10-Q 1 ha-06302018x10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or

 o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from       to       
 
Commission file number 1-31443
 HAWAIIAN HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
71-0879698
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
3375 Koapaka Street, Suite G-350
 
 
Honolulu, HI
 
96819
(Address of Principal Executive Offices)
 
(Zip Code)
 
(808) 835-3700
(Registrant’s Telephone Number, Including Area Code)
  
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ý Yes o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ý Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes ý No
 
As of July 20, 2018, 50,737,816 shares of the registrant’s common stock were outstanding.




Hawaiian Holdings, Inc.
Form 10-Q
Quarterly Period ended June 30, 2018
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION

ITEM 1.                   FINANCIAL STATEMENTS.
Hawaiian Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017 (a)
 
2018
 
2017 (a)
 
 
(unaudited)
Operating Revenue:
 
 

 
 

 
 
 
 
Passenger
 
$
655,162

 
$
624,006

 
$
1,266,762

 
$
1,187,758

Other
 
60,285

 
46,110

 
114,097

 
88,567

Total
 
715,447

 
670,116

 
1,380,859

 
1,276,325

Operating Expenses:
 
 

 
 

 
 
 
 
Wages and benefits
 
171,555

 
154,660

 
340,264

 
305,713

Aircraft fuel, including taxes and delivery
 
153,026

 
102,774

 
286,472

 
206,312

Maintenance, materials and repairs
 
60,970

 
52,566

 
119,111

 
111,970

Aircraft and passenger servicing
 
38,626

 
35,636

 
75,144

 
69,926

Aircraft rent
 
29,865

 
34,553

 
61,765

 
67,688

Commissions and other selling
 
31,853

 
32,162

 
63,778

 
61,804

Other rentals and landing fees
 
31,184

 
27,438

 
61,999

 
55,774

Depreciation and amortization
 
32,919

 
27,872

 
65,164

 
55,340

Purchased services
 
31,474

 
28,055

 
62,595

 
54,692

Contract terminations expense
 

 

 
35,322

 

Special items
 

 
4,771

 

 
23,450

Other
 
41,047

 
32,789

 
80,052

 
64,786

Total
 
622,519

 
533,276

 
1,251,666

 
1,077,455

Operating Income
 
92,928

 
136,840

 
129,193

 
198,870

Nonoperating Income (Expense):
 
 

 
 

 
 
 
 
Interest expense and amortization of debt discounts and issuance costs
 
(7,627
)
 
(7,711
)
 
(16,182
)
 
(15,714
)
Gains (losses) on fuel derivatives
 
18,952

 
(4,712
)
 
23,569

 
(13,510
)
Interest income
 
1,931

 
1,467

 
3,405

 
2,619

Capitalized interest
 
2,355

 
2,082

 
4,593

 
3,842

Other, net
 
(2,752
)
 
(4,317
)
 
(1,696
)
 
(6,240
)
Total
 
12,859

 
(13,191
)
 
13,689

 
(29,003
)
Income Before Income Taxes
 
105,787

 
123,649

 
142,882

 
169,867

Income tax expense
 
26,307

 
46,755

 
34,860

 
59,327

Net Income
 
$
79,480

 
$
76,894

 
$
108,022

 
$
110,540

Net Income Per Common Stock Share:
 
 

 
 

 
 
 
 
Basic
 
$
1.57

 
$
1.43

 
$
2.12

 
$
2.06

Diluted
 
$
1.56

 
$
1.43

 
$
2.12

 
$
2.05

Weighted Average Number of Common Stock Shares Outstanding:
 
 
 
 
 
 
 
 
Basic
 
50,776

 
53,626

 
50,915

 
53,595

Diluted
 
50,878

 
53,914

 
51,038

 
53,948

Cash Dividends Declared Per Common Stock Share
 
$
0.12

 
$

 
$
0.24

 
$


(a) Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 2 to Consolidated Financial Statements contained in Part I, Item 1 of this report for additional information.

See accompanying Notes to Consolidated Financial Statements.

3



Hawaiian Holdings, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)

 
 
Three Months Ended June 30,
 
 
2018
 
2017 (a)
 
 
(unaudited)
Net Income
 
$
79,480

 
$
76,894

Other comprehensive income, net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $166 and $897 for 2018 and 2017, respectively
 
514

 
1,390

Net change in derivative instruments, net of tax expense of $2,999 and $768 for 2018 and 2017, respectively
 
9,263

 
1,261

Net change in available-for-sale investments, net of tax expense of $54 and $20 for 2018 and 2017, respectively
 
167

 
32

Total other comprehensive income
 
9,944

 
2,683

Total Comprehensive Income
 
$
89,424

 
$
79,577


 
 
Six Months Ended June 30,
 
 
2018
 
2017 (a)
 
 
(unaudited)
Net Income
 
$
108,022

 
$
110,540

Other comprehensive income (loss), net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $332 and $1,794 for 2018 and 2017, respectively
 
1,027

 
2,858

Net change in derivative instruments, net of tax expense of $654 and net of tax benefit of $3,557 for 2018 and 2017, respectively
 
2,019

 
(5,836
)
Net change in available-for-sale investments, net of tax benefit of $95 and net of tax expense of $72 for 2018 and 2017, respectively
 
(293
)
 
118

Total other comprehensive income (loss)
 
2,753

 
(2,860
)
Total Comprehensive Income
 
$
110,775

 
$
107,680


(a) Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 2 to Consolidated Financial Statements contained in Part I, Item 1 of this report for additional information.

See accompanying Notes to Consolidated Financial Statements.


