<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 June 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 August 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)
JUNE 30, DECEMBER 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 41,592 $ 31,011
Restricted cash.................................................................... 14,816 6,432
Accounts receivable, net........................................................... 32,370 29,995
Inventories, net................................................................... 10,120 8,546
Prepaid expenses and other......................................................... 6,131 5,923
-------- --------
TOTAL CURRENT ASSETS........................................................... 105,029 81,907
-------- --------
Property and equipment, less accumulated depreciation and
amortization of $31,207 and $25,584 in 1999 and 1998, respectively................. 103,354 84,922
Other assets........................................................................... 6,158 8,232
Reorganization value in excess of amounts
allocable to identifiable assets, net ("Excess Reorganization Value").............. 43,034 46,850
-------- --------
TOTAL ASSETS................................................................... $257,575 $221,911
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................................................. $ 4,631 $ 3,532
Current portion of capital lease obligations....................................... 5,235 4,614
Accounts payable................................................................... 34,744 28,883
Accrued liabilities................................................................ 24,658 16,517
Air traffic liability.............................................................. 33,542 22,131
-------- --------
TOTAL CURRENT LIABILITIES...................................................... 102,810 75,677
-------- --------
Long-Term Debt......................................................................... 24,183 14,454
Capital Lease Obligations.............................................................. 3,078 5,966
Other Liabilities and Deferred Credits................................................. 33,941 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)
Accumulated deficit................................................................ (3,331) (6,007)
Accumulated other comprehensive loss............................................... (4,506) (4,506)
-------- --------
SHAREHOLDERS' EQUITY........................................................... 93,563 90,887
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................................... $257,575 $221,911
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed financial statements
2
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HAWAIIAN AIRLINES, INC.
CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger ............................ $ 101,581 $ 91,086 $ 192,067 $ 173,294
Charter .............................. 9,663 8,670 19,850 18,103
Cargo ................................ 5,912 5,657 11,047 10,829
Other ................................ 5,163 3,590 9,365 7,023
--------- --------- --------- ---------
TOTAL ............................ 122,319 109,003 232,329 209,249
--------- --------- --------- ---------
OPERATING EXPENSES:
Wages and benefits ................... 34,486 29,379 67,476 58,926
Aircraft fuel, including taxes and oil 17,473 17,047 31,259 35,851
Maintenance materials and repairs .... 24,542 20,997 48,302 42,179
Rentals and landing fees ............. 7,227 7,314 14,647 14,659
Sales commissions .................... 3,625 2,971 7,039 6,138
Depreciation and amortization ........ 4,210 3,394 7,806 6,125
Other ................................ 26,402 21,837 49,969 41,226
--------- --------- --------- ---------
TOTAL ............................ 117,965 102,939 226,498 205,104
--------- --------- --------- ---------
OPERATING INCOME ......................... 4,354 6,064 5,831 4,145
--------- --------- --------- ---------
NONOPERATING EXPENSE:
Interest expense, net ................ (429) (39) (658) (361)
Loss on disposition of equipment ..... (363) (46) (783) (59)
Other, net ........................... (26) (99) 622 (47)
--------- --------- --------- ---------
TOTAL ............................ (818) (184) (819) (467)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES ............... 3,536 5,880 5,012 3,678
INCOME TAX PROVISION ..................... (1,643) (2,939) (2,336) (1,839)
--------- --------- --------- ---------
NET INCOME ............................... 1,893 2,941 2,676 1,839
OTHER COMPREHENSIVE INCOME (LOSS) ........ -- -- -- --
--------- --------- --------- ---------
COMPREHENSIVE INCOME ..................... $ 1,893 $ 2,941 $ 2,676 $ 1,839
--------- --------- --------- ---------
--------- --------- --------- ---------
NET INCOME PER COMMON STOCK SHARE:
Basic ................................ $ 0.05 $ 0.07 $ 0.07 $ 0.04
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted .............................. $ 0.04 $ 0.07 $ 0.06 $ 0.04
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
SHARES OUTSTANDING:
Basic ................................ 40,997 40,898 40,997 40,885
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted .............................. 42,223 42,178 42,218 42,246
