<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, 1999
( ) 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, 1999, 40,997,335 shares of Common Stock shares were
outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAWAIIAN AIRLINES, INC.
CONDENSED BALANCE SHEETS (IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 35,597 $ 31,011
Restricted cash........................................................ 19,955 6,432
Accounts receivable, net.............................................. 31,853 29,995
Inventories, net...................................................... 11,722 8,546
Prepaid expenses and other............................................ 6,240 5,923
--------------- ---------------
TOTAL CURRENT ASSETS.............................................. 105,367 81,907
--------------- ---------------
Property and equipment, less accumulated depreciation and
amortization of $34,937 and $25,584 in 1999 and 1998, respectively.... 106,174 84,922
Other assets.............................................................. 7,235 8,232
Reorganization value in excess of amounts
allocable to identifiable assets, net ("Excess Reorganization Value"). 39,229 46,850
--------------- ---------------
TOTAL ASSETS...................................................... $258,005 $221,911
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt..................................... $ 4,638 $ 3,532
Current portion of capital lease obligations.......................... 4,214 4,614
Accounts payable...................................................... 34,106 28,883
Air traffic liability................................................. 42,078 22,131
Accrued liabilities................................................... 18,543 16,517
--------------- ---------------
TOTAL CURRENT LIABILITIES......................................... 103,579 75,677
--------------- ---------------
Long-Term Debt............................................................ 23,561 14,454
Capital Lease Obligations................................................. 2,930 5,966
Other Liabilities and Deferred Credits.................................... 30,870 34,927
SHAREHOLDERS' EQUITY:
Common and Special Preferred Stock..................................... 410 410
Capital in excess of par value........................................ 99,418 99,418
Warrants.............................................................. 3,153 3,153
Notes receivable from Common Stock sales.............................. (1,581) (1,581)
Retained earnings (accumulated deficit)............................... 171 (6,007)
Accumulated other comprehensive loss.................................. (4,506) (4,506)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY........................................ 97,065 90,887
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $258,005 $221,911
=============== ===============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
<PAGE>
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,
-----------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger...................................... $111,987 $ 97,358 $304,054 $270,652
Charter........................................ 10,891 8,416 30,741 26,519
Cargo.......................................... 5,829 5,686 16,877 16,514
Other.......................................... 6,324 4,072 15,690 11,096
------------- -------------- -------------- -------------
TOTAL...................................... 135,031 115,532 367,362 324,781
------------- -------------- -------------- -------------
OPERATING EXPENSES:
Wages and benefits............................. 36,276 31,486 103,752 90,412
Aircraft fuel, including taxes and oil......... 20,451 15,138 51,710 50,989
Maintenance materials and repairs.............. 26,774 20,546 75,076 62,725
Rentals and landing fees....................... 7,806 8,357 22,453 23,016
Sales commissions.............................. 3,572 2,574 10,611 8,712
Depreciation and amortization.................. 4,723 3,317 12,529 9,442
Other.......................................... 28,299 22,604 78,258 63,824
------------- -------------- -------------- -------------
TOTAL...................................... 127,901 104,022 354,389 309,120
------------- -------------- -------------- -------------
OPERATING INCOME................................... 7,130 11,510 12,973 15,661
------------- -------------- -------------- -------------
NONOPERATING EXPENSE:
Interest expense, net.......................... (252) (31) (910) (392)
Loss on disposition of equipment............... (59) (83) (842) (142)
Other, net..................................... (196) (31) 425 (78)
------------- -------------- -------------- -------------
TOTAL...................................... (507) (145) (1,327) (612)
------------- -------------- -------------- -------------
INCOME BEFORE INCOME TAXES......................... 6,623 11,365 11,646 15,049
INCOME TAX PROVISION............................... (3,133) (5,231) (5,468) (7,070)
------------- -------------- -------------- -------------
NET INCOME......................................... 3,490 6,134 6,178 7,979
