Impact of the COVID-19 Pandemic

3 Months Ended

Mar. 31, 2020

Unusual or Infrequent Items, or Both [Abstract]

Due to the spread of COVID-19, what began with the Company's suspension of service to South Korea and Japan in late February, accelerated in March, when governments in Australia, New Zealand, Tahiti, American Samoa, and Hawai`i instituted requirements of self-isolation or quarantine for incoming travel, as well as travel within the State of Hawai`i. As a result of these actions, global travel demand declined precipitously to historically low levels, with the Company's capacity reduced by more than 95% in the last week in March. See Note 6, for a discussion of the recognition of passenger revenue, the Company's air traffic liability and ticket breakage.

In response, the Company has taken, or intends to take, numerous actions to mitigate the impact of declining demand on its business including, but not limited to:


•	Drawing down fully from the Company's previously undrawn $235.0 million revolving credit facility on March 16, 2020 (refer to Note 9 for additional discussion),


•	Suspension of dividend payments on, and the repurchase of, the common stock of the Company,


•	Applying for, and on April 22, 2020, receiving the first tranche of funding of $146.2 million under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) Payroll Support Program (PSP), as discussed in further detail below, and the Company is eligible for an additional $364 million in loans through the CARES Act Economic Relief Program (ERP),


•	Pursuing additional financing secured by the Company's unencumbered assets, including 36 aircraft with an estimated fair value of approximately $800.0 million,


•	Instituting a hiring freeze across the Company, except for operationally critical and essential positions,


•	Deferring non-essential, non-aircraft capital expenditures,


•	Instituting voluntary unpaid leave and float day purchase programs offered to each work group, and


•	Reducing discretionary contractor, vendor and other spending.

Additionally, all of the Company’s officers have reduced their base salaries by between 10% and 50% through at least September 30, 2020. Members of the Board of Directors have also temporarily reduced their compensation. The Company anticipates it may implement further discretionary changes and other cost reduction and liquidity preservation measures as needed to address the volatile and quickly-changing dynamics of passenger demand and changes in revenue, regulatory and public health directives and prevailing government policy and financial market conditions.

Based on these actions, including recovery assumptions made for the impact of COVID-19, the Company has concluded that it will be able to generate sufficient liquidity to satisfy its obligations and remain in compliance with existing covenants for the next twelve months, prior to giving effect to any additional financing that may occur. The Company continues to evaluate

future financing opportunities by leveraging its unencumbered assets, which as of March 31, 2020, have a fair value of approximately $800 million, and utilizing additional funding from the CARES Act, as discussed below.

The Company's assumptions about future conditions used to estimate liquidity requirements, including the impact of the COVID-19 pandemic and other ongoing impacts to the business, are subject to uncertainty, and actual results could differ from these estimates. The Company will continue to monitor these conditions as new information becomes available, and will update its analyses accordingly.

Valuation of Goodwill and Indefinite-Lived Intangibles

Goodwill and intangible assets with indefinite lives are not amortized. The Company applies a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. The Company assesses the value of our goodwill and indefinite-lived assets under either a qualitative or quantitative approach.

During the quarter ended March 31, 2020, the adverse economic impact and declining passenger demand attributed to the COVID-19 pandemic drove down the Company's stock price to 52-week lows and significantly reduced cash flow projections. Therefore, the Company qualitatively assessed that an impairment loss may have been incurred as of March 31, 2020. The Company therefore performed an interim test of the recoverability of its goodwill and indefinite-lived intangible assets. The Company determined that the fair value of its indefinite-lived intangible assets exceeded the carrying value and was not impaired. As it relates to goodwill, the Company determined that the estimated fair value of the Company's one reporting unit was less than its carrying value. The deficit between the fair value and the carrying value of the reporting unit exceeded the amount of goodwill on the unaudited Consolidated Balance Sheet, and therefore, the Company recognized a goodwill impairment charge of $106.7 million during the three months ended March 31, 2020.

Fair value is determined using a combination of an income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to its present value, and a market approach. The valuation methodology and underlying financial information included in the Company's determination of fair value required significant judgments by management. The principal assumptions used in the Company's discounted cash flow analysis consisted of (a) the long-term projections of future financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which it operates.

Valuation of Long-Lived Assets

The Company's long-lived assets, consisting principally of aircraft and non-aircraft equipment, are classified as property and equipment, net on the unaudited Consolidated Balance Sheet, and have a recorded value of approximately $2.3 billion at March 31, 2020. The Company reviews long-lived assets used in operations for impairment when events and circumstances indicate the assets may be impaired.