--------- --------- --------- ---------
--------- --------- --------- ---------
</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>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 2,676 $ 1,839
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ......................... 7,806 6,125
Net periodic postretirement benefit cost .............. 694 669
Loss on disposition of equipment ...................... 783 59
Income tax provision recognized as a reduction
to Excess Reorganization Value .................... 2,336 1,839
Increase in restricted cash ........................... (8,384) (837)
Decrease (increase) in accounts receivable ............ (2,375) 3,919
Increase in inventories ............................... (1,574) (122)
Decrease (increase) in prepaid expenses and other ..... (208) 1,332
Increase (decrease) in accounts payable ............... 5,861 (561)
Increase in accrued liabilities ....................... 8,141 1,020
Increase in air traffic liability ..................... 11,411 7,218
Other, net ............................................ (223) (894)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 26,944 21,606
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of investment securities ............................. -- 3,001
Purchase of property and equipment ........................ (25,229) (6,850)
Net proceeds from disposition of equipment ................ 305 742
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............. (24,924) (3,107)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .................... -- 64
Issuance of long-term debt ................................ 12,281 425
Repayment of long-term debt ............................... (1,453) (657)
Repayment of capital lease obligations .................... (2,267) (2,075)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,561 (2,243)
NET INCREASE IN CASH AND CASH EQUIVALENTS ......... 10,581 16,256
Cash and cash equivalents - Beginning of Period ................ 31,011 15,713
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD ...................... $ 41,592 $ 31,969
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed financial statements
4
<PAGE>
HAWAIIAN AIRLINES, INC.
STATISTICAL DATA
(IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED) (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SCHEDULED OPERATIONS:
Revenue passengers flown ..................... 1,336 1,268 2,631 2,453
Revenue passenger miles ("RPM") .............. 1,033,123 960,980 1,931,428 1,755,629
Available seat miles ("ASM") ................. 1,371,776 1,227,900 2,627,109 2,431,395
Passenger load factor ........................ 75.3% 78.3% 73.5% 72.2%
Passenger revenue per passenger mile ("Yield") 9.8(cent) 9.5(cent) 9.9(cent) 9.9(cent)
OVERSEAS CHARTER OPERATIONS:
Revenue passengers flown ..................... 63 60 132 127
RPM .......................................... 175,565 165,729 368,022 349,106
ASM .......................................... 186,903 176,470 385,690 371,239
TOTAL OPERATIONS:
Revenue passengers flown ..................... 1,399 1,328 2,763 2,580
RPM .......................................... 1,208,688 1,126,709 2,299,450 2,104,735
ASM .......................................... 1,558,679 1,404,370 3,012,799 2,802,634
Revenue per ASM .............................. 7.85(cent) 7.76(cent) 7.71(cent) 7.47(cent)
Cost per ASM ................................. 7.57(cent) 7.33(cent) 7.52(cent) 7.32(cent)
</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 June 30, 1999 and December 31,
1998. 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 POLICES
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 June 30, 1999 and December
31, 1998, approximately $14.8 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.
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 1999 results will require a
provision for income taxes. For the three and six month periods ended June
30, 1999, estimated interperiod tax provisions of $1.6 million and $2.3
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.
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
6
<PAGE>
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 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP") 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.
7
<PAGE>
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, 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 second quarter 1999, the Company generated operating and net income of $4.4
million and $1.9 million, respectively. Quarter over quarter, operating revenues
increased by $13.3 million, primarily due to an $11.5 million increase in
scheduled and chartered passenger revenues. Operating expenses increased by
$15.0 million principally due to higher labor, maintenance and general
administrative expenses. As anticipated, the Company has incurred additional
operating expenses, essentially representing buildup costs related to the
implementation of its 1999 growth strategies as discussed in ROUTES, AIRCRAFT
AND ALLIANCES below. The incurrence of these buildup costs were expected to be
non-uniform with a disproportionate increase occurring in the latter part of
second quarter 1999. Incremental labor and training costs incurred to support
these growth strategies accounted for approximately $1 million in second quarter
1999.