4



Hawaiian Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except shares)
 
 
June 30, 2018
 
December 31, 2017 (a)
 
 
(unaudited)
ASSETS
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
333,791

 
$
190,953

Restricted cash
 
1,000

 
1,000

Short-term investments
 
259,313

 
269,297

Accounts receivable, net
 
111,493

 
140,279

Spare parts and supplies, net
 
36,387

 
35,361

Prepaid expenses and other
 
99,315

 
79,186

Total
 
841,299

 
716,076

Property and equipment, less accumulated depreciation and amortization of $611,642 and $558,548 as of June 30, 2018 and December 31, 2017, respectively
 
2,086,955

 
1,842,263

Other Assets:
 
 

 
 

Long-term prepayments and other
 
183,276

 
193,632

Intangible assets, less accumulated amortization of $22,080 and $21,561 as of June 30, 2018 and December 31, 2017, respectively
 
14,668

 
15,187

Goodwill
 
106,663

 
106,663

Total Assets
 
$
3,232,861

 
$
2,873,821

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
153,262

 
$
140,805

Air traffic liability
 
712,069

 
589,093

Other accrued liabilities
 
144,003

 
147,593

Current maturities of long-term debt and capital lease obligations
 
113,526

 
59,470

Total
 
1,122,860

 
936,961

Long-Term Debt and Capital Lease Obligations
 
578,453

 
511,201

Other Liabilities and Deferred Credits:
 
 

 
 

Accumulated pension and other post-retirement benefit obligations
 
218,426

 
220,788

Other liabilities and deferred credits
 
257,911

 
225,605

Deferred tax liability, net
 
135,164

 
134,141

Total
 
611,501

 
580,534

Commitments and Contingencies
 


 


Shareholders’ Equity:
 
 

 
 

Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of June 30, 2018 and December 31, 2017
 

 

Common stock, $0.01 par value per share, 50,735,132 and 51,173,453 shares outstanding as of June 30, 2018 and December 31, 2017, respectively
 
507

 
512

Capital in excess of par value
 
125,871

 
126,743

Accumulated income
 
866,180

 
793,134

Accumulated other comprehensive loss, net
 
(72,511
)
 
(75,264
)
Total
 
920,047

 
845,125

Total Liabilities and Shareholders’ Equity
 
$
3,232,861

 
$
2,873,821

 
(a) Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 2 to Consolidated Financial Statements contained in Part I, Item 1 of this report for additional information.

See accompanying Notes to Consolidated Financial Statements.

5



Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
 
Six Months Ended June 30,
 
 
2018
 
2017
 
 
(unaudited)
Net cash provided by Operating Activities
 
$
373,761

 
$
335,440

Cash flows from Investing Activities:
 
 

 
 

Additions to property and equipment, including pre-delivery payments
 
(258,112
)
 
(96,278
)
Proceeds from disposition of property and equipment
 
987

 
33,511

Purchases of investments
 
(110,092
)
 
(107,533
)
Sales of investments
 
119,236

 
125,881

Net cash used in investing activities
 
(247,981
)
 
(44,419
)
Cash flows from Financing Activities:
 
 

 
 

Long-term borrowings
 
86,500

 

Repayments of long-term debt and capital lease obligations
 
(30,047
)
 
(30,484
)
Dividend payments
 
(12,238
)
 

Debt issuance costs
 
(889
)
 

Repurchases of common stock
 
(22,745
)
 
(4,299
)
Other
 
(3,523
)
 
(7,535
)
Net cash provided by (used in) financing activities
 
17,058

 
(42,318
)
Net increase in cash and cash equivalents
 
142,838

 
248,703

Cash, cash equivalents, and restricted cash - Beginning of Period
 
191,953

 
330,991

Cash, cash equivalents, and restricted cash - End of Period
 
$
334,791

 
$
579,694

 
See accompanying Notes to Consolidated Financial Statements.


6



Hawaiian Holdings, Inc. 
Notes to Consolidated Financial Statements (Unaudited)
 
1. Business and Basis of Presentation
 
Hawaiian Holdings, Inc. (the Company or Holdings) is a holding company incorporated in the State of Delaware. The Company’s primary asset is its sole ownership of all issued and outstanding shares of common stock of Hawaiian Airlines, Inc. (Hawaiian). The accompanying unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC).  Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented. Due to seasonal fluctuations, among other factors common to the airline industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year.  The accompanying unaudited Consolidated Financial Statements should be read in conjunction with the financial statements and the notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
 
2. Significant Accounting Policies
 
Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, and created Topic 606 (ASC 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASC 606 replaced most existing revenue recognition guidance in GAAP and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.

The Company elected to adopt the full retrospective transition method as of January 1, 2018, resulting in the restatement of the prior periods as of the date of adoption. The overall decrease in equity as of January 1, 2016 was $76.0 million net of tax, with an offsetting change primarily in Other liabilities and deferred credits. Refer to Note 5 for additional revenue recognition discussion.

The most significant impact of the standard relates to the accounting for the Company's frequent flyer travel award program. This change, as well as other less significant changes, are described below:

Frequent flyer - The standard requires the Company to account for miles earned by passengers in the HawaiianMiles program through flight activity as a component of the passenger revenue ticket transaction at the estimated selling price of the miles, effectively eliminating the incremental cost accounting previously applied. ASC 606 resulted in a significant increase to the deferred revenue liability on the Company's balance sheet, as the estimated selling price of the miles significantly exceeds the value previously recorded for incremental cost. The allocated value of miles earned through flights and sold to partners is recognized at the time the free travel or other award is redeemed by the passenger. Previously, the transportation element associated with sold miles was deferred and recognized as passenger revenue over the period when the transportation was expected to be provided (23 months).
Passenger revenue - The standard requires the Company to make certain adjustments to its passenger revenue, most notably related to unused tickets, which represents unexercised passenger rights. The Company uses historical information to estimate the proportion of ticket revenue that will expire unused to be recognized at the scheduled flight date. Prior to the adoption of ASC 606, the Company recorded this revenue as the tickets expired unused. As of the adoption date the adjustment due to passenger ticket expiration had the effect of reducing the air traffic liability but did not have a significant effect on revenue recognized. Ticket change fees were previously recognized at the time the fees were assessed; however, under ASC 606, the Company now defers the recognition of ticket change fees as a component of air traffic liability until the related transportation is provided. Further, the Company reclassified revenue items such as checked baggage, charter, ticket change and cancellation fees, in flight revenue, and other incidental sales to passenger revenue (from other operating revenue), as these items do not represent distinct performance obligations separate from the transportation provided to the passenger.
Selling Costs - Under ASC 606, the Company will capitalize selling costs associated with credit card fees, booking fees, and commissions, and recognize the associated expense at the ticketed flight date. Prior to ASC 606, the Company recognized the costs associated with credit card and booking fees as they were incurred.