OTHER COMPREHENSIVE INCOME......................... - - - -
------------- -------------- -------------- -------------
COMPREHENSIVE INCOME............................... $ 3,490 $ 6,134 $ 6,178 $ 7,979
============= ============== ============== =============
NET INCOME PER COMMON STOCK SHARE:
Basic......................................... $ 0.09 $ 0.15 $ 0.15 $ 0.20
============= ============== ============== =============
Diluted....................................... $ 0.08 $ 0.15 $ 0.15 $ 0.19
============= ============== ============== =============
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
SHARES OUTSTANDING:
Basic......................................... 40,997 40,932 40,997 40,906
============= ============== ============== =============
Diluted....................................... 42,144 42,045 42,195 42,182
============= ============== ============== =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
<PAGE>
HAWAIIAN AIRLINES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
<TABLE>
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NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................. $ 6,178 $ 7,979
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.......................................... 12,529 9,442
Net periodic postretirement benefit cost.............................. 1,030 1,071
Loss on disposition of equipment....................................... 842 142
Income tax provision recognized as a reduction to
Excess Reorganization Value........................................ 5,468 7,070
Increase in restricted cash........................................... (13,523) (2,701)
Increase in accounts receivable........................................ (1,858) (1,148)
Decrease (increase) in inventories.................................... (3,176) 68
Decrease (increase) in prepaid expenses and other..................... (317) 2,542
Increase (decrease) in accounts payable............................... 5,223 (320)
Increase in air traffic liability..................................... 19,947 945
Increase in accrued liabilities........................................ 2,026 483
Other, net............................................................. (4,698) 1,428
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES......................... 29,671 27,001
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......................................... (32,168) (9,291)
Net proceeds from disposition of equipment................................. 306 871
Sale of investment securities............................................. - 4,001
------------- --------------
NET CASH USED IN INVESTING ACTIVITIES.............................. (31,862) (4,419)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt................................... 12,449 563
Repayment of long-term debt................................................ (2,236) (990)
Repayment of capital lease obligations..................................... (3,436) (3,146)
Proceeds from issuance of Common Stock..................................... - 77
Proceeds on notes receivable from Common Stock sales...................... - 133
------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............... 6,777 (3,363)
------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......................... 4,586 19,219
Cash and cash equivalents - Beginning of Period................................. 31,011 15,713
------------- --------------
CASH AND CASH EQUIVALENTS - END OF PERIOD....................................... $ 35,597 $34,932
============= ==============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
<PAGE>
HAWAIIAN AIRLINES, INC.
STATISTICAL DATA (IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED) (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ----------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
SCHEDULED OPERATIONS:
Revenue passengers flown......................... 1,461 1,333 4,092 3,786
Revenue passenger miles ("RPM").................. 1,123,450 992,615 3,054,878 2,748,244
Available seat miles ("ASM")..................... 1,437,071 1,268,422 4,064,180 3,699,817
Passenger load factor............................ 78.2% 78.3% 75.2% 74.3%
Passenger revenue per passenger mile ("Yield")... 10.0 CENTS 9.8 CENTS 10.0 CENTS 9.8 CENTS
OVERSEAS CHARTER OPERATIONS:
Revenue passengers flown......................... 70 60 202 187
RPM.............................................. 195,261 166,061 563,283 515,167
ASM.............................................. 205,339 177,454 591,029 548,693
TOTAL OPERATIONS:
Revenue passengers flown......................... 1,531 1,393 4,294 3,973
RPM.............................................. 1,318,711 1,158,676 3,618,161 3,263,411
ASM.............................................. 1,642,410 1,445,876 4,655,209 4,248,510
Revenue per ASM.................................. 8.2 CENTS 8.0 CENTS 7.9 CENTS 7.6 CENTS
Cost per ASM..................................... 7.8 CENTS 7.2 CENTS 7.6 CENTS 7.3 CENTS
</TABLE>
<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 position of Hawaiian Airlines, Inc.
