ITEM 1. BUSINESS.
THE COMPANY
Hawaiian Airlines, Inc. ("Hawaiian Airlines" or the "Company") is the largest airline headquartered in Hawaii, based on operating revenues of $426.4 million for 1998. The Company is engaged primarily in the scheduled transportation of passengers, cargo and mail. The Company was incorporated in January 1929 under the laws of the Territory of Hawaii. The Common Stock of the Company trades on the American Stock Exchange and Pacific Exchange under the symbol "HA." The Company's principal offices are located at 3375 Koapaka Street, Suite G-350, Honolulu, Hawaii 96819. Its telephone and facsimile numbers are (808) 835-3700 and (808) 835-3690, respectively. Its website address is www.hawaiianair.com.
OPERATIONS
PASSENGER SERVICE
The Company's passenger airline business is its chief source of revenue. Scheduled passenger service consists of, on average and depending on seasonality, approximately 130 to 150 flights per day among the six major islands of the State of Hawaii ("Interisland"), daily service to Las Vegas and the four key United States ("U.S.") West Coast gateway cities of Los Angeles, San Francisco, Seattle and Portland ("Transpac"), twice weekly service to Pago Pago, American Samoa and weekly service to Papeete, Tahiti in the South Pacific ("Southpac"). The Company also provides charter service from Honolulu to Las Vegas and Anchorage, Alaska ("Overseas Charter"). As discussed below, the Company operates a fleet of DC-9 and DC-10 aircraft to service these routes.
Management estimates that the entire Interisland market averages approximately nine to ten million passengers annually. Management estimates that approximately two-thirds of Interisland travelers are visitors to Hawaii while the balance are Hawaii residents. Residents rely on Interisland flights in much the same way as mainland residents rely on a state highway system. The Company's Interisland operations provide service to seven airports on the six major Hawaiian islands of Oahu, Hawaii, Maui, Kauai, Molokai and Lanai. The Company's Interisland routes are serviced with DC-9 aircraft. During 1998, the Interisland market represented approximately 36.3% of the Company's total operating revenues.
During 1998, the Company's Transpac operations served Las Vegas and the U.S. West Coast gateway cities of Los Angeles, San Francisco, Seattle and Portland. DC-10 aircraft are used to service Transpac routes. In 1998, the Transpac market represented approximately 50.1% of the Company's total operating revenues.
Hawaiian Airlines currently is the sole carrier providing air service from Honolulu to American Samoa and Tahiti. Fares are relatively stable throughout the year. These Southpac routes are serviced with DC-10 aircraft. During 1998, the Southpac market represented approximately 5.1% of the Company's total operating revenues.
In addition to its regular scheduled service, the Company operated, on average, six weekly charter flights to Las Vegas and two charter rotations per week to Anchorage. The Company's Overseas Charter operation utilized DC-10 aircraft and produced 8.5% of the Company's total operating revenues in 1998.
Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for further discussion on the Company's passenger service routes.
FUEL
Aviation fuel is a significant expense for any air carrier and even marginal changes in fuel prices can greatly impact a carrier's profitability. The following table sets forth statistics about Hawaiian Airlines' aviation fuel consumption and cost for each of the last three years:
Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for further discussion on aircraft fuel expense.
The single most important factor affecting petroleum product prices, including the price of aviation fuel, continues to be the actions of the major oil producing countries in setting targets for the production and pricing of crude oil. In addition, aviation fuel prices are affected by the markets for heating oil, diesel fuel, automotive gasoline and natural gas. All petroleum product prices continue to be subject to unpredictable economic, political and market factors. Also, the balance among supply, demand and price has become more reactive to world market conditions. Accordingly, the price and availability of aviation fuel, as well as other petroleum products, continues to be unpredictable. In the event of a fuel supply shortage resulting from a disruption of oil imports or otherwise, higher fuel prices or curtailment of scheduled service could result. A one cent change in the cost per gallon of fuel has an impact on the Company's operating expenses of approximately $89,000 per month (based on 1998 consumption). Changes in fuel prices may have a greater impact on the Company than certain of its Transpac competitors with more modern, fuel efficient aircraft.
As discussed below, although Hawaiian Airlines has contracts with several different fuel suppliers, almost all of its aviation fuel is purchased from Northwest Airlines, Inc. ("Northwest").
AIRCRAFT
At December 31, 1998 the Company's fleet consists of 11 DC-10 and 14 DC-9 aircraft of which one DC-10 and three DC-9s are owned by the Company. The remaining ten DC-10s are leased under long-term operating leases with American Airlines, Inc. ("American"), which expire in 2001. Of the 11 leased DC-9s (including related flight equipment), five are under operating leases and six are under capital leases. The DC-9 leases expire at various times between 2000 and 2004.
Aircraft maintenance costs represent a significant operating cost for the Company (approximately 21%, 19% and 18% of total operating expenses for 1998, 1997 and 1996, respectively) which will increase as the Company's aircraft increase in age. The average age of the Company's DC-10 and DC-9 aircraft is 26 years and 21 years, respectively. The Company intends to replace some or all of its existing aircraft with replacement aircraft in the next decade in order to reduce maintenance costs and achieve other operating efficiencies, although no assurance can be given that the Company will have the capital necessary to replace such aircraft.
In the event one or more of the Company's aircraft were to be out of service, the Company may have difficulty completing its scheduled or chartered service. Any interruption of service caused by the unavailability of aircraft due to unscheduled servicing or repair or otherwise, or lack of availability of substitute aircraft, could have a material adverse effect on the Company's service, reputation and profitability. As is customary in the airline industry, the Company does not have business interruption insurance.
Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for further discussion on the Company's aircraft fleet and the maintenance thereof.
SEGMENT INFORMATION
Due to the centralization of the Company's operations in the State of Hawaii and the interdependence of its routes, management considers its operations to be one industry segment. Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for discussion on Industry Segment Information and those certain operating revenue products which constitute the segment.