7




Restated financial statement information, which reflects the adoption of the ASC 606 is below:

 
Three Months Ended June 30, 2017
 
As Reported
 
Adjustments
 
As Restated
 
(in thousands)
Operating Revenue:
 
 
 
 
 
Passenger
$
593,210

 
$
30,796

 
$
624,006

Other
82,125

 
(36,015
)
 
46,110

Total
$
675,335

 
$
(5,219
)
 
$
670,116

Operating Expenses
532,786

 
490

 
533,276

Operating Income
142,549

 
(5,709
)
 
136,840

Nonoperating Income (Expense)
(13,191
)
 

 
(13,191
)
Income tax expense
48,925

 
(2,170
)
 
46,755

Net Income
$
80,433

 
$
(3,539
)
 
$
76,894

Net Income Per Common Stock Share:
 
 
 
 
 
Basic
$
1.50

 
$
(0.07
)
 
$
1.43

Diluted
$
1.49

 
$
(0.06
)
 
$
1.43


 
Six Months Ended June 30, 2017
 
As Reported
 
Adjustments
 
As Restated
 
(in thousands)
Operating Revenue:
 
 
 
 
 
Passenger
$
1,130,800

 
$
56,958

 
$
1,187,758

Other
158,720

 
(70,153
)
 
88,567

Total
$
1,289,520

 
$
(13,195
)
 
$
1,276,325

Operating Expenses
1,079,677

 
(2,222
)
 
1,077,455

Operating Income
209,843

 
(10,973
)
 
198,870

Nonoperating Income (Expense)
(29,003
)
 

 
(29,003
)
Income tax expense
63,495

 
(4,168
)
 
59,327

Net Income
$
117,345

 
$
(6,805
)
 
$
110,540

Net Income Per Common Stock Share:
 
 
 
 
 
Basic
$
2.19

 
$
(0.13
)
 
$
2.06

Diluted
$
2.18

 
$
(0.13
)
 
$
2.05




8



Select consolidated balance sheet line items, which reflect the adoption of the new standard are as follows:
 
December 31, 2017
 
Balance Sheet
 
As Reported
 
Adjustments
 
As Restated
 
(in thousands)
ASSETS
 
 
 
 
 
Prepaid expenses and other
$
65,196

 
$
13,990

 
$
79,186

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
Air traffic liability
545,362

 
43,731

 
589,093

Other accrued liabilities
146,283

 
1,310

 
147,593

Noncurrent Liabilities:
 
 
 
 
 
Other liabilities and deferred credits
95,636

 
129,969

 
225,605

Deferred tax liability
174,344

 
(40,203
)
 
134,141

Shareholders' Equity:
 
 
 
 
 
Accumulated income
913,951

 
(120,817
)
 
793,134


There was no impact to the Company's net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.

Recently Issued Accounting Pronouncements

In February 2018, the FASB issued 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). The guidance allows reclassification from accumulated other comprehensive income to retained earnings of stranded taxes resulting from the Tax Cuts and Jobs Act (the Tax Act). In addition, under ASU 2018-02, certain disclosures regarding stranded tax effects are required. ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company continues to evaluate the impact of ASU 2018-02 and the potential effects on the Company's consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (ASU 2017-02), which better aligns a company's risk management activities and financial reporting for hedging relationships and is intended to simplify hedge accounting requirements. ASU 2017-12 is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is continuing to evaluate the components and options within ASU 2017-12.

In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02), requiring a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018. ASU 2016-02 requires entities to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is evaluating the impact the adoption of this standard will have on its consolidated financial statements and believes this ASU will have a significant impact on its consolidated balance sheet but does not expect that the ASU will have a material impact on the Company's results of operations or cash flows. The effect of adopting the new standard will be to record right-of-use assets and operating lease obligations for current operating leases on the Company's balance sheet. Management is continuing to assess its current inventory of leases; as of June 30, 2018 the Company had 17 aircraft that are treated as an operating leases. Management has also identified and is evaluating the leases surrounding the terminal operations including hangar space, office space, and IT equipment.

The FASB is in process of finalizing transition relief which will allow entities to continue to apply the guidance in ASC 840, Leases including its disclosure requirements, in the comparative periods presented in the year that a company adopts ASU 2016-02 (ASC 842). Entities that elect this option will record the cumulative effect of adoption on the effective date rather than at the beginning of the earliest comparative period presented. See Note 10 below which discusses our lease obligations as of June 30, 2018.

9




3. Accumulated Other Comprehensive Income (Loss)
 
Reclassifications out of accumulated other comprehensive income (loss) by component are as follows: 
Details about accumulated other comprehensive (income) loss components
 
Three months ended June 30,
 
Six months ended June 30,
 
Affected line items in the statement where net income is presented
 
2018
 
2017
 
2018
 
2017
 
 
 
(in thousands)
 
 
Derivatives designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative losses (gains)
 
$
884

 
$
(480
)
 
$
2,105

 
$
(1,692
)
 
Passenger revenue
Total before tax
 
884

 
(480
)
 
2,105

 
(1,692
)
 
 
Tax expense (benefit)
 
(216
)
 
182

 
(515
)
 
641

 
 
Total, net of tax
 
$
668

 
$
(298
)
 
$
1,590

 
$
(1,051
)
 
 
Amortization of defined benefit plan items
 
 

 
 

 
 

 
 

 
 
Actuarial loss
 
$
624

 
$
2,228

 
$
1,248

 
$
4,456

 
Nonoperating Income (Expense), Other, net
Prior service cost
 
56

 
60

 
112

 
120

 
Nonoperating Income (Expense), Other, net
Total before tax
 
680

 
2,288

 
1,360

 
4,576

 
 
Tax benefit
 
(166
)
 
(898
)
 
(333
)
 
(1,765
)
 
 
Total, net of tax
 
$
514

 
$
1,390

 
$
1,027

 
$
2,811

 
 
Short-term investments
 
 

 
 

 
 

 
 

 
 
Realized losses (gain) on sales of investments, net
 
$
26

 
$
(12
)
 
$
31

 
$
(20
)
 
Nonoperating Income (Expense), Other, net
Total before tax
 
26

 
(12
)
 
31

 
(20
)
 
 
Tax expense (benefit)
 
(6
)
 
5

 
(7
)
 
8

 
 
Total, net of tax
 
$
20

 
$
(7
)
 
$
24

 
$
(12
)
 
 
Total reclassifications for the period
 
$
1,202

 
$
1,085

 
$
2,641

 
$
1,748

 
 