("Hawaiian Airlines" or the "Company") for the periods indicated. 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, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all investments purchased with an original maturity of
three months or less to be cash equivalents. As of September 30, 1999 and
December 31, 1998, approximately $20.0 million and $6.4 million, respectively,
of cash was restricted as to withdrawal. These funds serve as collateral to
support a credit card holdback for advance ticket sales and are classified as
restricted cash in the accompanying condensed balance sheets. Funds are made
available as air travel is provided.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments principally comprised of
heating oil forward contracts to manage market risks and hedge its exposure to
fluctuations in its aircraft fuel costs. These contracts qualify for hedge
accounting treatment as they manage risk, identify firm commitments for set time
periods and meet correlation criteria for effectiveness. The Company accounts
for its derivative contracts on a deferral basis. Initial and subsequent margin
deposit requirements are reflected in prepaid expenses and other assets.
Realized and unrealized gains and losses, fees and commissions are deferred and
recognized upon settlement of the underlying contract.
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%. For the three
and nine month periods ended September 30, 1999, estimated interperiod tax
provisions of $3.1 million and $5.5 million, respectively, have been reflected
in the accompanying condensed statements of earnings. While generally accepted
accounting principles require that a provision for income taxes be recorded, a
majority of the amount recorded will not require cash outlay as the provision
will be offset by net operating loss carryforwards available to the Company. The
estimated income tax benefit from the expected utilization of these net
operating loss carryforwards has been applied as a reduction to reorganization
value in excess of amounts allocable to identifiable assets.
<PAGE>
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of air traffic liability, accruals for loss
contingencies and the amounts reported for accumulated pension and other
postretirement benefit obligations. Management believes that such estimates have
been appropriately established in accordance with generally accepted accounting
principles.
RECLASSIFICATIONS
Certain prior year amounts were reclassified to conform to the 1999
presentation. Such reclassifications had no effect on previously reported
financial condition and/or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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. The provisions of SFAS No. 133, as amended by SFAS No. 137, are
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company will adopt SFAS No. 133 on January 1, 2001 but has not yet
determined the impact of its adoption.
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. The SOP 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.
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.
Adoption of the provisions of SOP 98-1 and SOP 98-5 by the Company as of January
1, 1999 did not have a material impact on the Company's financial position or
results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING INFORMATION
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, 1998 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, 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
operating segment.
RESULTS OF OPERATIONS
In third quarter 1999, the Company generated operating and net income of $7.1
million and $3.5 million, respectively. For the nine months ended September 30,
1999, the Company generated operating and net income of $13.0 million and $6.2
million, respectively. For the three and nine months ended September 30, 1999,
operating revenues respectively increased by $19.5 million and $42.6 million
compared to the corresponding periods in 1998, principally due to increases in
scheduled and chartered passenger revenues. For the comparable periods in 1999,
operating expenses increased by $23.9 million and $45.3 million, respectively,
compared to the corresponding periods in 1998, a result of higher labor,
aircraft fuel, maintenance and general administrative expenses. The Company also
continues to incur additional expenses from its increased flight operations and
investments in infrastructure to support the Company's growth. Incremental labor
and training costs related to the
<PAGE>
Company's expansion totaled more than $2 million during the nine month period
ended September 30, 1999.
As evidenced throughout 1999, overall tourism in Hawaii has shown gradual
improvement period over period. Preliminary statistics from the Hawaii Visitors
& Convention Bureau revealed that visitor arrivals to the State of Hawaii
through the first nine months of 1999 increased by 1.4%. Through September 1999,
a 6.3% decrease in Eastbound visitor traffic was offset by a 6.0% increase in
Westbound visitor traffic.
