports in the State of Hawaii. The Governor of the State of Hawaii has
reserved the right, however, to reinstate the landing fee charges before the
10
<PAGE>
two-year period ends. Under the current moratorium, the Company incurred
approximately $1.0 million less for landing fees in third quarter 1998 than
in third quarter 1997.
Sales commissions decreased by 0.07 CENTS or 28.0%. Sales commissions
decreased by $895,000 or 25.8% in third quarter 1998, principally due to a
decrease in the interline commission rate and an increase in the volume of
non-commissionable tickets sold quarter over quarter.
Depreciation and amortization increased by 0.04 CENTS or 21.1%. The Company
incurred approximately $383,000 and $369,000 of additional DC-9 overhaul and
ground equipment depreciation and amortization, respectively, in third
quarter 1998.
Other operating expenses per ASM increased by 0.14 CENTS or 9.9%. The Company
incurred approximately $3.3 million or 17.4% of additional other operating
expenses in third quarter 1998, primarily as a result of additional aircraft
service, advertising and promotion, professional and computer services,
communications, interrupted trip and inflight media expenses over third
quarter 1997.
11
<PAGE>
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
The following table compares operating passenger revenues and statistics for the
nine month periods ended September 30, 1998 and 1997, in thousands, except as
otherwise indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
Operating Passenger ------------------------------ Increase
Revenues and Statistics 1998 1997 (Decrease) %
- ------------------------------------ ------------------------------ ------------------------
<S> <C> <C> <C> <C>
Interisland:
Passenger revenues ............. $ 106,282 $ 100,132 $ 6,150 6.1
Revenue passengers flown ....... 2,822 2,837 (15) (0.5)
RPM ............................ 374,316 377,913 (3,597) (1.0)
ASM ............................ 666,216 653,944 12,272 1.9
Passenger load factor .......... 56.2% 57.8% (1.6) (2.8)
Yield .......................... 28.4CENTS 26.5CENTS 1.9CENTS 7.2
Transpac:
Passenger revenues ............. $ 150,265 $ 139,428 $ 10,837 7.8
Revenue passengers flown ....... 918 908 10 1.1
RPM ............................ 2,251,089 2,187,590 63,499 2.9
ASM ............................ 2,830,448 2,699,398 131,050 4.9
Passenger load factor .......... 79.5% 81.0% (1.5) (1.9)
Yield .......................... 6.7CENTS 6.4CENTS 0.3CENTS 4.7
Southpac:
Passenger revenues ............. $ 14,105 $ 14,756 $ (651) (4.4)
Revenue passengers flown ....... 46 46 - -
RPM ............................ 122,839 123,543 (704) (0.6)
ASM ............................ 203,153 203,047 106 0.1
Passenger load factor .......... 60.5% 60.8% (0.3) (0.5)
Yield .......................... 11.5CENTS 11.9CENTS (0.4)CENTS (3.4)
Overseas Charter:
Charter revenues ............... $ 26,519 $ 28,723 $ (2,204) (7.7)
Revenue passengers flown ....... 187 195 (8) (4.1)
RPM ............................ 515,167 523,578 (8,411) (1.6)
ASM ............................ 548,693 570,594 (21,901) (3.8)
</TABLE>
Significant period to period variances were as follows:
Passenger revenues totaled $270.7 million during the nine month period ended
September 30, 1998, an increase of $16.4 million or 6.4% over passenger revenues
of $254.3 million for the nine month period ended September 30, 1997. The
Company experienced period over period increases of $6.2 million and $10.8
million in its Interisland and Transpac passenger revenues, respectively,
primarily due to higher yields in both the Interisland and Transpac markets. As
discussed above, the higher yields resulted from a combination of improved fare
and inventory management, general price increases initiated by the Company in
both the Interisland and Transpac markets and competitive pricing actions,
principally in the Transpac market, in 1997.
12
<PAGE>
Overseas charter revenues totaled $26.5 million in the nine month period ended
September 30, 1998, representing a decrease of $2.2 million or 7.7% from the
nine month period ended September 30, 1997. The decrease is associated with the
Company flying fewer charters per week to Las Vegas in the first two quarters of
1998 versus the first two quarters of 1997 and general price decreases period
over period for its Las Vegas and Anchorage charter flights.