A rollforward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and six months ended June 30, 2018 and 2017 is as follows:

Three months ended June 30, 2018
 
Foreign Currency Derivatives
 
Defined Benefit
Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
(5,995
)
 
$
(75,440
)
 
$
(1,020
)
 
$
(82,455
)
Other comprehensive income before reclassifications, net of tax
 
8,595

 

 
147

 
8,742

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
668

 
514

 
20

 
1,202

Net current-period other comprehensive income
 
9,263

 
514

 
167

 
9,944

Ending balance
 
$
3,268

 
$
(74,926
)
 
$
(853
)
 
$
(72,511
)

10




Three months ended June 30, 2017
 
Foreign Currency Derivatives
 
Defined Benefit Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
(26
)
 
$
(108,734
)
 
$
(276
)
 
$
(109,036
)
Other comprehensive income before reclassifications, net of tax
 
1,559

 

 
39

 
1,598

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
(298
)
 
1,390

 
(7
)
 
1,085

Net current-period other comprehensive income
 
1,261

 
1,390

 
32

 
2,683

Ending balance
 
$
1,235

 
$
(107,344
)
 
$
(244
)
 
$
(106,353
)

Six months ended June 30, 2018
 
Foreign Currency Derivatives
 
Defined Benefit Pension Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
1,249

 
$
(75,953
)
 
$
(560
)
 
$
(75,264
)
Other comprehensive income (loss) before reclassifications, net of tax
 
429

 

 
(317
)
 
112

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
1,590

 
1,027

 
24

 
2,641

Net current-period other comprehensive income (loss)
 
2,019

 
1,027

 
(293
)
 
2,753

Ending balance
 
$
3,268

 
$
(74,926
)
 
$
(853
)
 
$
(72,511
)

Six months ended June 30, 2017
 
Foreign Currency Derivatives
 
Defined Benefit Pension Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
7,071

 
$
(110,202
)
 
$
(362
)
 
$
(103,493
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(4,785
)
 
47

 
130

 
(4,608
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
(1,051
)
 
2,811

 
(12
)
 
1,748

Net current-period other comprehensive income (loss)
 
(5,836
)
 
2,858

 
118

 
(2,860
)
Ending balance
 
$
1,235

 
$
(107,344
)
 
$
(244
)
 
$
(106,353
)


4. Earnings Per Share
 
Basic earnings per share, which excludes dilution, is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.
 
Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three and six months ended June 30, 2018 and 2017, anti-dilutive shares excluded from the calculation of diluted earnings per share were immaterial.

11



 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands, except for per share data)
Numerator:
 
 

 
 

 
 

 
 

Net Income
 
$
79,480

 
$
76,894

 
$
108,022

 
$
110,540

Denominator:
 
 

 
 

 
 

 
 

Weighted average common stock shares outstanding - Basic
 
50,776

 
53,626

 
50,915

 
53,595

Assumed exercise of stock options and awards
 
102

 
288

 
123

 
353

Weighted average common stock shares outstanding - Diluted
 
50,878

 
53,914

 
51,038

 
53,948

Net Income Per Share
 
 

 
 

 
 

 
 

Basic
 
$
1.57

 
$
1.43

 
$
2.12

 
$
2.06

Diluted
 
$
1.56

 
$
1.43

 
$
2.12

 
$
2.05


Stock Repurchase Program

In November 2017, the Company's Board of Directors approved a stock repurchase program pursuant to which the Company may repurchase up to $100 million of its outstanding common stock over a two-year period through December 2019. The stock repurchase program is subject to further modification or termination at any time. The Company spent $2.5 million and $22.8 million to repurchase and retire approximately 65 thousand shares and 614 thousand shares of the Company's common stock in open market transactions during the three and six months ended June 30, 2018, respectively. As of June 30, 2018, the Company had $77.2 million remaining to spend under its stock repurchase program.

Dividends

During the three months ended March 31, 2018 and June 30, 2018, the Company declared and paid cash dividends of $0.12 per share, totaling $12.2 million.

5. Revenue Recognition
The majority of our revenue is derived from transporting passengers on our aircraft. The Company accounts for revenue in accordance with ASC 606, which was adopted on January 1, 2018, using the full retrospective method. See Note 2 for further discussion of the adoption, including the impact on our previously issued financial statements.
The Company's primary operations are that of its wholly-owned subsidiary, Hawaiian. Principally all operations of Hawaiian
either originate and/or end in the State of Hawai'i. The management of such operations is based on a system-wide approach due
to the interdependence of Hawaiian's route structure in its various markets. As Hawaiian is engaged in only one significant line of business (i.e., air transportation), management has concluded that it has only one segment. The Company's operating revenues by geographic region (as defined by the Department of Transportation) are summarized below:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Geographic Information
 
(in thousands)
Domestic
 
$
528,476

 
$
501,724

 
$
1,020,678

 
$
952,521

Pacific
 
186,971

 
168,392

 
360,181

 
323,804

Total operating revenue
 
$
715,447

 
$
670,116

 
$
1,380,859

 
$
1,276,325

Passenger & Other revenue - Generally, the Company’s contracts with customers have two principal performance obligations, which are the promise to provide transportation to the passenger and the frequent flyer miles earned on the flight. In addition, the Company often charges additional fees for items such as baggage and in-flight entertainment. Such items are not capable of being distinct from the transportation provided because the customer can only benefit from the services during the flight. The transportation performance obligation, including the redemption of HawaiianMiles awards for flights, is satisfied, and revenue is recognized, as transportation is provided. In some instances, tickets sold by the Company can include a flight segment on another carrier which is referred to as an interline segment. In this situation, the Company acts as an agent for the other carrier and revenue is recognized net of cost in other revenue. Tickets sold by other airlines where the Company provides the transportation are recognized as passenger revenue at the estimated value to be billed to the other airline when travel is

12



provided. Differences between amounts billed and the actual amounts may be rejected and rebilled or written off if the amount recorded was different from the original estimate.
Other operating revenue consists of cargo revenue, ground handling fees, commissions, and fees earned under certain joint marketing agreements with other companies. These amounts are recognized when the service is provided.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Passenger Revenue by Type
 