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999
The following table compares third quarter 1999 operating passenger revenues and
statistics to those in third quarter 1998, in thousands, except as otherwise
indicated:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
Operating Passenger ----------------------------------- Increase
Revenues and Statistics 1999 1998 (Decrease) %
- ----------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Scheduled:
Passenger revenues.................... $ 111,987 $ 97,358 $ 14,629 15.0
Revenue passengers flown.............. 1,461 1,333 128 9.6
RPMs.................................. 1,123,450 992,615 130,835 13.2
ASMs.................................. 1,437,071 1,268,422 168,649 13.3
Passenger load factor................. 78.2% 78.3% (0.1) -
Yield................................. 10.0 CENTS 9.8 CENTS 0.2 CENTS 2.0
Overseas Charter:
Charter revenues...................... $ 10,891 $ 8,416 $ 2,475 29.4
Revenue passengers flown.............. 70 60 10 16.7
RPMs.................................. 195,261 166,061 29,200 17.6
ASMs.................................. 205,339 177,454 27,885 15.7
Total Operations:
Scheduled passenger and
overseas charter revenues.......... $ 122,878 $ 105,774 $ 17,104 16.2
Revenue passengers flown.............. 1,531 1,393 138 9.9
RPMs.................................. 1,318,711 1,158,676 160,035 13.8
ASMs.................................. 1,642,410 1,445,876 196,534 13.6
</TABLE>
Significant quarter to quarter variances were as follows:
Scheduled passenger revenues totaled $112.0 million in third quarter 1999, an
increase of $14.6 million or 15.0% over third quarter 1998. On a scheduled
system-wide basis, the Company experienced an approximate 13.2% increase in
RPMs, complemented by a 2.0% increase in yield. Quarter over quarter, the
Company's Interisland and Transpacific passenger revenues increased by $2.5
million and $11.6 million, respectively. These scheduled passenger revenue
increases were primarily driven by an 8% increase in Interisland passengers
carried and RPMs and a 14% increase in Transpacific revenue passengers carried
and RPMs, respectively.
<PAGE>
Overseas charter revenues increased $2.5 million or 29.4%, principally due to
(1) the commencement in August 1999 of a two-year agreement providing for
approximately 20 round-trip charter flights per month between Los Angeles and
Tahiti and (2) additional ad hoc charters flown quarter over quarter.
The following table compares operating expenses per ASM for third quarter 1999
with third quarter 1998 by major category:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------- Increase
Operating Expenses Per ASM 1999 1998 (Decrease) %
- --------------------------------------------- ---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Wages and benefits........................... 2.21 CENTS 2.18 CENTS 0.03 CENTS 1.4
Aircraft fuel, including taxes and oil....... 1.25 1.05 0.20 19.0
Maintenance materials and repairs............ 1.63 1.42 0.21 14.8
Rentals and landing fees..................... 0.48 0.58 (0.10) (17.2)
Sales commissions............................ 0.22 0.18 0.04 22.2
Depreciation and amortization................ 0.29 0.23 0.06 26.1
Other........................................ 1.72 1.56 0.16 10.3
---------- ---------- ---------- -----------
Total............................. 7.80 CENTS 7.20 CENTS 0.60 CENTS 8.3
========== ========== ========== ===========
</TABLE>
All fluctuations in operating expenses were affected by an overall increase in
ASM of approximately 13.6% quarter over quarter. Significant quarter to quarter
variances were as follows:
Quarter over quarter, wages and benefits increased by $4.8 million or 15.2%.
Wages and benefits totaled $36.3 million in third quarter 1999 versus $31.5
million in third quarter 1998. A majority of the increase is attributable to (1)
a 3% wage increase effective December 1, 1998 and (2) additional wages and
benefits from increased flying.
Aircraft fuel cost, including taxes and oil ("Aircraft Fuel Cost") per ASM
increased by 0.20 CENTS or 19.0%. Quarter over quarter, the Company incurred
approximately $5.3 million or 35.1% more Aircraft Fuel Cost. Due to increased
flying, gallons consumed increased by 14.4% while the average cost of aircraft
fuel per gallon, excluding taxes, increased by 13.2 CENTS or 28.4%. For the
remainder of 1999, the Company anticipates that the average cost of aircraft
fuel per gallon will reflect those levels experienced during third quarter 1999.