The following table compares operating expenses per ASM by major category for
the nine month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------ Increase
Operating Expenses Per ASM 1998 1997 (Decrease) %
- ------------------------------------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Wages and benefits ........................ 2.13CENTS 2.09CENTS 0.04CENTS 1.9
Aircraft fuel, including taxes and oil .... 1.20 1.44 (0.24) (16.7)
Maintenance materials and repairs ......... 1.48 1.41 0.07 5.0
Rentals and landing fees .................. 0.54 0.63 (0.09) (14.3)
Sales commissions ......................... 0.21 0.25 (0.04) (16.0)
Depreciation and amortization ............. 0.22 0.19 0.03 15.8
Other ..................................... 1.50 1.42 0.08 5.6
---- ---- ------ ------
Total ........................... 7.28CENTS 7.43CENTS (0.15)CENTS (2.0)
---- ---- ------ ------
---- ---- ------ ------
</TABLE>
All fluctuations in operating expenses were affected by an overall increase in
ASM of approximately 2.9% period over period. Significant period to period
variances were as follows:
Wages and benefits per ASM increased by 0.04 CENTS or 1.9%. Wages and
benefits increased by approximately $4.2 million or 4.9% period over period.
A majority of the increase is attributable to (i) the $2.5 million of
additional wages and benefits and estimated profit sharing discussed above
and (ii) second quarter 1997 benefits being adjusted by $750,000 for
favorable experience in the Company's workers compensation and postretirement
service costs.
Aircraft Fuel Cost per ASM decreased in the nine month period ended September
30, 1998 over the nine month period ended September 30, 1997 by 0.24 CENTS or
16.7%. Approximately $8.3 million or 14.0% less Aircraft Fuel Cost was
incurred by the Company in the nine month period ended September 30, 1998.
Period over period, average cost of aircraft fuel per gallon, excluding
taxes, decreased by 12.0 CENTS or 17.7%.
Maintenance materials and repairs per ASM increased by 0.07 CENTS or 5.0%. In
1998, the Company incurred approximately $4.6 million or 8.0% in additional
maintenance expense as compared to the same period in 1997 due to (i) $1.3
million more in DC-9 airframe and engine repairs and (ii) $3.3 million more
in DC-10 maintenance expense, the result of increased monthly maintenance
rates charged by American Airlines, Inc. ("American") and increased DC-10
flight hours flown in the nine month period ended September 30, 1998.
Rentals and landing fees per ASM decreased by 0.09 CENTS or 14.3%. As
discussed previously, the Company incurred approximately $4.0 million less in
landing fees in the nine month period ended
13
<PAGE>
September 30, 1998 as a result of the two-year moratorium placed on landing
fees at all airports in the State of Hawaii commencing September 1, 1997.
Sales commissions decreased by 0.04 CENTS or 16.0% period over period. Total
sales commissions decreased by $1.7 million or 16.3% in the nine month period
ended September 30, 1998. As discussed above, the decrease is principally due
to a decrease in the interline commission rate and an increase in the volume
of non-commissionable tickets sold.
Depreciation and amortization increased by 0.03 CENTS or 15.8%. Through
September 30, 1998, an additional $1.5 million of DC-9 overhaul and ground
equipment depreciation and amortization, respectively, was incurred by the
Company.
Other operating expenses per ASM increased by 0.08 CENTS or 5.6%. As noted
above and in previous quarters, for the nine month period ended September 30,
1998, the Company has experienced general increases in its administrative
costs primarily in its aircraft service, advertising and promotion,
professional and computer services and inflight media expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that it has various options available to meet its capital,
debt and operating commitments, including cash and cash equivalents on hand on
September 30, 1998 of $34.9 million, internally generated funds and a credit
facility with total availability of $10.9 million as of September 30, 1998 with
aggregate term loans and letters of credit outstanding in the amounts of $5.2
million and $100,000, respectively. The Company will continue to consider
various borrowing or leasing options to supplement its cash requirements.
Cash and cash equivalents for the nine month period ending September 30, 1998
increased by $19.2 million. Operating activities for the nine month period ended
September 30, 1998 provided $27.0 million in cash and cash equivalents,
primarily due to the Company generating $15.7 million in operating profit. For
the nine month period ended September 30, 1998, the Company expended $9.3
million of its $14.9 million in planned capital expenditures for 1998.
Capitalized portions of scheduled DC-9 checks and overhauls and continued
investments in improved software, related hardware and implementation costs
represent a majority of these capital expenditures.
WARRANTS
In January 1996, due to its participation in certain recapitalization efforts of
the Company, American's parent company, AMR Corporation ("AMR"), received, among
other things, warrants which, subject to certain conditions and as adjusted
pursuant to applicable anti-dilution provisions, entitled AMR to purchase up to
1,949,338 shares of the Company's Common Stock (the "AMR Warrant Shares") at
$1.07 per share. If not exercised, the warrants expire on September 11, 2001.