(in thousands)
Passenger revenue, excluding frequent flyer
 
$
618,406

 
$
590,527

 
$
1,196,361

 
$
1,124,581

Frequent flyer revenue, transportation component
 
36,756

 
33,479

 
70,401

 
63,177

Passenger Revenue
 
$
655,162

 
$
624,006

 
$
1,266,762

 
$
1,187,758

 
 
 
 
 
 
 
 
 
Other revenue (e.g. cargo and other miscellaneous)
 
$
41,539

 
$
33,894

 
$
80,229

 
$
66,035

Frequent flyer revenue, marketing and brand component
 
18,746

 
12,216

 
33,868

 
22,532

Other Revenue
 
$
60,285

 
$
46,110

 
$
114,097

 
$
88,567

For the three months ended June 30, 2018 and 2017, the Company's total revenue was $715.4 million and $670.1 million, respectively. As of June 30, 2018 and December 31, 2017, the Company's Air traffic liability balance as it relates to passenger tickets (excluding frequent flyer) was $536.3 million and $422.6 million, respectively, which represents future revenue that is expected to be realized over the next 12 months. During the three months ended June 30, 2018 and 2017, the amount of revenue recognized that was included in Air traffic liability as of the beginning of the respective period was $293.1 million and $294.5 million, respectively. During the six months ended June 30, 2018 and 2017, the amount of revenue recognized that was included in Air traffic liability as of the beginning of the respective period was $332.5 million and $295.9 million, respectively.

Passenger revenue associated with unused tickets, which represent unexercised passenger rights, is recognized in proportion
to the pattern of rights exercised by related passengers (e.g. scheduled departure dates). To calculate the portion to be recognized as revenue in the period, the Company utilizes historical information and applies the trend rate to the current air traffic liability balances for that specific period.
Management has elected (via a practical expedient election) to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer, e.g., sales, use, value added, and certain excise taxes.
Frequent Flyer Revenue - Hawaiian's frequent flyer travel award program provides a variety of awards to program members based on accumulated mileage. ASC 606 requires the Company to account for miles earned by passengers in the HawaiianMiles program through flight activity as a component of the passenger revenue ticket transaction at the estimated selling price of the miles. Ticket consideration received is allocated between the performance obligations, primarily travel and miles earned by passengers. The allocated value of the miles is deferred until the free travel or other award is used by the passenger, at which time it is included in passenger revenue. The value of the ticket used in the determination of the estimated selling price is based on the historical value of equivalent flights to those provided for loyalty awards and the related miles redeemed to obtain that award adjusted for breakage or fulfillment. On a quarterly basis, the Company calculates the equivalent ticket value (ETV) by analyzing the fares of similar tickets for the prior 12 months, considering cabin class and geographic region.
The Company also sells mileage credits to companies participating in our frequent flyer program. These contracts generally include multiple performance obligations, including the transportation that will ultimately be provided when the mileage credits are redeemed and marketing and brand related activities. The marketing and brand performance obligations are effectively provided each time a HawaiianMiles member uses the co-branded credit card and monthly access to customer lists and marketing is provided, which corresponds to the timing of when the Company issues or is obligated to issue the mileage credits to the HawaiianMiles member. Therefore, the Company recognizes revenue for the marketing and brand performance obligations when HawaiianMiles members use their co-brand credit card and the resulting mileage credits are issued to them, which best correlates with the Company’s performance toward satisfying the obligation.

During the first quarter of 2018, we amended our partnership with Barclaycard US, Hawaiian's co-branded credit card partner. Management determined that the amendment should be accounted for as a termination of the existing contract and the creation of a new contract under ASC 606 and the relative selling price was determined for each performance obligation of the new

13



agreement. The new agreement continues through 2024 and includes improved economics and enhanced product offerings for our Barclay's co-branded cardholders.

Accounting for frequent flyer revenue involves the use of various techniques to estimate revenue. The Company sells mileage credits to companies participating in the frequent flyer program, who in turn issue those miles to customers based on the volume of spend, making the majority of the transaction price variable. To determine the total estimated transaction price, the Company forecasts future credit card activity using historical information.

The relative selling price is determined using management’s standalone estimated selling price of each performance obligation. The objective of using the estimated selling price based methodology is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. Accordingly, the Company determines the best estimate of selling price by considering multiple inputs and methods including, but not limited to, discounted cash flows, brand value, published selling prices, number of miles awarded and number of miles redeemed. The Company estimates the selling price of miles using an ETV adjusted for a fulfillment discount as described above.

Miles expire after 18 months of member account inactivity. The ETV includes a fulfillment discount (breakage) to reflect the value of the award ticket over the number of miles that, based on historical experience, will be needed to obtain the award. The Company reviews its breakage estimates annually based upon the latest available information regarding redemption and expiration patterns (e.g., credit card and non-credit card holders). The Company’s estimate of the expected expiration of miles requires significant management judgment. Current and future changes to expiration assumptions or to the expiration policy, or to program rules and program could affect the estimated value of a mile.

The Company's frequent flyer liability is recorded within two balance sheet accounts, Air traffic liability (short-term) and Other liabilities and deferred credits (long-term) based on estimated and expected redemption patterns using historical data and analysis. As of June 30, 2018 and December 31, 2017, the Company's contract liability balance was $372.2 million and $321.9 million, respectively.

Accounts Receivable - Accounts receivable primarily consist of amounts due from credit card companies, non-airline partners, and cargo transportation customers. The Company provides an allowance for uncollectible accounts equal to the estimated losses expected to be incurred based on historical chargebacks, write-offs, bankruptcies and other specific analyses. Bad debt expense was not material in any period presented.
Costs to obtain or fulfill a contract - In order for the Company to provide transportation to our customers we incur fulfillment costs which are generally: booking fees, credit card fees, and commission/selling costs. As of June 30, 2018 and December 31, 2017, the Company's asset balance associated with these costs were $19.9 million and $16.7 million, respectively. During the three months ended June 30, 2018 and 2017, expenses related to these costs totaled to $23.8 million and $24.3 million, respectively. During the six months ended June 30, 2018 and 2017, expenses related to these costs totaled to $47.7 million and $46.8 million, respectively. To determine the amount to capitalize and expense at the end of each period, the Company uses historical sales data and estimates the amount associated with unflown tickets.