Maintenance materials and repairs per ASM increased by 0.21 CENTS or 14.8%.
Quarter over quarter, the Company incurred approximately $6.2 million or 30.3%
in additional expense due to (1) $2.9 million more in DC-9 airframe maintenance
and (2) $3.3 million more in DC-10 maintenance expense, the result of increases
in the maintenance rates charged by American Airlines, Inc. ("American") and the
number of DC-10 aircraft used and hours flown.
Rentals and landing fees decreased by 0.10 CENTS or 17.2% in third quarter 1999
compared to third quarter 1998. Rentals and landing fees totaled $7.8 million
for third quarter 1999, a decrease of $551,000 or 6.6% from third quarter 1998.
The decrease primarily resulted from the net of (1) $1.6 million less in DC-10
rental expense as the Company renegotiated its leases of American DC-10 aircraft
in second quarter 1999 and (2) $608,000 in additional landing fees as the
two-year moratorium placed on landing fees at all airports in the State of
Hawaii ended on September 1, 1999.
<PAGE>
Sales commissions increased by 0.04 CENTS or 22.2% in third quarter 1999
compared to third quarter 1998. Sales commissions totaled $3.6 million in third
quarter 1999, an increase of $1.0 million or 38.8% principally due to an
increase in the volume of sales from travel agency and retail sales sources.
Depreciation and amortization per ASM increased by 0.06 CENTS or 26.1%.
Additional depreciation of approximately $1.5 million was incurred from owned
DC-9 and DC-10 aircraft placed into service in 1999.
Other operating expenses increased quarter over quarter by $5.7 million or
25.2%, principally attributable to expenses associated with the Company's
increased flying schedule and passengers flown, including but not limited to,
credit card fees, ground handling, food and beverage, personnel expenses and
communication.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
The following table compares operating passenger revenues and statistics for the
nine month periods ended September 30, 1999 and 1998, in thousands, except as
otherwise indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
Operating Passenger ----------------------------------- Increase
Revenues and Statistics 1999 1998 (Decrease) %
- ---------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Scheduled:
Passenger revenues................... $ 304,054 $ 270,652 $ 33,402 12.3
Revenue passengers flown............. 4,092 3,786 306 8.1
RPMs................................. 3,054,878 2,748,244 306,634 11.2
ASMs................................. 4,064,180 3,699,817 364,363 9.8
Passenger load factor................ 75.2% 74.3% 0.9 1.2
Yield................................ 10.0 CENTS 9.8 CENTS 0.2 CENTS 2.0
Overseas Charter:
Charter revenues..................... $ 30,741 $ 26,519 $ 4,222 15.9
Revenue passengers flown............. 202 187 15 8.0
RPMs................................. 563,283 515,167 48,116 9.3
ASMs................................. 591,029 548,693 42,336 7.7
Total Operations:
Scheduled passenger and
overseas charter revenues......... $ 334,795 $ 297,171 $ 37,624 12.7
Revenue passengers flown............. 4,294 3,973 321 8.1
RPMs................................. 3,618,161 3,263,411 354,750 10.9
ASMs................................. 4,655,209 4,248,510 406,699 9.6
</TABLE>
Significant period to period variances were as follows:
Scheduled passenger revenues totaled $304.1 million during the nine month period
ended September 30, 1999, an increase of $33.4 million or 12.3% over passenger
revenues of $270.7 million for the nine month period ended September 30, 1998.
The Company experienced period over period increases of $4.6 million and $27.4
million in its Interisland and Transpacific passenger revenues, respectively.
The Company's concentrated efforts throughout the year to improve fare and
passenger mix and initiate
<PAGE>
and maintain general price increases resulted in, for the nine months ended
September 30, 1999 (1) higher yields in the Transpacific market of
approximately 6% and (2) a 7% and 12% increase in Interisland and
Transpacific RPMs and passengers carried, respectively.