SEASONALITY
The airline industry is a highly cyclical business with substantial volatility. Airlines frequently experience short-term cash requirements caused by both seasonal fluctuations in traffic that often deplete cash during off-peak periods and other factors that are not necessarily seasonal, including the extent and nature of price and other competition from other airlines, changing levels of operations, national and international events, fuel prices and general economic conditions, including inflation. Because a substantial portion of airline travel, both personal and to a lesser extent business, is discretionary, the industry tends to experience adverse financial results in general economic downturns. Accordingly, airlines require substantial liquidity to sustain continued operations under most conditions. Working capital deficits are not uncommon in the airline industry since airlines typically have no product inventories and sales of tickets not yet flown are reflected as current liabilities.
The Company's results are sensitive to seasonal and cyclical volatility primarily due to seasonal leisure and holiday travel. The Company believes that Hawaii is one of the most popular destinations for passengers flying on frequent flyer travel awards and is in general a popular spot for vacation travelers. As such, traffic levels are typically lowest in the first quarter of the year with strong travel periods during June, July, August and December. Aggressive fare pricing strategies that increase the availability and size of ticket discounts are utilized during weaker travel periods. Because certain of the Company's costs do not vary significantly regardless of traffic levels, such seasonality substantially affects the Company's profitability and liquidity.
DEPENDENCE ON TOURISM
Since the Company's operations are limited almost exclusively to flights to, from and among, the Hawaiian Islands, the Company's profitability is linked to the number of travelers to, from and among the Islands and a material reduction in the number of such travelers would have a material adverse effect on the Company's operations. Tourism constitutes a majority of the visitor counts to and from Hawaii. Because tourism levels are related to discretionary income, the level of Hawaii tourism is affected by the strength of the local Hawaii economy and economies in the areas from which tourists to Hawaii typically originate. Hawaii tourism is also dependent upon the popularity of Hawaii as a tourist destination and negative events reduce tourist interest in Hawaii. In addition, from time to time, various events such as the Persian Gulf War and industry-specific problems such as strikes have had a negative impact on tourism in Hawaii.
In 1998, for the first time in five years, the total number of visitors to Hawaii declined as compared to the previous year. Preliminary statistics from the Hawaii Visitors and Convention Bureau (the "HVCB") estimate that Hawaii ended the 1998 year with approximately 6.7 million visitors, a 1.6% decline from 1997. Westbound arrivals from the U.S. mainland and European markets increased by 4.1% over 1997. However, the increase was offset by a decrease in Eastbound traffic, primarily from Japan, of 10.8%. Year over year, the islands of Maui, the Big Island of Hawaii and Kauai experienced increased visitor counts of 0.7%, 6.6% and 3.1%, respectively. The increase was countered by a 5.5% decrease for Oahu, which has historically had the largest number of visitors.
Significant influences on passenger traffic to Hawaii have been and will continue to be 1) the local Hawaii economy, which has stagnated in the 1990s due to declines in outside capital investment, sluggish tourism, reduced military spending and reduction in the sugar and pineapple industries, once the mainstays of the Hawaii agricultural business; 2) the strength and growth of the U.S. mainland economy; 3) the general economic crisis in Asia, especially Japan; and 4) the recent resurgence of the vacation cruise industry and more effective promotion by areas such as Mexico, the Caribbean and Europe and domestic leisure attractions, such as theme parks and Las Vegas. Also, the increased incidence of tactical pricing sales for
travel in and among the 48 contiguous states of the U.S., which have become more prevalent during the past two years, has resulted in the diversion of potential Hawaii discretionary travel.
No assurance can be given that the level of passenger traffic to Hawaii will not decline further in the future. A decline in the level of Hawaii passenger traffic could have a material adverse effect on the Company's operations.
COMPETITION
The airline industry is highly competitive, primarily due to the effects of the Airline Deregulation Act of 1978, recodified into the Transportation Act, which has substantially eliminated government authority to regulate domestic routes and fares and has increased the ability of airlines to compete with respect to destination, flight frequencies and fares. Airline profit levels are highly sensitive to and can be severely impacted by, adverse changes in fuel costs, average yield and passenger demand.
The U.S. airline industry has consolidated in recent years as a result of mergers and liquidations, and further consolidation may occur in the future. The consolidations have, among other things, enabled certain carriers to expand their international operations and increase their presence in the U.S. domestic market. In addition, the airline industry has experienced in recent years alliances between large U.S. and foreign carriers and between U.S. carriers, allowing those carriers within such alliances to strengthen their overall operations. Conversely, the industry has also seen in recent years the emergence and growth of low cost, low fare domestic carriers who have further intensified competitive pressures. Aircraft, skilled labor and gates at most airports continue to be available to start-up carriers. In some cases, the new entrants have initiated or triggered price discounting.
Many of the Company's competitors are larger and have substantially greater resources. In addition, the commencement of service by new carriers on the Company's routes could negatively impact the Company's operating results. Competing airlines (including the Company) have, from time to time, reduced fare levels and increased capacity beyond market demand on routes served by the Company in order to maintain or generate additional revenues. Such activity, which may occur in the future, by competing airlines could reduce fares or passenger traffic to levels where profitable operations could not be achieved. Due to its smaller size and liquidity, the Company may be less able to withstand aggressive marketing tactics or a prolonged fare war initiated by its competitors.
Vigorous price competition exists, with competitors frequently offering reduced discount fares and other promotions to stimulate traffic during normally slack travel periods, generate cash flow or increase relative market share in selected markets. The introduction of broadly available, deeply discounted fares by a major U.S. airline could result in lower yields for the entire industry and could have a material adverse effect on the Company's operating results.
Airlines are subject to a high degree of financial and operating leverage. Due to high fixed costs, the expenses of each flight do not vary proportionately with the number of passengers carried, but the revenues generated from a particular flight are directly related to the number of passengers carried. Accordingly, while a decrease in the number of passengers carried would cause a corresponding decrease in revenue (if not offset by higher fares), it may result in a disproportionately greater decrease in profits. However, an increase in the number of passengers carried would have the opposite effect.