As part of the Company's response to COVID-19, discussed above, including substantial capacity reductions and the temporary grounding of the majority of its fleet, as well as reduced cash flow projections, the Company identified indicators of impairment of its long-lived assets. To determine whether impairment exists for aircraft used in operations, assets are grouped at the fleet-type level (the lowest level for which there are identifiable cash flows) and future cash flows are estimated based on projections of capacity, passenger mile yield, fuel costs, labor costs and other relevant factors. Based on the Company's evaluation, it was determined that the net carrying values of the assets are recoverable through the generation of undiscounted future cash flows and that its long-lived assets are not impaired as of March 31, 2020. The Company will continue to monitor the duration and extent of the impact of COVID-19 on its business, and will continue to evaluate its current fleet for impairment accordingly.

CARES Act

On March 27, 2020, President Trump signed into law the CARES Act, which provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the U.S. economy. The assistance includes tax relief and government loans, grants and investments for entities in affected industries. The CARES Act provides for, among other things: (a) financial relief to passenger air carriers for direct payroll support under the PSP, (b) financial relief in the form of loans and loan guarantees available for operations under the ERP, (c) temporary suspension of certain aviation taxes, (d) temporary deferral of certain employer payroll taxes, and (e) additional corporate tax benefits that are further discussed in Note 13.

Payroll Support Program

On April 22, 2020, the Company entered into a Payroll Support Program Agreement (the PSP Agreement) with the U.S. Department of the Treasury (Treasury) under the CARES Act. In connection with the PSP Agreement, the Company entered into a Warrant Agreement (the Warrant Agreement) with the Treasury, and the Company issued a promissory note to the Treasury (the Note). Pursuant to the PSP Agreement, the Treasury will provide the Company with financial assistance to be released in installments expected to total approximately $292.5 million, to be used exclusively for the purpose of continuing to pay employee salaries, wages and benefits. Under the PSP Agreement, the Company agreed to (i) refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits through September 30, 2020, (ii) limit executive compensation through March 24, 2022 and (iii) suspend payment of dividends and stock repurchases through September 30, 2021. The PSP Agreement also imposes certain Treasury mandated reporting obligations on the Company. Finally, the Company is required to continue to provide air service to markets served prior to March 1, 2020 until March 1, 2022, to the extent determined reasonable and practicable by the U.S. Department of Transportation (DOT); subject to exemptions granted by the DOT to the Company given the absence of demand for such services.

The Note issued by Hawaiian to the Treasury will increase to a total principal sum of approximately $57.8 million as Hawaiian receives installments from the Treasury under the PSP Agreement. The Note has a ten year term and bears interest at a rate per annum equal to 1.00% until the fifth anniversary of the PSP Closing Date, and thereafter bears interest at a rate equal to the secured overnight financing rate plus 2.00% until the tenth anniversary of the PSP Closing Date, which interest is payable semi-annually beginning on September 30, 2020. The Note may be prepaid at any time, without penalty and is subject to customary change of control provisions and events of default.

As compensation to the U.S. government for providing financial relief under the PSP Agreement, and pursuant to the Warrant Agreement, the Company agreed to issue to the Treasury a total of 488,477 warrants to purchase shares of the Company’s common stock at an exercise price of $11.82 per share (the Warrants). The Warrants are non-voting, freely transferable, may be settled as net shares or in cash at the Company’s option, expire five years from the date of issuance, and contain registration rights and customary anti-dilution provisions.

Economic Relief Program

Under the ERP, the Company is eligible to receive an approximately $364.0 million secured loan. Conditions of the loan are consistent with the PSP; however, certain restrictions, including prohibition of share repurchases and dividend payments extend for 12 months after the loan is no longer outstanding. On April 17, 2020, the Company filed an application with the Treasury for access to these funds. The Company is currently evaluating its desired level of participation in the ERP.

Special Items

Special items in the unaudited Consolidated Statements of Operations consisted of the following:



	Three months ended March 31,
	2020		2019
	(in thousands)
Collective bargaining agreement payment ⁽¹⁾	$	20,242	$	—
Goodwill impairment ⁽²⁾	106,662		—
Total Special items	$	126,904	$	—

(1)

In March 2020, the Company reached an agreement in principle with the flight attendants of Hawaiian, represented by the Association of Flight Attendants (the AFA) on a new five-year contract that runs through April 2025. On April 3, 2020, the Company received notice from the AFA that the collective bargaining agreement (CBA) was ratified by its members. The ratified CBA provides for, among other things, a ratification payment to be paid over a one-year term, increased medical cost sharing, improved pay scales, and a one-time medical savings contribution to eligible flights attendants upon retirement. As of March 31, 2020, the Company accrued $23.5 million, of which $20.2 million was related to service prior to January 1, 2020, and recorded as a Special item in the unaudited Consolidated Statements of Operations. The remaining $3.3 million was recorded as a component of Wages and benefits in the unaudited Consolidated Statements of Operations.

(2)

As discussed in Note 2, the Company recognized a goodwill impairment charge of $106.7 million during the three months ended March 31, 2020.