For the six months ended June 30, 1999, the Company improved operating and net
income by $1.7 million and $837,000, respectively, as compared to the six months
ended June 30, 1998. Operating and net income for the six months ended June 30,
1999 totaled $5.8 million and $2.7 million, respectively. Period over period,
operating revenues increased by $23.1 million, again primarily due to a $20.5
million increase in scheduled and chartered passenger revenues. Operating
expenses increased by $21.4 million
8
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with higher labor, maintenance and general administrative costs being
partially offset by reduced aircraft fuel expense. Again, the Company has
incurred additional operating expenses related to buildup costs associated
with its 1999 growth strategies as discussed below.
The Hawaii economy posted an inflation-adjusted 2.2% gross state product growth
rate in 1998, the highest percentage level since 1990. However, overall tourism
in Hawaii remains stagnant. Preliminary statistics from the Hawaii Visitors &
Convention Bureau revealed that period over period, visitor arrivals to the
State of Hawaii through the first six months of 1999 were relatively unchanged.
Through June 1999, overall visitor counts to Hawaii increased by a net 0.6%,
with a 7.7% decrease in Eastbound visitor traffic being offset by a 5.4%
increase in Westbound visitor traffic.
THREE MONTH PERIOD ENDED JUNE 30, 1999
The following table compares second quarter 1999 operating passenger revenues
and statistics to those in second quarter 1998, in thousands, except as
otherwise indicated:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
Operating Passenger ------------------------------------ Increase
Revenues and Statistics 1999 1998 (Decrease) %
- ------------------------------------------------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Scheduled:
Passenger revenues ......... $ 101,581 $ 91,086 $ 10,495 11.5
Revenue passengers flown ... 1,336 1,268 68 5.4
RPM ........................ 1,033,123 960,980 72,143 7.5
ASM ........................ 1,371,776 1,227,900 143,876 11.7
Passenger load factor ...... 75.3% 78.3% (3.0) (3.8)
Yield ...................... 9.8(cent) 9.5(cent) 0.3(cent) 3.2
Overseas Charter:
Charter revenues ........... $ 9,663 $ 8,670 $ 993 11.5
Revenue passengers flown ... 63 60 3 5.0
RPM ........................ 175,565 165,729 9,836 5.9
ASM ........................ 186,903 176,470 10,433 5.9
Total Operations:
Scheduled passenger and
overseas charter revenues $ 111,244 $ 99,756 $ 11,488 11.5
Revenue passengers flown ... 1,399 1,328 71 5.3
RPM ........................ 1,208,688 1,126,709 81,979 7.3
ASM ........................ 1,558,679 1,404,370 154,309 11.0
</TABLE>
Significant quarter to quarter variances were as follows:
Scheduled passenger revenues totaled $101.6 million in second quarter 1999, an
increase of $10.5 million or 11.5%. On a scheduled system-wide basis, the
Company experienced an approximate 5.9% increase in its average fares due to
improved fare and inventory management, passenger mix and general increases on
all pricing tiers. The average fare increase was offset by a greater average
passenger stage length of approximately 2.0%, reflecting a larger contribution
of passenger revenues from the Company's Transpacific operations. Quarter over
quarter, the Company's Transpacific passenger revenues increased by $9.9
million, primarily due to the aforementioned efforts resulting in higher yields
and an 8% increase in Transpacific RPMs and passengers carried.
9
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Overseas charter revenues increased $993,000 or 11.5%, principally due to
additional ad hoc charters flown quarter over quarter.