6. Short-Term Investments
 
Debt securities that are not classified as cash equivalents are classified as available-for-sale investments and are stated as current assets at fair value as these securities are available for use in current operations.  Realized gains and losses on sales of investments are reflected in nonoperating income (expense) in the Company's unaudited Consolidated Statements of Operations.  Unrealized gains and losses on available-for-sale debt securities are reflected as a component of accumulated other comprehensive income.


14



The following is a summary of short-term investments held as of June 30, 2018 and December 31, 2017:
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
June 30, 2018
 
(in thousands)
Corporate debt
 
$
154,333

 
$
21

 
$
(1,002
)
 
$
153,352

U.S. government and agency debt
 
55,081

 

 
(182
)
 
54,899

Municipal bonds
 
16,684

 

 
(49
)
 
16,635

Other fixed income securities
 
34,462

 

 
(35
)
 
34,427

Total short-term investments
 
$
260,560

 
$
21

 
$
(1,268
)
 
$
259,313

 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
December 31, 2017
 
(in thousands)
Corporate debt
 
$
165,610

 
$
8

 
$
(535
)
 
$
165,083

U.S. government and agency debt
 
59,054

 
1

 
(215
)
 
58,840

Municipal bonds
 
21,517

 

 
(104
)
 
21,413

Other fixed income securities
 
23,973

 
1

 
(13
)
 
23,961

Total short-term investments
 
$
270,154

 
$
10

 
$
(867
)
 
$
269,297


Contractual maturities of short-term investments as of June 30, 2018 are shown below. 
 
 
Under 1 Year
 
1 to 5 Years
 
Total
 
 
(in thousands)
Corporate debt
 
$
69,250

 
$
84,102

 
$
153,352

U.S. government and agency debt
 
44,011

 
10,888

 
54,899

Municipal bonds
 
9,643

 
6,992

 
16,635

Other fixed income securities
 
26,780

 
7,647

 
34,427

Total short-term investments
 
$
149,684

 
$
109,629

 
$
259,313


 
7.  Fair Value Measurements
 
ASC Topic 820, Fair Value Measurement (ASC 820), defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities;
 
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities; and
 
Level 3 — Unobservable inputs for which there is little or no market data and that are significant to the fair value of the assets or liabilities.


15



The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis:
 
 
Fair Value Measurements as of June 30, 2018
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
175,486

 
$
128,131

 
$
47,355

 
$

Restricted cash
 
1,000

 
1,000

 

 

Short-term investments
 
259,313

 

 
259,313

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Crude oil call options
 
28,216

 

 
28,216

 

Foreign currency derivatives
 
5,674

 

 
5,674

 

Total assets measured at fair value
 
$
469,689

 
$
129,131

 
$
340,558

 
$

Foreign currency derivatives
 
747

 

 
747

 

Total liabilities measured at fair value
 
$
747

 
$

 
$
747

 
$

 
 
 
Fair Value Measurements as of December 31, 2017
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
62,310

 
$
27,807

 
$
34,503

 
$

Restricted cash
 
1,000

 
1,000

 

 

Short-term investments
 
269,297

 

 
269,297

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Crude oil call options
 
20,272

 

 
20,272

 

Jet fuel swaps
 
336

 

 
336

 

Foreign currency derivatives
 
4,300

 

 
4,300

 

Total assets measured at fair value
 
$
357,515

 
$
28,807

 
$
328,708

 
$

Foreign currency derivatives
 
1,713

 

 
1,713

 

Total liabilities measured at fair value
 
$
1,713

 
$

 
$
1,713

 
$


Cash equivalents.  The Company's level 1 cash equivalents consist of money market securities and the level 2 cash equivalents consist of U.S. agency bonds, mutual funds, and commercial paper. The instruments classified as level 2 are valued using quoted prices for similar assets in active markets.

Restricted cash.  The Company’s restricted cash consists of money market securities.
 
Short-term investments.  Short-term investments include U.S. and foreign government notes and bonds, U.S. agency bonds, variable-rate corporate bonds, asset backed securities, foreign and domestic corporate bonds, municipal bonds, and commercial paper.  These instruments are valued using quoted prices for similar assets in active markets or other observable inputs.

Fuel derivative contracts.  The Company’s fuel derivative contracts consist of crude oil call options and jet fuel swaps, which are not traded on a public exchange. The fair value of these instruments are determined based on inputs available or derived from public markets including contractual terms, market prices, yield curves, and measures of volatility among others.
 
Foreign currency derivatives.  The Company’s foreign currency derivatives consist of Japanese Yen and Australian Dollar forward contracts and are valued primarily based upon data available or derived from public markets.

The table below presents the Company’s debt (excluding obligations under capital leases and financing obligations) measured at fair value: 

16



Fair Value of Debt
June 30, 2018
 
December 31, 2017
Carrying
 
Fair Value
 
Carrying
 
Fair Value
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
(in thousands)
$
495,504

 
$
478,893

 
$

 
$

 
$
478,893

 
$
433,072

 
$
444,099

 
$

 
$

 
$
444,099

 
The fair value estimates of the Company’s debt were based on the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar instruments.
 
The carrying amounts of cash, other receivables, and accounts payable approximate fair value due to the short-term nature of these financial instruments.
 
8.  Financial Derivative Instruments
 
The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in global fuel prices and foreign currencies.
 
Fuel Risk Management

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into derivative financial instruments. During the three and six months ended June 30, 2018, the Company primarily used crude oil call options and jet fuel swaps to hedge its aircraft fuel expense.  These derivative instruments were not designated as hedges under ASC Topic 815, Derivatives and Hedging (ASC 815), for hedge accounting treatment. As a result, any changes in fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

The following table reflects the amount of realized and unrealized gains and losses recorded as nonoperating income (expense) in the Company's unaudited Consolidated Statements of Operations.
 
 
Three months ended June 30,
 
Six months ended June 30,
Fuel derivative contracts
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Gains (losses) realized at settlement
 
$
10,827

 
$
(1,902
)
 
$
16,488

 
$
687

Reversal of prior period unrealized amounts
 
(10,748
)
 
3,441

 
(11,792
)
 
(4,506
)
Unrealized gains (losses) that will settle in future periods
 
18,873

 
(6,251
)
 
18,873

 
(9,691
)
Gains (losses) on fuel derivatives recorded as nonoperating income (expense)
 
$
18,952

 
$
(4,712
)
 
$
23,569

 
$
(13,510
)

Foreign Currency Exchange Rate Risk Management
 
The Company is subject to foreign currency exchange rate risk due to revenues and expenses that are denominated in foreign currencies, with the primary exposures being the Japanese Yen and Australian Dollar. To manage exchange rate risk, the Company executes its international revenue and expense transactions in the same foreign currency to the extent practicable. As discussed in Note 9 the Company also recently executed Japanese Yen denominated debt agreements.