The airline industry is highly sensitive to general economic conditions. Because a substantial portion of airline travel is discretionary, the operating and financial results of the Company may be negatively impacted by any downturn in national or regional economic conditions in the U.S., particularly California, the Pacific Northwest and Hawaii, and certain Asian countries, particularly Japan. Any prolonged general reduction in airline passenger traffic will adversely affect the Company.
INTERISLAND
While there are several small commuter and air taxi companies, which provide air transportation to Hawaii airports that cannot be served with large aircraft, the Interisland market is serviced primarily by two carriers, the Company and its primary competitor in the Interisland market, Aloha Airlines, Inc. ("Aloha"). Aloha's competitive position is strengthened through its marketing affiliation with United Airlines, Inc. ("United"), the largest carrier of passengers to Hawaii. Aloha participates in United's
frequent flyer program and also has a code sharing agreement with United. Aloha principally utilizes 19 Boeing 737 aircraft with a schedule that averages approximately, depending on seasonality, 150 to 180 daily flights, which service the same basic Interisland routes as the Company. Hawaiian Airlines has approximately, depending on seasonality, 130 to 150 Interisland flights per day. Also, refer to THE DISCUSSION BELOW REGARDING THE COMPANY'S MAJOR MARKETING AFFILIATIONS, INCLUDING CODE SHARING ARRANGEMENTS. The Company believes that Interisland competition is primarily based on fare levels, flight frequency, on-time performance and reliability, name recognition, frequent flyer programs, customer service and aircraft type.
TRANSPAC
On its Transpac routes, the Company currently competes with major carriers such as United, Delta Airlines, Inc., Northwest and, to a lesser extent, Continental Airlines, Inc. ("Continental") and American. In addition, the Company competes against charter carriers in the Transpac market. The Company believes that Transpac competition is primarily based on fare levels, flight frequency, on-time performance and reliability, name recognition, frequent flyer programs, customer service and in-flight service.
RELIANCE ON THIRD PARTIES
The Company has entered into agreements with contractors, including American, Northwest, Continental and certain other airlines, to provide certain facilities and services required for its operations, including aircraft leasing and maintenance, code sharing, reservations, computer services, frequent flyer programs, passenger processing, fuel, ground facilities, baggage and cargo handling and personnel training. This reliance on third parties to provide services subjects the Company to the risk that such services could be discontinued without adequate replacement services being available.
The Company leases ten DC-10 aircraft from American. American is responsible for maintenance on all of the Company's DC-10 aircraft (leased and owned) with the Company having access to spare parts, engines and rotables for the maintenance of these aircraft. As such, the Company does not maintain large inventories of spare engines or parts to support the operation of the DC-10 aircraft. The Company pays a minimum monthly charge for maintenance services, monthly in arrears. During 1998, the Company incurred approximately $69.6 million of lease and maintenance expenses under the American leases and aircraft maintenance agreements. American has the right to terminate its obligation to provide aircraft maintenance services on and after January 1, 1999, upon 180 days' prior notice. American has indicated to the Company its intent to provide maintenance services through September 2001, although it may still exercise its right to terminate upon 180 days' prior notice. If American terminated the maintenance arrangement, the Company would have to seek an alternate source of maintenance service or undertake to maintain its DC-10s internally. No assurance can be given that the Company would be able to do so on a basis that is as cost-effective as the American maintenance arrangement. Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for further discussion on the Company's DC-10 aircraft fleet. The Company also participates in American's AAdvantage frequent flyer program and SABRE reservation system. Commencing March 2, 1998, the Company and American also effected a code sharing agreement. These programs and services make the Company more competitive, but increase its reliance on third parties.
The Company purchases almost all of its aviation fuel from Northwest pursuant to an agreement which provides that, in case of shortages, Northwest will provide fuel to its own fleet first and then a portion of the remaining fuel available will be allocated between Hawaiian Airlines and any other applicable airlines. The agreement requires Northwest to provide Hawaiian Airlines with aviation fuel at Northwest's actual acquisition cost without markup for profit and with reimbursement only for out-of-pocket costs. The agreement is renewed automatically on December 31 of each year unless canceled by either of the parties with 90 days' written notice. Hawaiian Airlines is prohibited from reselling such fuel. No assurance can be given that the Company would be able to secure an adequate supply of fuel from alternate sources if a fuel shortage were to cause the supply from Northwest to be inadequate or if Northwest were to cancel the agreement. The Company paid Northwest approximately $60.7 million, $72.6 million and $70.9 million for the fuel supplied under this agreement in 1998, 1997 and 1996, respectively. Further, effective July 1996, the Company entered into a cooperative marketing agreement
with Northwest, which provides for extensive marketing cooperation, including a code sharing arrangement and frequent flyer participation. In 1998 and in both 1997 and 1996, a majority of the Company's ticket sales were made by travel agents, including approximately 40% and 30% by six large wholesalers. In 1998, a particular Hawaii-based wholesaler, Panda Travel Inc., constituted approximately 13% of the Company's total operating revenues. Travel agents generally have a choice between one or more airlines when booking a customer's flight. Accordingly, any effort by travel agencies to favor another airline or to disfavor the Company could adversely affect the Company. Although management intends to continue to offer an attractive and competitive product to travel agencies and to maintain favorable relations with travel agencies, there can be no assurance that travel agencies will not disfavor the Company or favor other airlines in the future, either of which could have an adverse effect on the Company's operations.