The following table compares operating expenses per ASM for second quarter 1999
with second quarter 1998 by major category:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------- Increase
Operating Expenses Per ASM 1999 1998 (Decrease) %
- ----------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
Wages and benefits ................... 2.21(cent) 2.09(cent) 0.12(cent) 5.7
Aircraft fuel, including taxes and oil 1.12 1.21 (0.09) (7.4)
Maintenance materials and repairs .... 1.57 1.50 0.07 4.7
Rentals and landing fees ............. 0.46 0.52 (0.06) (11.5)
Sales commissions .................... 0.23 0.21 0.02 9.5
Depreciation and amortization ........ 0.27 0.24 0.03 12.5
Other ................................ 1.69 1.55 0.14 9.0
---- ---- ---- -----
Total ..................... 7.55(cent) 7.32(cent) 0.23(cent) 3.1
---- ---- ---- -----
---- ---- ---- -----
</TABLE>
All fluctuations in operating expenses were affected by an overall increase
in ASM of approximately 11.0% quarter over quarter. Significant quarter to
quarter variances were as follows:
The dilutive effect of increased ASMs quarter over quarter was offset by
increased wages and benefits of $5.1 million or 17.4%. Wages and benefits
totaled $34.5 million in second quarter 1999 versus $29.4 million in second
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 and implementation of the Company's 1999 growth strategies.
Aircraft fuel cost, including taxes and oil ("Aircraft Fuel Cost") per ASM
decreased by 0.09(cent) or 7.4%. Quarter over quarter, the Company incurred
approximately $426,000 or 2.5% more Aircraft Fuel Cost. Due to increased flying,
gallons consumed increased by 11.6% while the average cost of aircraft fuel per
gallon, excluding taxes, decreased by 3.0(cent) or 5.4%. The average cost of
aircraft fuel per gallon has steadily increased during 1999. The second quarter
decrease of 3.0(cent) and 5.4% compares to a first quarter 1999 decrease in
average cost of aircraft fuel per gallon, excluding taxes, of 13.8(cent) and
28.1%. The Company anticipates that the average cost of aircraft fuel per gallon
will increase as the remainder of the year progresses.
Maintenance materials and repairs per ASM increased by 0.07(cent) or 4.7%.
Quarter over quarter the Company incurred approximately $3.5 million or 16.9%
in additional maintenance expense principally due to $3.0 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.
Other operating expenses increased quarter over quarter by $4.6 million or
20.9%, principally attributable to expenses associated with the Company's
increased flying schedule and passengers flown, including but not limited to,
ground handling, food and beverage and personnel expenses.
10
<PAGE>
SIX MONTH PERIOD ENDED JUNE 30, 1999
The following table compares operating passenger revenues and statistics for the
six month periods ended June 30, 1999 and 1998, in thousands, except as
otherwise indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
Operating Passenger ------------------------------------ Increase
Revenues and Statistics 1999 1998 (Decrease) %
- ------------------------------------------------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Scheduled:
Passenger revenues ........... $ 192,067 $ 173,294 $ 18,773 10.8
Revenue passengers flown ..... 2,631 2,453 178 7.3
RPM .......................... 1,931,428 1,755,629 175,799 10.0
ASM .......................... 2,627,109 2,431,395 195,714 8.0
Passenger load factor ........ 73.5% 72.2% 1.3 1.8
Yield ........................ 9.9(cent) 9.9(cent) -(cent) -
Overseas Charter:
Charter revenues ............. $ 19,850 $ 18,103 $ 1,747 9.7
Revenue passengers flown ..... 132 127 5 3.9
RPM .......................... 368,022 349,106 18,916 5.4
ASM .......................... 385,690 371,239 14,451 3.9
Total Operations:
Scheduled passenger and
overseas charter revenues . $ 211,917 $ 191,397 $ 20,520 10.7
Revenue passengers flown ..... 2,763 2,580 183 7.1
RPM .......................... 2,299,450 2,104,735 194,715 9.3
ASM .......................... 3,012,799 2,802,634 210,165 7.5
</TABLE>
Significant period to period variances were as follows:
Scheduled passenger revenues totaled $192.1 million during the six month period
ended June 30, 1999, an increase of $18.8 million or 10.8% over passenger
revenues of $173.3 million for the six month period ended June 30, 1998. The
Company experienced period over period increases of $2.1 million and $15.8
million in its Interisland and Transpacific passenger revenues, respectively. As
mentioned above, the Company's concentrated efforts to improve fare and
passenger mix and initiate and maintain general price increases resulted in, for
the six months ended June 30, 1999 (i) higher yields in the Transpacific market
and (ii) a 6% and 10% increase in Interisland and Transpacific RPMs and
passengers carried, respectively.