The Company enters into foreign currency forward contracts to further manage the effects of fluctuating exchange rates. The effective portion of the gain or loss of designated cash flow hedges is reported as a component of accumulated other comprehensive income (AOCI) and reclassified into earnings in the same period in which the related sales are recognized as passenger revenue. The effective portion of the foreign currency forward contracts represents the change in fair value of the hedge that offsets the change in the fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized as nonoperating income (expense). Foreign currency forward contracts that are not designated as cash flow hedges are recorded at fair value, and any changes in fair value are recognized as other nonoperating income (expense) in the period of change.
 

17



The Company believes that its foreign currency forward contracts that are designated as cash flow hedges will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company expects to reclassify a net gain of approximately $3.6 million into earnings over the next 12 months from AOCI based on the values at June 30, 2018.
 
The following tables present the gross fair value of asset and liability derivatives that are designated as hedging instruments under ASC 815 and derivatives that are not designated as hedging instruments under ASC 815, as well as the net derivative positions and location of the asset and liability balances within the Company's unaudited Consolidated Balance Sheets.

Derivative position as of June 30, 2018 
 
 
Balance Sheet
Location
 
Notional Amount
 
Final
Maturity
Date
 
Gross fair
value of
assets
 
Gross fair
value of
(liabilities)
 
Net
derivative
position
 
 
 
 
(in thousands)
 
 
 
(in thousands)
Derivatives designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Foreign currency derivatives
 
Prepaid expenses and other
 
16,987,750 Japanese Yen
51,428 Australian Dollars
 
June 2019
 
4,600

 
(558
)
 
4,042

 
 
Long-term prepayments and other
 
4,795,400 Japanese Yen
8,940 Australian Dollars
 
June 2020
 
810

 
(185
)
 
625

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Prepaid expenses and other
 
1,216,250 Japanese Yen
4,489 Australian Dollars
 
September 2018
 
264

 
(4
)
 
260

Fuel derivative contracts
 
Prepaid expenses and other
 
94,080 gallons
 
June 2019
 
28,216

 

 
28,216

 
Derivative position as of December 31, 2017
 
 
Balance Sheet
Location
 
Notional Amount
 
Final
Maturity
Date
 
Gross fair
value of
assets
 
Gross fair
value of
(liabilities)
 
Net
derivative
position
 
 
 
 
(in thousands)
 
 
 
(in thousands)
Derivatives designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Foreign currency derivatives
 
Prepaid expenses and other
 
16,732,375 Japanese Yen
47,805 Australian Dollars
 
December 2018
 
3,737

 
(1,441
)
 
2,296

 
 
Long-term prepayments and other
 
4,666,700 Japanese Yen
9,180 Australian Dollars
 
December 2019
 
546

 
(195
)
 
351

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Other accrued liabilities
 
866,150 Japanese Yen
3,148 Australian Dollars
 
March 2018
 
17

 
(77
)
 
(60
)
Fuel derivative contracts
 
Prepaid expenses and other
 
94,332 gallons
 
December 2018
 
20,608

 

 
20,608

 
The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the Company's unaudited Consolidated Statements of Comprehensive Income. 
 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Foreign currency derivatives
 
$
(11,378
)
 
$
(2,505
)
 
$
884

 
$
(480
)
 
$

 
$



18



 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Foreign currency derivatives
 
$
(569
)
 
$
7,705

 
$
2,105

 
$
(1,692
)
 
$

 
$


Risk and Collateral
 
Financial derivative instruments expose the Company to possible credit loss in the event the counterparties fail to meet their obligations. To manage such credit risks, the Company (1) selects its counterparties based on past experience and credit ratings, (2) limits its exposure to any single counterparty, and (3) regularly monitors the market position and credit rating of each counterparty. Credit risk is deemed to have a minimal impact on the fair value of the derivative instruments, as cash collateral would be provided by the counterparties based on the current market exposure of the derivative.

ASC 815 requires a reporting entity to elect a policy of whether to offset rights to reclaim cash collateral or obligations to return cash collateral against derivative assets and liabilities executed with the same counterparty under a master netting agreement, or present such amounts on a gross basis. The Company’s accounting policy is to present its derivative assets and liabilities on a net basis, including any collateral posted with the counterparty. The Company had no collateral posted with counterparties as of June 30, 2018 and December 31, 2017.

The Company is also subject to market risk in the event these financial instruments become less valuable in the market. However, changes in the fair value of the derivative instruments will generally offset the change in the fair value of the hedged item, limiting the Company’s overall exposure.

9.  Debt
 
As of June 30, 2018, the expected maturities of long-term debt for the remainder of 2018 and the next four years, and thereafter, were as follows (in thousands): 
Remaining months in 2018
$
28,275

2019
81,023

2020
29,545

2021
56,509

2022
63,622

Thereafter
236,531

 
$
495,505


During the three months ended June 30, 2018, the Company executed Japanese Yen denominated debt agreements for a total value of $86.5 million, which is collateralized by aircraft. The loans that were executed were each for a term of 12 years at fixed installment coupon rates of 1.01% and 1.05%. The fluctuation in foreign exchange rates at each balance sheet date is reflected within the nonoperating income (expense) line item. The foreign currency gain or loss for three months ended June 30, 2018 was de minimus.
 
10.  Leases

The Company leases aircraft, engines, and other assets under long-term lease arrangements. Other leased assets include real property, airport and terminal facilities, maintenance facilities, and general offices. Certain leases include escalation clauses and renewal options. When lease renewals are considered to be reasonably assured, the rental payments that will be due during the renewal periods are included in the determination of rent expense over the life of the lease.