REGULATION
GENERAL
As a certificated air carrier, Hawaiian Airlines is subject to the regulatory jurisdiction of the U.S. Department of Transportation (the "DOT") and the Federal Aviation Administration (the "FAA"). The DOT has jurisdiction over certain aviation matters such as the carrier's certificate of public convenience and necessity, international routes and fares, consumer protection policies including baggage liability and denied-boarding compensation and unfair competitive practices as set forth in the Transportation Act. Hawaiian Airlines and all other domestic airlines are subject to regulation by the FAA under the Transportation Act. The FAA has regulatory jurisdiction over flight operations generally, including equipment, ground facilities, security systems, maintenance and other safety matters. To assure compliance with its operational standards, the FAA requires air carriers to obtain operations, air worthiness and other certificates, which may be suspended or revoked for cause. The FAA also conducts safety audits and has the power to impose fines and other sanctions for violations of aviation safety and security regulations. As are other carriers, Hawaiian Airlines is subject to inspections by the FAA in the normal course of its business on a routine ongoing basis. Hawaiian Airlines operates under a Certificate of Public Convenience and Necessity issued by the DOT (authorizing it to provide commercial aircraft service) as well as a Part 121 Scheduled Carrier Operating Certificate issued by the FAA.
MAINTENANCE DIRECTIVES AND OTHER REGULATIONS
Hawaiian Airlines has developed extensive maintenance programs, which consist of a series of phased checks of each aircraft type. These checks are performed at specified intervals measured either by time flown or by the number of takeoffs and landings ("cycles") performed. Checks range from daily "walk around" inspections, to more involved overnight maintenance checks, to exhaustive and time consuming overhauls. Aircraft engines are subject to phased, or continuous, maintenance programs designed to detect and remedy potential problems before they occur. The service lives of certain parts and components of both airframe and engines are time or cycle controlled. Parts and other components are replaced or overhauled prior to the expiration of their time or cycle limits. The FAA approves all airline maintenance programs, including changes to the programs. In addition, the FAA licenses the mechanics who perform the inspections and repairs, as well as the inspectors who monitor the work.
The FAA frequently issues air worthiness directives, often in response to specific incidents or reports by operators or manufacturers, requiring operators of specified equipment to perform prescribed inspections, repairs or modifications within stated time periods or numbers of cycles. In the last several years, the FAA has issued a number of maintenance directives and other regulations relating to, among other things, cargo compartment fire detection/suppression systems, collision avoidance systems, airborne windshear avoidance systems, noise abatement and increased inspection requirements. The Company expects to continue to incur substantial expenditures for the purpose of complying with these new regulations, including, but not limited to:
1) The Company anticipates that in the period 1999 through 2001, eight of its DC-9 aircraft will require heavy airframe overhaul checks (the "C5-Check", previously referred to as a D-Check). The C5-Check for a DC-9 requires more than 20,000 man-hours of maintenance work and includes stripping the airframe, extensively testing the airframe structure and a large number of parts and components, and reassembling the overhauled airframe with new or rebuilt components. The Company anticipates each C5-Check to cost approximately $1.0 million;
2) The FAA has and is expected to continue to require structural modifications and the replacement of certain parts, as well as the implementation of additional maintenance programs or changes to current programs, with respect to various types of aircraft over a certain age. These requirements vary, depending on the type of aircraft covered. Based on information currently available, the Company estimates that the total cost of complying with the aging aircraft requirements over the 1999 through 2003 period will approximate $660,000 per DC-9 aircraft;
3) The Company expects to incur approximately $100,000 per DC-9 aircraft per year for maintenance required under a corrosion prevention and control program. This program is anticipated to continue indefinitely in the future;
4) The FAA has mandated the installation of smoke detection and fire suppression systems in the cargo compartments of both DC-10 and DC-9 aircraft by December 2000. The cost for systems and installation is estimated to be $130,000 and $83,000 per each DC-10 and DC-9 aircraft, respectively;
5) As a result of certain incidents where Digital Flight Data Recorder ("DFDR") information was insufficient to determine the cause of the accident, the FAA has also mandated additional recording parameters for the DC-10 and DC-9 aircraft by the first heavy maintenance check after August 1999 but no later than August 2001. The DC-10 DFDR will be upgraded from 17 to 22 parameters at an estimated cost of $60,000 per aircraft. The DC-9 DFDR will be upgraded from 11 to 18 parameters at an estimated cost of $47,000 per aircraft;
6) During the period from 1999 through 2003, the Company anticipates continued implementation of its supplemental inspection document program for certain of its DC-9 aircraft, which is estimated to range up to $27,000 per aircraft.
The estimated future cost of complying with FAA regulations as discussed in the preceding paragraphs will be in addition to the costs of the Company's current DC-10 and DC-9 fleet maintenance programs.
In 1990, Congress passed legislation (the Airport Noise and Capacity Act of 1990) which provided for a reduction in commercial aircraft noise levels. Carriers were permitted to comply with the transitional requirements either by 1) phasing out, or retrofitting with noise abatement equipment, certain older aircraft known as Stage 2 aircraft, or 2) phasing in quieter aircraft, known as Stage 3 aircraft by December 31, 1999, with the possibility of certain waivers until December 31, 2003, when full phase out is required. Congress provided an exemption for air carriers operating turnaround service in Hawaii, or between a place in Hawaii and a place outside the 48 contiguous states, to operate as many Stage 2 aircraft of a certain weight as they operated on November 5, 1990. Air carriers that provided flights between places only in Hawaii on November 5, 1990 may include in the number of Stage 2 aircraft under the exemption all Stage 2 aircraft that it owned or leased on November 5, 1990, whether or not the aircraft were operated by the carrier on that date. However, an air carrier may provide flights between places only in Hawaii using Stage 2 aircraft only if the carrier provided the service on November 5, 1990. The Company believes these exemptions restrict air carriers other than the Company and Aloha from operating Stage 2 aircraft in Hawaii. Because Stage 2 aircraft are less expensive to acquire than Stage 3 aircraft, this exemption provides limited protection against the entry of another carrier, which would be required to operate an all Stage 3 fleet. This advantage is partially offset by the fact that Stage 3 aircraft are generally less expensive to operate and maintain, as well as the fact that in any event over time, carriers will move toward having an all Stage 3 fleet. Although the Company and Aloha may operate Stage 2 aircraft in Hawaii after December 31, 1999, the air carriers will be prohibited from transporting Stage 2 aircraft to and from the 48 contiguous states for any purpose, including heavy airframe overhaul and maintenance, unless an amendment to the Federal law is enacted by Congress or an exemption is obtained from the FAA. No assurance can be given that the Company can obtain the exemption from the FAA or that Congress will pass legislation allowing non-revenue operations of Stage 2 aircraft to and from the contiguous 48 states. Should neither of these events occur, the Company would have to seek alternatives, primarily with regard to heavy maintenance service on its Stage 2 aircraft. No assurance can be given that the Company would be able to do so on a cost-effective basis.