Overseas charter revenues totaled $19.9 million in the six month period ended
June 30, 1999, an increase of $1.7 million or 9.7% from the six month period
ended June 30, 1998. The increase is primarily associated with the Company
flying additional ad hoc charters period over period.
The following table compares operating expenses per ASM by major category for
the six month periods ended June 30, 1999 and 1998:
11
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------- Increase
Operating Expenses Per ASM 1999 1998 (Decrease) %
- ------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
Wages and benefits ................... 2.24(cent) 2.10(cent) 0.14(cent) 6.7
Aircraft fuel, including taxes and oil 1.04 1.28 (0.24) (18.8)
Maintenance materials and repairs .... 1.60 1.50 0.10 6.7
Rentals and landing fees ............. 0.49 0.52 (0.03) (5.8)
Sales commissions .................... 0.23 0.22 0.01 4.5
Depreciation and amortization ........ 0.26 0.22 0.04 18.2
Other ................................ 1.66 1.47 0.19 12.9
---- ---- ---- -----
Total ..................... 7.52(cent) 7.31(cent) 0.21(cent) 2.9
---- ---- ---- -----
---- ---- ---- -----
</TABLE>
All fluctuations in operating expenses were affected by an overall increase in
ASM of approximately 7.5% period over period. Significant period to period
variances were as follows:
The dilutive effect of increased ASMs was offset by increased wages and benefits
of $8.5 million or 14.5%. Wages and benefits totaled $67.4 million versus $58.9
million for the respective six month periods in 1999 and 1998. Similar to above,
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 and
implementation of the Company's 1999 growth strategies.
Aircraft Fuel Cost per ASM decreased by 0.24(cent) or 18.8%. Approximately $4.6
million or 12.7% less Aircraft Fuel Cost was incurred by the Company in the six
month period ended June 30, 1999 compared to the six month period ended June 30,
1998. Period over period, average cost of aircraft fuel per gallon, excluding
taxes, decreased by 9.8(cent) or 16.9%.
Maintenance materials and repairs per ASM increased by 0.10(cent) or 6.7%. For
the six months ended June 30, 1999, the Company incurred approximately $6.1
million or 14.5% in additional maintenance expense as compared to the same
period in 1998 due to (i) $1.6 million more in DC-9 airframe and engine repairs
and (ii) $4.9 million more in DC-10 maintenance expense, the result of increased
American maintenance rates and the number of DC-10 aircraft used and flown.
Other operating expenses per ASM increased by 0.19(cent) or 12.9% period over
period. 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, food and
beverage, personnel expenses and reservation fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that it has various options available to meet its capital,
debt and operating commitments, including cash and liquid short-term investment
securities on hand on June 30, 1999 of $41.6 million and internally generated
funds. The Company also has restricted cash representing a credit card holdback
of $14.8 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 June 30, 1999 with aggregate
term loans and letters of credit outstanding in the amounts of $5.1
12
<PAGE>
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 six month period ended June 30, 1999
increased by $10.6 million. Operating activities for the six month period
ended June 30, 1999 provided $26.9 million in cash and cash equivalents,
primarily due to the Company generating positive operating and net income and
net increases in accounts payable, accrued liabilities and air traffic
liability. Through June 30, 1999, the Company incurred $25.2 million in
capital expenditures, approximately $15.8 million of which is associated with
the acquisition of additional DC-9 and DC-10 aircraft discussed below.
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 $49.8 million.
ROUTES, AIRCRAFT AND ALLIANCES
In 1999, the Company initiated and continues to implement certain growth
strategies.
In first quarter 1999 the Company expanded 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 August
1999, a two-year agreement providing for approximately 20 round-trip charter
flights per month between Los Angeles and Tahiti will commence. To service these
new routes, the Company took delivery of, in late 1998 and early 1999, two used
DC-10-30 aircraft and is seeking to acquire a third DC-10-30 aircraft.
Further, in an effort to meet existing and anticipated passenger demand in the
Interisland market resulting from the Company's marketing efforts, including its
code sharing arrangements with American and Northwest Airlines, Inc. and most
recently Continental Airlines, Inc. ("Continental"), as discussed below, the
Company took delivery of, in late 1998 and second quarter 1999, two used DC-9-50
aircraft. The full incremental capacity resulting from the two additional
DC-9-50 aircraft has been scheduled in third quarter 1999.