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As of June 30, 2018, the scheduled future minimum rental payments under operating and capital leases with non-cancellable basic terms of more than one year were as follows:
 
Capital & Financing Leases
 
Operating Leases
 
Aircraft
 
Other
 
Aircraft
 
Other
 
(in thousands)
Remaining in 2018
$
9,675

 
$
3,665

 
$
53,421

 
$
3,487

2019
19,350

 
6,561

 
98,327

 
6,735

2020
19,350

 
4,641

 
82,362

 
6,559

2021
19,350

 
4,566

 
66,259

 
6,669

2022
19,205

 
4,870

 
60,153

 
6,938

Thereafter
55,666

 
119,862

 
164,993

 
96,147

 
142,596

 
144,165

 
$
525,515

 
$
126,535

Less amounts representing interest
(24,885
)
 
(54,188
)
 
 
 
 
Present value of minimum capital lease payments
$
117,711

 
$
89,977

 
 
 
 
11. Employee Benefit Plans
 
The components of net periodic benefit cost for the Company’s defined benefit and other post-retirement plans included the following: 
 
 
Three months ended June 30,
 
Six months ended June 30,
Components of Net Period Benefit Cost
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Service cost
 
$
1,962

 
$
3,813

 
$
3,924

 
$
7,626

Other cost:
 
 
 
 
 
 
 
 
Interest cost
 
5,009

 
7,259

 
10,018

 
14,518

Expected return on plan assets
 
(5,588
)
 
(4,796
)
 
(11,176
)
 
(9,592
)
Recognized net actuarial loss
 
680

 
2,287

 
1,360

 
4,574

Total other components of the net periodic benefit cost
 
101

 
4,750

 
202

 
9,500

Net periodic benefit cost
 
$
2,063

 
$
8,563

 
$
4,126

 
$
17,126

 
Total other components of the net periodic benefit cost are recorded within the nonoperating income (expense), other, net line item.

During each of the three and six months ended June 30, 2018, the Company made no contributions to its defined benefit and other postretirement plans as the Company is not required to make any further minimum contributions until 2019 due to the sufficiency of the plans' current position. During the three and six months ended June 30, 2017, the Company contributed $8.0 million and $14.4 million, respectively, to its defined benefit and other post-retirement plans.

In August 2017, the Company completed the termination of the Merged Pension plan by transferring the assets and liabilities to a third-party insurance company. At that time, the Company contributed a total of $18.5 million in cash to fully fund the plan. In March 2017, the Company announced the ratification of a 63-month contract amendment with its pilots as represented by the Air Line Pilots Association (ALPA). In August 2017, the Company made a one-time cash payment of approximately $101.9 million to fund the HRA and settle the post-65 post-retirement medical plan obligation. The cash contributed was distributed to the trust funding the individual health retirement notional accounts of the participants.

12. Commitments and Contingent Liabilities
 
Commitments

As of June 30, 2018, the Company had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:

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Aircraft Type
 
Firm Orders
 
Purchase Rights
 
Expected Delivery Dates
A321neo aircraft
 
11

 
9

 
Between 2018 and 2020
 
 
 
 
 
 
 
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
3

 
2

 
Between 2018 and 2019

In February 2018, the Company exercised its right to terminate its aircraft purchase agreement between the Company and Airbus for six Airbus A330-800neo aircraft and the purchase rights for an additional six Airbus A330-800neo aircraft. Refer to Note 13 below for discussion on the contract termination charge. In July 2018, the Company executed a purchase agreement for the purchase of 10 Boeing 787-9 "Dreamliner" aircraft with purchase rights for an additional 10 aircraft. The Company also intends to enter into additional related agreements in connection with the Boeing 787-9 purchases, including for the purchases of aircraft engines, a flight simulator, spare parts and materials and related services. The expected expenditures for the Boeing 787-9 aircraft and related parts are not reflected in the table below.

Committed capital and operating expenditures include escalation amounts based on estimates. Capital expenditures represent aircraft and aircraft related equipment commitments, and operating expenditures represent all other commitments the Company has entered into. The gross committed expenditures and committed payments for those deliveries as of June 30, 2018 are detailed below: 
 
 
Capital
 
Operating
 
Total Committed
Expenditures
 
 
(in thousands)
Remaining in 2018
 
$
207,042

 
$
35,568

 
$
242,610

2019
 
278,254

 
61,857

 
340,111

2020
 
47,978

 
56,483

 
104,461

2021
 
5,075

 
51,725

 
56,800

2022
 
5,075

 
51,922

 
56,997

Thereafter
 
38,067

 
216,069

 
254,136

 
 
$
581,491

 
$
473,624

 
$
1,055,115

 
Litigation and Contingencies
 
The Company is subject to legal proceedings arising in the normal course of its operations. Management does not anticipate that the disposition of any currently pending proceeding will have a material effect on the Company’s operations, business or financial condition.

General Guarantees and Indemnifications
 
In the normal course of business, the Company enters into numerous aircraft financing and real estate leasing arrangements that have various guarantees included in such contracts. It is common in such lease transactions for the lessee to agree to indemnify the lessor and other related third-parties for tort liabilities that arise out of, or relate to, the lessee’s use of the leased aircraft or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by such parties' gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to the lessee's use of the real estate leased premises. The Company believes that it is insured (subject to deductibles) for most of the tort liabilities and related indemnities described above with respect to the aircraft and real estate that it leases. The Company cannot reasonably estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.
 
Credit Card Holdback
 
Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $1.0 million at each of June 30, 2018 and December 31, 2017.
 

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In the event of a material adverse change in the Company's business, the holdback could increase to an amount up to 100% of the outstanding credit card amounts that is unflown (e.g. air traffic liability), which would also cause an increase in the level of restricted cash. If the Company is unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material adverse impact on the Company's operations, business or financial condition.

13. Contract Terminations Expense and Special Items

Contract terminations expense

For the six months ended June 30, 2018, the Company terminated two contracts which incurred a total of $35.3 million in contract terminations expense. The transactions are described below:

In February 2018, the Company exercised its right to terminate the aircraft purchase agreement between the Company and Airbus for six Airbus A330-800neo aircraft and the purchase rights for an additional six Airbus A330-800neo aircraft. To terminate the purchase agreement, the Company was obligated to repay Airbus for concessions received relating to a prior firm order, training credits, as well as forfeit the pre-delivery progress payments made towards the flight equipment. The Company recorded a contract terminations expense to reflect a portion of the termination penalty within the Consolidated Statements of Operations.

In January 2018, the Company entered into a transaction with its lessor to early terminate and purchase three Boeing 767-300 aircraft leases and concurrently entered into a forward sale