Additional laws and regulations have been proposed from time to time that could significantly increase the cost of airline operations by, for example, imposing additional requirements or restrictions on
operations. Laws and regulations also have been considered from time to time that would prohibit or restrict the ownership and/or transfer of airline routes or takeoff and landing slots. Also, the award of international routes to U.S. carriers (and their retention) is regulated by treaties and related agreements between the U.S. and foreign governments, which are amended from time to time. The Company cannot predict what laws and regulations will be adopted or what changes to international air transportation treaties will be effected, if any, or how they will affect the Company.
Hawaiian Airlines believes that it is in compliance with all requirements necessary to maintain in good standing its operating authority granted by the DOT and its air carrier operating certificate issued by the FAA. A modification, suspension or revocation of any of the Company's DOT or FAA authorizations or certificates would have a material adverse effect upon the Company.
Several aspects of airlines' operations are subject to regulation or oversight by Federal agencies other than the FAA and DOT. The antitrust laws are enforced by the U.S. Department of Justice. The U.S. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services provided by the Company's cargo services. Labor relations in the air transportation industry are generally regulated under the Railway Labor Act. The Company and other airlines certificated prior to October 24, 1978 are also subject to preferential hiring rights granted by the Transportation Act to certain airline employees who have been furloughed or terminated (other than for cause).
LIMITATION ON FOREIGN OWNERSHIP OF SHARES
The Transportation Act prohibits non-U.S. citizens from owning more than 25% of the voting interest of a U.S. air carrier. The Company's Restated Articles of Incorporation prohibit the ownership or control of more than 25% (to be increased or decreased from time to time to that percentage permissible under the laws of the U.S.) of issued and outstanding voting capital stock of the Company by persons who are not "citizens of the U.S.". As of December 31, 1998, less than 25% of the Common Stock of the Company was held by non-U.S. citizens.
INSURANCE
The Company is exposed to potential losses that may be incurred in the event of an aircraft accident. Any such accident could involve not only the repair or replacement of a damaged aircraft and its consequential temporary or permanent loss of service, but also significant potential claims of injured passengers and others. The Company is required by the DOT to carry liability insurance on each of its aircraft. The Company currently maintains public liability insurance which management believes is adequate and consistent with current industry practice. However, there can be no assurance that the amount of such coverage will not be changed or that the Company will not bear substantial losses from accidents. Substantial claims resulting from an accident in excess of related insurance coverage could have a material adverse effect on the Company.
LANDING FEES
Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for discussion on State of Hawaii landing fees from September 1, 1997 to September 1, 1999.
TICKET TAXES
Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for discussion on ticket taxes.
EMPLOYEES
As of December 31, 1998, Hawaiian Airlines had 2,577 employees, of which 2,147 were employed on a full-time basis. The majority of Hawaiian Airlines' employees are covered by labor agreements with the International Association of Machinists and Aerospace Workers (AFL-CIO), the Air Line Pilots Association International, the Association of Flight Attendants, the Transport Workers Union and the Communications Section Employees Union. The amendable date of all five contracts is February 28, 2000. Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for further discussion on the Company's employees.
ITEM 2.
ITEM 2. PROPERTIES.
Information provided in Notes 4, 5 and 6 to the Financial Statements contained in Part IV, Item 14 of this Form 10-K is incorporated herein by reference.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Information provided in Note 10 to the Financial Statements contained in Part IV, Item 14 of this Form 10-K is incorporated herein by reference.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) Market Information.
The Registrant's Common Stock is traded on the American Stock Exchange and Pacific Exchange under the symbol HA. The following table sets forth the reported high and low sales prices for the Common Stock for the quarters indicated, as reported by the American Stock Exchange:
(b) Holders.
As of March 1, 1999, there were approximately 1,061 holders of record of the Company's Common Stock.
(c) Dividends.
Under the terms of the financing arrangement with CIT Group/Credit Finance, Inc., the Company is restricted from paying any cash or stock dividends. No dividends were paid by the Company in 1998 or 1997.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Information under the caption "Selected Financial and Statistical Data" on pages to contained in Part IV, Item 14 of this Form 10-K is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained here and throughout, 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 these 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 and heretofore, as well as those discussed elsewhere in this Form 10-K. All forward-looking statements contained in this Form 10-K 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.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
For the year ended December 31, 1998, the Company generated operating income of $17.4 million, a $14.9 million improvement from 1997 operating income of $2.5 million. The Company also generated net income of $8.2 million, a $9.2 million improvement from the $1.0 million net loss experienced in 1997. The improvement is associated with the Company's generation of $22.2 million more of operating revenues. Decreases of $11.5 million and $3.9 million in overall fuel and landing fee expenses, respectively, were offset by other operating expense increases as a result of increased flight activity in 1998.
Included in the 1998 and 1997 results of operations are provisions for income taxes of $7.8 million and $1.7 million, respectively. While generally accepted accounting principles require that the provisions for income taxes be recorded, most of the amounts recorded will not require cash outlay as the amounts will be offset by net operating loss carryforwards available to the Company. As noted in Note 7 in NOTES TO FINANCIAL STATEMENTS contained in Part IV, Item 14 of this Form 10-K, 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.