Overseas charter revenues totaled $30.7 million in the nine month period ended
September 30, 1999, an increase of $4.2 million or 15.9% from the nine month
period ended September 30, 1998. As described above, the increase is primarily
associated with the Company commencing charters between Los Angeles and Tahiti
and the flying of additional ad hoc charters period over period.
The following table compares operating expenses per ASM by major category for
the nine month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------- Increase
Operating Expenses Per ASM 1999 1998 (Decrease) %
- --------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Wages and benefits............................ 2.23 CENTS 2.13 CENTS 0.10 CENTS 4.7
Aircraft fuel, including taxes and oil........ 1.11 1.20 (0.09) (7.5)
Maintenance materials and repairs............. 1.61 1.48 0.13 8.8
Rentals and landing fees...................... 0.48 0.54 (0.06) (11.1)
Sales commissions............................. 0.23 0.21 0.02 9.5
Depreciation and amortization................. 0.27 0.22 0.05 22.7
Other......................................... 1.68 1.50 0.18 12.0
========== ========== ========== ===========
Total.............................. 7.61 CENTS 7.28 CENTS 0.33 CENTS 4.5
========== ========== ========== ===========
</TABLE>
All fluctuations in operating expenses were affected by an overall increase in
ASM of approximately 9.6% period over period. Significant period to period
variances were as follows:
Wages and benefits totaled $103.8 million versus $90.4 million for the
respective nine month periods in 1999 and 1998, an increase of $13.3 million or
14.8%. Similar to above, a majority of the increase is primarily attributable to
(1) a 3% wage increase effective December 1, 1998 and (2) additional wages and
benefits from increased flying and implementation of the Company's 1999 growth
strategies.
Maintenance materials and repairs per ASM increased by 0.13 CENTS or 8.8% for
the nine months ended September 30, 1999 compared to the same period in 1998.
For the nine months ended September 30, 1999, the Company incurred approximately
$12.4 million or 19.7% in additional maintenance expense as compared to the same
period in 1998 due to (1) $4.4 million more in DC-9 airframe and engine repairs
and (2) $7.7 million more in DC-10 maintenance expense, the result of increased
American maintenance rates and the number of DC-10 aircraft used and flown.
Sales commissions per ASM increased by 0.02 CENTS or 9.5%. Sales commissions
totaled $10.6 million, an increase of $1.9 million or 21.8%. As mentioned above,
the increase is primarily the result of increased sales activity from travel
agency and retail sales sources.
<PAGE>
Depreciation and amortization per ASM increased by 0.05 CENTS or 22.7% for the
first nine months of 1999 compared to the same period in 1998. Additional
depreciation of approximately $2.9 million was incurred from owned DC-9 and
DC-10 aircraft and related rotable parts placed into service in 1999.
Other operating expenses per ASM increased by 0.18 CENTS or 12.0% period over
period. Other operating expenses increased period over period by $14.4 million
or 22.6%. Similar to that discussed above, the increase is primarily
attributable to expenses associated with the Company's increased flying schedule
and passengers flown, including but not limited to, ground handling, security,
food and beverage, advertising and promotion and personnel expenses.
AIRCRAFT
On September 22, 1999, the Company announced that, subject to the negotiation
and execution of a definitive agreement, it had accepted an offer from The
Boeing Company ("Boeing") to purchase up to 20 Boeing 717-200 aircraft to
replace its present Interisland fleet. The Company currently utilizes 15 DC-9-50
aircraft to service its Interisland routes. The 717s (1) have the same Type
Rating as the DC-9, allowing easier maintenance and crew training transitioning;
(2) seat eight passengers in first class and 115 in coach; (3) utilize twin BMW
Rolls-Royce BR715 engines that generate emissions 60% below existing federal
standards; and (4) meet federal Stage 3 and Stage 4, as currently defined,
requirements. The 717s are also expected to be 25% more fuel-efficient, less
costly to maintain than the Company's current DC-9-50 fleet and able to fly with
greater frequency than the DC-9s. This would allow an expanded Interisland
flight schedule to accommodate existing and increasing passenger demand
generated from the Company's marketing efforts, its code share agreements with
American, Continental Airlines, Inc. ("Continental") and Northwest Airlines,
Inc. and the Company's own expanded Transpacific operations. A firm order valued
at more than $430 million for 13 Boeing 717-200 aircraft has been placed, with
the Company anticipating taking delivery of the 13 new aircraft throughout the
year 2001. Financing will be provided through Boeing for acquisition of the
initial 13 aircraft.