AMR also retained the right to require the Company, on two occasions, to use its
best efforts to register, at the Company's expense subject to certain
conditions, some or all of the AMR Warrant Shares under the Securities Act of
1993, as amended.
Pursuant to its reorganization in 1994, the Company granted warrants (the
"Reorganization Warrants") to certain individuals which, as adjusted for
anti-dilution provisions, entitled such individuals to purchase 1,618,972 shares
of Common Stock (the "Reorganization Warrant Shares") at $1.67 per share. As of
December 31, 1997, all of the warrants had been exercised.
14
<PAGE>
In September 1998, AMR requested and the Company commenced efforts to register
all of the AMR Warrant Shares. Under the piggy-back rights provided under the
Reorganization Warrants, the Reorganization Warrant Shares will also be
registered in conjunction with the AMR Warrant Shares.
DERIVATIVE FINANCIAL INSTRUMENTS
As of September 30, 1998, the Company utilized crude oil forward contracts to
manage market risks and hedge its financial exposure resulting from fluctuations
in its aircraft fuel costs. The Company employs a strategy whereby crude oil
contracts are used to cover up to 45% of the Company's anticipated aircraft fuel
needs on a rolling twelve month basis.
At September 30, 1998, the Company had petroleum forward contracts to purchase
165,000 barrels of crude oil in the aggregate amount of $2.5 million through
February 1999. These forward contracts represented approximately 8% of the
Company's anticipated 1998 aircraft fuel needs. At September 30, 1998, the
estimated fair value and carrying value of these outstanding contracts was a net
receivable of $260,000. Included as a component of Aircraft Fuel Cost are net
realized and unrealized losses on such contracts amounting to $361,000 and $1.6
million for the three and nine month periods ended September 30, 1998.
ROUTES, AIRCRAFT AND EMPLOYEES
In September 1998, the Company announced plans to expand its Transpac operations
by adding four weekly nonstop flights between Los Angeles and Maui and three
weekly flights from Los Angeles to Maui to Kona on the Big Island of Hawaii in
first quarter 1999. In November 1998, the Company also announced a charter
agreement with Renaissance Cruises commencing August 1999. The agreement is for
two years, will involve approximately 20 round-trips per month between Los
Angeles and Tahiti and is estimated to be worth more than $70 million in
incremental passenger charter revenue to the Company.
The Company is currently in negotiations to procure two used DC-10-30 aircraft
and will commence efforts to acquire a third DC-10-30. The Company also
anticipates hiring approximately 280 to 380 additional employees to facilitate
servicing the new routes.
The Company also has authority to commence nonstop flight operations between
Tokyo and Maui in the year 2000. However, a formal decision to progress on
operation of the route is subject to a number of future events, the outcome of
which cannot be predicted at this time, including a dispute over the runway
length in Maui.
TICKET TAX
In 1997, legislation was enacted to, among other things, gradually reduce the
Federal passenger excise tax from 10% to 7.5% and phase-in a $3 "head tax" per
domestic flight segment by the year 2002. On October 1, 1998, the passenger
excise tax decreased from 9% to 8%, with a correspondent increase in the "head
tax" from $1 to $2 per domestic flight segment. The Company has and will adjust
its fares accordingly due to these enacted tax changes based upon prevailing
market conditions. There can be no assurance that the Company will be able to
maintain its current fare levels or predict with any certainty the effects on
its fares should the taxes again be adjusted, lapse and/or be reinstated.
15
<PAGE>
INFORMATION TECHNOLOGY SYSTEMS AND YEAR 2000
The Company is currently in the process of bringing a number of major
information technology systems on line for strategic purposes as well as to
address issues associated with the year 2000. These information technology
projects are designed to either replace or enhance existing systems, including
local and wide area networks, yield management, revenue and financial
accounting, human resources and payroll. Estimated external costs associated
with these efforts is estimated to approximate $10 to $12 million, of which
approximately $8 million has been incurred as of September 30, 1998.
In addition to replacing a number of core information systems, the Company has
recognized the potential impact of the year 2000 on its operations and has
established a dedicated director and Year 2000 Project Office to oversee the
Company's compliance efforts. The Year 2000 Project Office operates on four
tracks including (i) information and communication systems; (ii) hardware; (iii)
business partnerships; and (iv) government and externalities. Each track
utilizes the Federal General Accounting Office methodology and available best
practices. The strategy is to create a comprehensive review of mission critical
systems as they apply to the continuum of Hawaiian Airlines' business
operations.