OPERATING REVENUES
Operating revenues totaled $426.4 million in 1998 compared to $404.2 million in 1997, an increase of $22.2 million or 5.5%, driven principally by a $22.1 million or 6.7% increase in passenger revenues.
PASSENGER AND CHARTER
The following table compares operating passenger revenues and statistics, in thousands, except as otherwise indicated, for the years ended 1998 and 1997:
Significant year to year variances were as follows:
Interisland passenger revenues totaled $138.6 million in 1998 compared to $132.6 million in 1997. The $6.0 million or 4.5% increase is in direct correlation to a 1.3CENTS or 4.9% increase in yield. Year over year, revenue passengers carried and revenue passenger miles ("RPM") were relatively comparable. The increase in yield is attributed to 1) general price increases initiated by the Company throughout 1998 and 2) improved fare and inventory management through use of the Company's relatively new yield management system.
Transpac passenger revenues totaled $196.7 million in 1998, an increase of $16.3 million or 9.0% over 1997 Transpac
passenger revenues of $180.4 million. The Company experienced increases of 3.9% and 6.0% in its passengers carried and RPM, respectively. These increases were complemented by a 0.2CENTS or 3.1% increase in yield, again reflecting improved fare and inventory management and general price increase initiatives by the Company throughout 1998.
Overseas charter revenues decreased by $1.4 million or 3.8% in 1998. The decrease is primarily due to, during the first half of 1998, the Company flying on average, two fewer charters per week to Las Vegas and general price decreases charged for both its Las Vegas and Anchorage charter flights.
OTHER OPERATING
Other operating revenues in 1998 totaled $14.7 million, an increase of $1.1 million or 8.3%, primarily due to additional revenues related to the promotion of the Company's frequent flyer program.
OPERATING EXPENSES
Operating expenses totaled $409.0 million in 1998, an increase of $7.3 million or 1.8% from total operating expenses of $401.7 million in 1997.
The following table compares operating expenses per Available Seat Mile ("ASM") by major category for 1998 with 1997:
All fluctuations in operating expenses per ASM were affected by an overall increase in ASM of approximately 4.3% in 1998 from 1997. Significant year to year variances were as follows:
Wages and benefits per ASM remained relatively consistent from year to year. The dilutive effect of increased ASMs was offset by increased wages and benefits in 1998 of $4.3 million or 3.8% over 1997. Wages and benefits totaled $118.9 million in 1998 versus $114.6 million in 1997. A majority of the increase is attributable to additional wages and benefits from increased flying operations and the accrual for the Company's profit sharing program.
Aircraft fuel, including taxes and oil ("Aircraft Fuel"), per ASM decreased year over year by 0.27CENTS or 18.8%. The Company incurred $11.5 million or 14.8% less Aircraft Fuel cost in 1998, the combination of a 3.9% increase in gallons consumed, a 19.8% decrease in the average cost of aircraft fuel per gallon and $2.3 million in aggregate realized and unrealized losses on the Company's Aircraft Fuel derivative financial instruments.
Maintenance materials and repairs per ASM increased by 0.08CENTS or 5.7% in 1998 from 1997. The Company experienced $7.7 million or 10.1% in additional maintenance principally due to 1) $5.3 million more in DC-10 maintenance expense from increased utilization of DC-10 aircraft for long-haul flying and 2) $2.3 million more in DC-9 engine repairs.
Rentals and landing fees per ASM decreased by 0.06CENTS or 10.0%. Commencing September 1, 1997, a two-year moratorium was placed on landing fees at all airports in the State of Hawaii. The Governor of the State of Hawaii reserved the right, however, to reinstate the landing fee charges before the two-year period ends. Under the current moratorium, the Company incurred approximately $3.9 million less for landing fees in 1998 than in 1997.
Sales commissions per ASM decreased by 0.03CENTS or 12.5%. Sales commissions decreased by $1.4 million or 10.6% in 1998, principally due to a decrease in the interline commission rate and an increase in the volume of non-commissionable tickets sold year over year.
Depreciation and amortization per ASM increased by 0.02CENTS or 10.0%. Depreciation and amortization totaled $12.6 million in 1998 versus $10.7 million in 1997. A majority of the $1.9 million or 17.8% increase is due to $1.1 million and $700,000 in additional depreciation and amortization on ground equipment and DC-9 overhauls in 1998.
Other operating expenses per ASM increased by 0.09CENTS or 6.4% between 1998 and 1997. The Company incurred approximately $8.4 million or 11.0% of additional other operating expenses in 1998 over 1997, primarily as a result of additional aircraft service, advertising and promotion and general and administrative expenses, including professional and legal fees.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 requires reclassification of financial statements for earlier periods provided for comparative purposes.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 requires restatement of comparative information presented for earlier periods.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which amends the disclosure requirements of SFAS No. 87, "Employer's Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 addresses disclosure only and does not change any of the measurement or recognition provisions provided for in SFAS Nos. 87, 88 or 106. SFAS No. 132 requires restatement of comparative information presented for earlier periods.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
In March 1998, the American Institute of Certified Public Accountants Accounting Standards Executive Committee (the "AcSEC") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. SOP 98-1 also requires that costs related to the preliminary project stage and the post-implementation/operations stage, as defined, in an internal-use computer software development project be expensed as incurred. SOP 98-1 is effective for fiscal years beginning after December 15, 1998.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which requires that
costs incurred during start-up activities, including organization costs, be expensed as incurred. The provisions of SOP 98-5 are effective for fiscal years beginning after December 15, 1998.
The Company adopted the provisions of SFAS Nos. 130, 131 and 132 effective January 1, 1998. Adoption of SFAS No. 130 did not result in the reclassification of comparative financial statement information presented for earlier periods. Adoption of SFAS No. 131 did not result in a modification to the Company's reporting segment and accordingly, comparative financial statement information presented for earlier periods was not restated. The Company's disclosures regarding pension and other postretirement benefits for prior periods have been restated to comply with the provisions of SFAS No. 132. Further, management does not expect the adoption of SFAS No. 133, SOP 98-1 or SOP 98-5 by the respective required dates to have a material impact on the Company's financial condition, results of operations, liquidity and/or previously reported financial information.