The Company also recently announced agreements to sublease two DC-10-30
aircraft from Continental for use in its charter operations and its nonstop
Transpacific Los Angeles to Maui route. The Company expects delivery of the
first aircraft on or about November 15, 1999 and the second aircraft on or
about April 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that it has various options available to meet its current
and future capital, debt and operating commitments, including cash and liquid
short-term investment securities on hand on September 30, 1999 of $35.6 million
and internally generated funds. The Company also has restricted cash
representing a credit card holdback of $20.0 million resulting from advance
ticket sales. These funds are made available to the Company for general use as
air travel is provided and fluctuate based upon advance booking trends. The
Company also maintains a credit facility with a total availability of $9.3
million as of September 30, 1999 with aggregate term loans and letters of credit
outstanding in the amounts of $5.3 million and $3.2 million, 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 ended September 30, 1999
increased by $4.6 million. Operating activities for the nine month period ended
September 30, 1999 provided $29.7 million in cash and cash equivalents,
primarily due to the Company generating positive operating and net income and
net increases in accounts payable, air traffic liability and accrued
liabilities. Through September 30, 1999, the Company incurred $32.2 million in
capital expenditures, approximately $19.5
<PAGE>
million of which is associated with the acquisition of additional DC-9 and
DC-10 aircraft. Capitalized portions of aircraft improvements and continued
investments in improved software, related hardware and ground equipment and
other assets represent a majority of the remaining capital expenditures. The
Company estimates that its 1999 capital expenditures will approximate $47.8
million.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes heating oil forward contracts to manage market risks and
hedge its financial exposure resulting from fluctuations in its aircraft fuel
costs. When fully implemented, the Company plans to employ a strategy whereby
heating oil contracts are used to cover approximately 50% of the Company's
anticipated aircraft fuel needs on a rolling six month basis. At September 30,
1999, the Company held petroleum forward contracts to purchase 256,000 barrels
of heating oil in the aggregate amount of $6.2 million through April 2000. These
forward contracts represented approximately 17% of the Company's anticipated
1999 aircraft fuel needs for the next six months. Realized gains on liquidated
contracts amounting to $87,000 and $111,000, are included as a component of
Aircraft Fuel Cost for the three and nine month periods ended September 30,
1999.
INFORMATION TECHNOLOGY SYSTEMS AND YEAR 2000
The Company has brought 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 either replaced or enhanced existing
systems, including local and wide area networks, yield management and all or
portions of revenue and financial accounting. Essentially all development and
implementation efforts related to these projects have been completed.
Approximately $8 million of external costs associated with these efforts have
been incurred as of September 30, 1999. The Company's efforts have transitioned
whereby, as necessary, these projects have been incorporated into or complement
those Year 2000 programs described below.
The Company's dedicated Year 2000 Director and Year 2000 Project Office continue
to oversee the Company's Year 2000 compliance efforts, which operate on four
tracks including (1) information and communication systems; (2) hardware; (3)
business partnerships; and (4) government and externalities. Each track utilizes
the Federal General Accounting Office methodology and available best practices.
STATE OF READINESS
The Company has and continues to perform constant awareness activities through
regular informational briefings and newsletter updates along with formal briefs
of management and senior management. The Company has initiated public relations
activities, and is working with the Air Transport Association in a continuing
coordinated industry effort.