On August 3, 1999, the Company announced commencement of a formal code share
arrangement with Continental which will allow passengers to book connecting
travel between points in the domestic U.S. mainland and any of the islands in
the State of Hawaii. The code share arrangement enhances the cooperative
marketing alliance with Continental established in 1997.
LANDING FEES
On September 1, 1999, a two-year moratorium placed on landing fees at all
airports in the State of Hawaii is scheduled to end. The Governor of the State
of Hawaii has reserved the right to reinstate the landing fee charges before the
two-year period ends. Prior to the moratorium, the Company had averaged
approximately $500,000 per month in landing fees at airports in the State of
Hawaii.
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, 1999, the passenger
excise tax is scheduled to decrease from 8% to 7.5%, with a correspondent
increase in the "head tax" from $2 to $2.25 per domestic flight segment. 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 when the scheduled
tax change occurs.
13
<PAGE>
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 June 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, formal briefs
of management and senior management, and the development of "personal Y2K
kits" for all employees to address their concerns. The Company has initiated
public relations activities, and is working with the Air Transport
Association on a 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 standalone machines have been
subjected to the same detailed audits.
Remediation of legacy systems is approximately 97% complete with all remediation
and testing of mission critical systems expected before September 30, 1999. The
Company has contracted with external vendors to assist in its testing efforts
and is currently testing its applications inventory.
The Company continues an aggressive business partner management program and is
conducting a telephone survey of vital and important vendors, supported by site
visits as necessary.
Hardware assessments have identified a very small amount of equipment which is
date aware, with no systems yet identified as requiring remediation. Currently,
the Company believes that all mission critical systems will be documented as
Year 2000 Ready by either the manufacturer or through testing by the Company,
with a target milestone of August 1999.
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 to $2 million for such remediation and testing.
This will be in addition to the $8 million expended on those replacement systems
described above.
14
<PAGE>
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 systems. 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.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No material developments in matters previously reported or
reportable events arising in the three or six months ended
June 30, 1999 were noted, other than that described
immediately below.
During second quarter 1999, the Department of Taxation of the
State of Hawaii (the "State DOT") informally advised the
Company that it was prepared to issue proposed tax assessment
notices to the Company's lessors of DC9 aircraft under
operating leases for general excise tax liability on the lease
rent paid to such lessors. Pursuant to the leases, the Company
would, subject to certain defenses, including but not limited
to the Company's prior discharge in bankruptcy of certain
obligations, be liable to the lessors for such taxes and
possibly interest and penalties thereon. In the opinion of
management, an adequate reserve for this contingency has been
established in the accompanying balance sheets and, after
consultation with legal counsel, management believes that the
ultimate disposition of this matter will not have a material
adverse effect on the Company's operations or financial
condition.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the May 21, 1999 Annual Meeting of Shareholders of Hawaiian
Airlines, Inc., the following matter was voted upon:
<TABLE>
<CAPTION>
Election of Board of Directors Votes
------------------------------ -----
<S> <C>
John W. Adams 33,139,359 For
776,053 Withheld
Paul J. Casey 33,147,789 For
767,623 Withheld
Todd G. Cole 33,118,174 For
797,238 Withheld
Robert C. Coo 33,142,474 For
772,938 Withheld
Joseph P. Hoar 33,140,584 For
774,828 Withheld
16
<PAGE>
Reno F. Morella 33,133,777 For
781,635 Withheld
Arthur J. Pasmas 33,142,624 For
772,788 Withheld
Samson Poomaihealani 33,138,255 For
777,157 Withheld
Edward Z. Safady 33,140,074 For
775,338 Withheld
Sharon L. Soper 33,138,356 For
777,056 Withheld
Thomas J. Trzanowski 33,136,574 For
778,838 Withheld
</TABLE>
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.
None.
17
<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.
August 16, 1999 By /s/ John L. Garibaldi
----------------------------------------
John L. Garibaldi
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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0
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