1997 COMPARED TO 1996
For the year ended December 31, 1997, the Company generated operating income of $2.5 million, a $475,000 improvement from 1996 operating income of $2.0 million. The Company also reduced its net loss before extraordinary items and cumulative effect of change in accounting principle by $1.7 million to $572,000 in 1997 from $2.3 million in 1996. The Company incurred a net loss of $1.0 million for the year ended December 31, 1997, a $511,000 improvement from the net loss of $1.5 million in 1996.
OPERATING REVENUES
Operating revenues totaled $404.2 million in 1997 compared to $384.5 million in 1996, an increase of $19.7 million or 4.9%. Significant year to year variances were as follows:
PASSENGER AND CHARTER
The following table compares operating passenger revenues and statistics, in thousands, except as otherwise indicated, for the years ended 1997 and 1996:
Interisland passenger revenues decreased by $393,000 or 0.3% to $132.6 million in 1997 from $133.0 million in 1996. Interisland passenger revenues were impacted by softness in tourism throughout the State of Hawaii, principally through the first six months of 1997. The decrease in Interisland passenger revenues was also caused by less ASM as evidenced by the 6.7% decrease in available seat miles year over year. The decrease in revenue passengers carried and RPM, however were offset by a 0.5CENTS or 1.9% increase in yield, the result of certain price increases initiated in the Interisland market by the Company in the latter months of 1997.
Transpac passenger revenues totaled $180.4 million in 1997, an increase of $7.0 million or 4.0% over 1996 Transpac passenger revenues of $173.4 million. In 1997, the Company adjusted its Transpac frequencies to particular Transpac
destinations depending on market demand. The Company experienced increases of 8.1% and 6.5% in its passengers carried and RPM, respectively. However, these increases were offset by a 0.1CENTS or 1.5% decrease in yield reflecting more aggressive pricing actions taken by the Company to stimulate travel demand and be competitive, primarily in the second and third quarters of 1997. These pricing strategies, combined with cooperative advertising and promotions, were targeted at Transpac markets in which the Company had increased its level of service and those in which the Company maintained code share alliances.
Overseas charter revenues in 1997 totaled $37.2 million, an increase of $9.3 million from 1996 Overseas charter revenues of $27.8 million. The increase is attributable to the Company operating on average, eight charters per week to Las Vegas throughout the first six months of 1997 versus six per week throughout the first six months of 1996, and from February 1997 to April 1997 and from May 1997 to December 1997, on average, two and one charter rotations per week, respectively, to Anchorage, Alaska. The Anchorage charters were not operated in 1996.
CARGO
Transpac cargo revenues increased by $1.1 million or 9.2% to $13.0 million in 1997 from $11.9 million in 1996. The increase was primarily due to increased frequencies in Transpac routes which allowed the Company to transport 1,783 or 9.2% more tons of freight in 1997 compared to 1996.
OTHER OPERATING
Other operating revenues in 1997 totaled $13.6 million, an increase of $3.4 million or 32.9%, primarily due to approximately $2.3 million in additional revenues related to the promotion of the Company's frequent flyer program and inflight media and service products.
OPERATING EXPENSES
Operating expenses totaled $401.7 million in 1997, an increase of $19.3 million or 5.0% from total operating expenses of $382.4 million in 1996.
The following table compares operating expenses per ASM by major category for 1997 with 1996:
All fluctuations in operating expenses per ASM were affected by an overall increase in ASM of approximately 6.6% in 1997 from 1996. Significant year to year variances were as follows:
Wages and benefits per ASM decreased by 0.02CENTS or 0.9%. The dilutive effect of increased ASM was offset by increased wages and benefits in 1997 of $6.0 million or 5.5% over 1996. Wages and benefits totaled $114.6 million in 1997 versus $108.6 million in 1996. The Company incurred additional customer service, crew and inflight wages and benefits primarily due to increased long-haul flying.
Aircraft Fuel per ASM decreased year over year by 0.05CENTS or 3.4%. The effect of increased ASM was offset by an overall increase in Aircraft Fuel costs of $2.2 million or 2.9% to $78.1 million in 1997 from $75.9 million in 1996. The Company incurred $3.5 million in additional costs from the consumption of approximately 4.5 million or 4.6% more gallons of fuel in 1997 than in 1996 and $1.1 million in aggregate realized and unrealized losses on the Company's Aircraft Fuel derivative financial instruments. These additional costs were offset by a decrease in Aircraft Fuel expense year over year of $2.2 million resulting from a decrease in the average cost per gallon of 2.2CENTS or 2.9%.
Maintenance materials and repairs per ASM increased by 0.05CENTS or 3.7% in 1997 from 1996. The Company experienced $7.3 million or 10.6% in additional maintenance principally due to 1) $5.7 million more in DC-10 maintenance expense as the Company utilized between nine and ten DC-10 aircraft throughout 1997 versus a varying fleet of eight to ten DC-10 aircraft in 1996 due to increased long-haul frequencies and 2) $1.2 million more in DC-9 airframe and engine repairs.
Rentals and landing fees per ASM were primarily affected by decreased landing fees of $2.2 million in 1997. A two-year moratorium was placed on landing fees at all airports in Hawaii commencing September 1, 1997. The Company had averaged approximately $500,000 per month in landing fees at airports in the State of Hawaii prior to the moratorium.
Depreciation and amortization per ASM increased by 0.03CENTS or 17.6%. Depreciation and amortization totaled $10.7 million in 1997 versus $8.7 million in 1996. A majority of this $2.0 million or 23.0% increase in 1997 is due to 1) $1.2 million in additional depreciation and amortization on DC-9 and DC-10 capitalized parts and overhauls and 2) $548,000 in additional depreciation on DC-9 flight equipment financed through capital leases.