STATE OF READINESS
The Company has and continues to perform constant awareness activities through
regular informational briefings and newsletter updates, formal briefs of
management and senior management, and the development of "personal Y2K kits" for
all employees to address their concerns. In addition to internal activities, the
Company anticipates commencement of public relations efforts in early 1999.
The Company has recently completed an inventory of potentially affected hardware
and has completed inventories of major applications in the mainframe
environment. The client-server environment is scheduled to be inventoried and
assessed in early November 1998 with the assistance of automated tools. In
addition to joint efforts with trade associations such as the Air Transport
Association, Hawaiian Airlines has also mailed surveys to over 1,400 business
partners with the intent of discerning their respective Year 2000 activities.
Because of the implementation of the major information technology systems
discussed above, there remains an amount of computer code requiring redress
which is not considered to be significant. Hawaiian Airlines is in the process
of having this legacy code remediated by a third party vendor with work to be
completed by the end of 1998. Hardware assessments have likewise found a very
small amount of equipment being date aware. Currently, the Company believes that
all mission critical systems will be remediated and tested by mid-1999.
ESTIMATED COSTS TO ADDRESS YEAR 2000 ISSUES
As mentioned, because a substantial portion of the information systems inventory
is being replaced by new applications that are represented to be Year 2000
compliant, the Company's remaining Year 2000 issues are primarily related to
remediation of legacy code and assistance in conducting Year 2000 testing. The
Company estimates that it will expend $1 to $2 million for such remediation and
testing. This will be in addition to those monies being expended for replacement
of the Company's information systems as described above.
16
<PAGE>
RISKS OF YEAR 2000 ISSUES
Preliminary reviews of flight systems have found little potential impact of Year
2000 issues, and existing contingency plans and training address the loss of
most affected operations systems. The primary risks to Hawaiian Airlines are
those of business continuity. The Company is aggressively addressing both its
supply and revenue chains to assess, to the best of the Company's knowledge,
that both products and business operations of its partners are not adversely
affected by the Year 2000 problem.
CONTINGENCY PLANS FOR HAWAIIAN AIRLINES
In addition to its normal operational disaster recovery plans, Hawaiian Airlines
will be including Year 2000 specific activities. While the Company believes that
all systems will be Year 2000 ready, all critical, vital, and important systems
will have appropriate contingency plans developed to address complete and
partial systems failure. Contingency plans are expected to be complete in May of
1999.
Notwithstanding the foregoing, the Company's business, financial condition or
results of operations could be materially adversely affected by the failure of
its systems or those operated by third parties on which the Company's business
relies (including those of the Federal Aviation Administration) to operate
properly beyond 1999. There can be no assurance that such systems will be
modified for Year 2000 operational requirements on a timely basis. Because of
the variables associated with the Year 2000 date problem, management cannot give
assurance that in-progress system transitions will be sufficient or assure that
the Company will not be affected by the Year 2000 issue in some form or manner.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No material developments in matters previously reported or reportable
events arising in the three or nine months ended September 30, 1998
were noted.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
To be considered for inclusion in the Company's 1999 proxy material,
shareholder proposals to be considered for presentation at the 1999
Annual Meeting of Shareholders must be received by the Corporate
Secretary of the Company at its principal offices at 3375 Koapaka
Street, Suite G-350, Honolulu, Hawaii 96819 on or before January 22,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated September 11, 1998 (date of event
August 28, 1998) reporting Item 5, "Other Events" and Item 7,
"Financial Statements, Proforma Financial Information and
Exhibits."
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAWAIIAN AIRLINES, INC.
November 12, 1998 By /s/ JOHN L. GARIBALDI
---------------------
John L. Garibaldi
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 34,932
<SECURITIES> 0
<RECEIVABLES> 33,035
<ALLOWANCES> 500
<INVENTORY> 9,282
<CURRENT-ASSETS> 79,896
<PP&E> 91,862
<DEPRECIATION> 23,543
<TOTAL-ASSETS> 206,463
<CURRENT-LIABILITIES> 71,520
<BONDS> 10,689
0
0
<COMMON> 409
<OTHER-SE> 94,653
<TOTAL-LIABILITY-AND-EQUITY> 206,463
<SALES> 324,781
<TOTAL-REVENUES> 324,781
<CGS> 309,120
<TOTAL-COSTS> 309,120
<OTHER-EXPENSES> 219
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 392
<INCOME-PRETAX> 15,049
<INCOME-TAX> 7,070
<INCOME-CONTINUING> 7,979
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,979
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
</TABLE>