The Company has inventoried all of its hardware and software applications and is
in the process of formally documenting its inventory assessments. Applications
and hardware configurations of computers operating on the Company's networks
have been audited using automated tools and stand-alone machines have been
subjected to the same detailed audits.
Remediation of legacy systems is 100% complete with all remediation and testing
of mission critical systems completed as of September 30, 1999. The Company has
contracted with external vendors to assist in its testing efforts and is
currently completing testing on two remaining systems.
<PAGE>
Departments are currently engaged in final documentation of their business
partners, including critical third-party service providers, with all activities
scheduled for completion in November 1999.
Hardware assessments have identified a very small amount of equipment which is
date aware, with no systems yet identified as requiring remediation. All mission
critical systems have been documented compliant either through manufacturer
assurances or testing by the Company.
ESTIMATED COSTS TO ADDRESS YEAR 2000 ISSUES
Because a substantial portion of the Company's information systems were 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 million to $2 million for such remediation and
testing. This will be in addition to the $8 million expended on those
replacement systems described above.
CONTINGENCY PLANS FOR HAWAIIAN AIRLINES
In addition to those Company contingency plans already on file for a number of
operational functions as a part of U.S. Federal Aviation Administration (the
"FAA") regulations and its normal operational disaster recovery plans, the
Company has undertaken Year 2000-specific contingency activities. To this end,
the Company has established a dedicated position for the coordination of
contingency plans. While the Company believes that all systems will be Year 2000
ready, the Company has substantively developed appropriate contingency plans to
address complete and partial systems failure for all critical, vital, and
important internal systems and those relied on from third-party service
providers. Hawaiian will continue to refine and test its contingency plans
throughout the remainder of 1999.
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. While indications to date are that its business
partners are actively preparing for the Year 2000, the Company will continue to
aggressively address both its supply and revenue chains to ensure, 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.
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, which the Company believes is the most reasonably likely worst
case scenario, failure of those systems operated by third parties on which the
Company's business relies (including those of the FAA) 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to certain market risks related to its aircraft fuel.
Refer to DERIVATIVE FINANCIAL INSTRUMENTS as described above for further
discussion on aircraft fuel and related financial instruments.
<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, 1999
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 2000 proxy material,
shareholder proposals to be considered for presentation at the 2000
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 December 17,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K.
(i) Current Report on Form 8-K dated September 14, 1999 (date of
event August 28, 1999) reporting Item 5, "Other Events" and
Item 7, "Financial Statements, Proforma Financial
Information and Exhibits."
(ii) Current Report on Form 8-K dated September 27, 1999 (date of
event September 22, 1999) reporting Item 5, "Other Events."
(iii) Current Report on Form 8-K dated October 5, 1999 (date of
event September 28, 1999) reporting Item 4, "Changes In
Registrant's Certifying Accountant."
(iv) Current Report on Form 8-K/A dated October 12, 1999 (date of
event September 28, 1999) reporting Item 4, "Changes In
Registrant's Certifying Accountant" and Item 7, "Financial
Statements, Proforma Financial Information and Exhibits."
<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, 1999 By /s/ JOHN L. GARIBALDI
----------------------------------------
John L. Garibaldi
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 55,552
<SECURITIES> 0
<RECEIVABLES> 32,353
<ALLOWANCES> 500
<INVENTORY> 11,722
<CURRENT-ASSETS> 105,367
<PP&E> 141,111
<DEPRECIATION> 34,937
<TOTAL-ASSETS> 258,005
<CURRENT-LIABILITIES> 103,579
<BONDS> 26,491
0
0
<COMMON> 410
<OTHER-SE> 96,655
<TOTAL-LIABILITY-AND-EQUITY> 258,005
<SALES> 367,362
<TOTAL-REVENUES> 367,362
<CGS> 354,389
<TOTAL-COSTS> 354,389
<OTHER-EXPENSES> 415
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 910
<INCOME-PRETAX> 11,646
<INCOME-TAX> 5,468
<INCOME-CONTINUING> 6,178
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,178
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.15
</TABLE>