Other operating expenses per ASM is comparable between 1997 and 1996. Other operating expenses increased by $4.5 million or 6.2% in 1997 compared to 1996 primarily due to $3.7 million in additional catering, ground handling and personnel expenses from increased long-haul flying.
EXTRAORDINARY ITEMS
In 1996, the Company paid approximately $4.7 million to GPA Group plc and its affiliate AeroUSA, Inc. to repurchase 827,221 shares of Common Stock and to repay approximately $4.5 million of long-term debt at a 15.0% discount, including any deferred costs and other expenses owed. These transactions resulted in an extraordinary gain, net of income taxes, of approximately $409,000.
Further, in December 1996, the Company exercised its option to prepay to American a $10.25 million promissory note secured by certain assets of the Company (the "American Note"). The Company paid American $9.15 million plus accrued interest with all liens securing the American Note being released. Early extinguishment of the American Note resulted in an extraordinary gain, net of income taxes, of approximately $357,000.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
As promulgated by the FASB's Emerging Issues Task Force, in fourth quarter 1997, the Company wrote off business process reengineering costs it had previously capitalized. As discussed below in INFORMATION TECHNOLOGY SYSTEMS AND YEAR 2000, the Company has commenced and committed significant resources to upgrading its business processes and information technology for strategic and year 2000 positioning. The write-off totaled approximately $450,000, net of income tax benefit of approximately $300,000.
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 at December 31, 1998 of $31.0 million, internally generated funds and a credit facility with total availability of $11.1 million as of December 31, 1998, with aggregate term loans and letters of credit outstanding in the amounts of $4.9 million and $1.1 million, respectively. The Company believes that its ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund its capital expenditure programs and to cover debt and other cash requirements in the foreseeable future.
Cash and cash equivalents for the year ended December 31, 1998 increased by $15.3 million from December 31, 1997. Operating activities for the year ended December 31, 1998 provided $30.2 million in cash and cash equivalents, primarily due to the Company generating $17.4 million in operating income. Investing activities for the year ended December 31, 1998 used $22.8 million of cash and cash equivalents primarily to acquire property and equipment, including two used aircraft as discussed below, continued investments in improved software, hardware and implementation costs and capitalized portions of DC-9 checks and overhauls. Including the effects of the two used aircraft discussed below, the Company had estimated its capital expenditures in 1998 to approximate $29.6 million. Financing activities for the year ended December 31, 1998 provided $7.9 million in cash and cash equivalents, principally the result of $7.6 million in net borrowings related to its debt and capital lease obligations.
The Company estimates that its capital expenditures in 1999 will approximate $49.8 million. Approximately, $20.8 million is associated with the acquisition of additional aircraft as discussed below. The remaining $29.0 million principally represents (1) capitalized portions of DC-9 and DC-10 checks, overhauls and configurations; (2) improvements in software and related hardware and airport and office facilities; and (3) purchase of ground equipment and other assets. Acquisition of additional aircraft is anticipated to be funded primarily through debt financings. Other authorized expenditures will be funded through use of available cash and cash equivalents and internally generated funds.
ROUTES, AIRCRAFT AND EMPLOYEES
In September 1998, the Company announced plans to expand its Transpac operations by adding in first quarter 1999 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. Further, in November 1998, a charter agreement was entered into with Renaissance Cruises. The two-year agreement provides for approximately 20 round-trip charter flights per month between Los Angeles and Tahiti, commencing in August 1999. The agreement is estimated to be worth more than $70 million in incremental passenger charter revenue to the Company.
Additional wide-body aircraft will be required to service the additional Transpac frequencies discussed immediately above. In November 1998, the Company entered into a purchase agreement for two used DC-10-30 aircraft. As of December 31, 1998, the Company had taken delivery of one of the used DC-10-30 aircraft. Delivery of the second used DC-10-30 aircraft took place during the first quarter 1999. Efforts have also commenced to acquire a third DC-10-30 aircraft. It is anticipated that approximately 280 to 380 additional employees will be hired to service the new routes.
In December 1998, the Company entered into a purchase agreement to acquire two used DC-9-50 aircraft in an attempt to maximize its code sharing arrangements with American and Northwest. The aircraft will be used in the Interisland market. As of December 31, 1998, one of the used DC-9-50 aircraft had been acquired. Delivery of the second used DC-9-50 is anticipated in first quarter 1999.
As stated earlier, the aircraft purchases discussed above have and will be primarily funded through debt financing. Management continues to assess the status and alternatives with regard to its DC-10 and DC-9 fleet, including, but not limited to, the extension of existing leases, exercise of purchase options and replacement of aircraft.
The Company also has been provisionally awarded authority to commence nonstop flight operations between Tokyo
and Maui in January 2000. No estimate can be given as to when or if a final decision awarding the route will be issued by the DOT. A decision by the Company to progress on operation of the route is subject to a number of future events, the outcome of which cannot be predicted at this time, including, in addition to the issuance of a final order from the DOT, obtaining takeoff and landing slots at the Narita International Airport and the resolution of litigation over lengthening of the runway in Maui.
WARRANTS
In January 1996, due to its participation in certain recapitalization efforts of the Company, American's parent company, AMR Corporation ("AMR"), received, among other things, warrants which, subject to certain conditions and as adjusted pursuant to applicable anti-dilution provisions, entitled AMR to purchase up to 1,949,338 shares of the Company's Common Stock (the "AMR Warrant Shares") at $1.07 per share. If not exercised, the warrants expire on September 11, 2001. AMR also retained the right to require the Company, on two occasions, to use its best efforts to register, at the Company's expense subject to certain conditions, some or all of the AMR Warrant Shares under the Securities Act of 1993, as amended.
Pursuant to its reorganization in 1994, the Company granted warrants to certain individuals, which, as adjusted for anti-dilution provisions, entitled such individuals to purchase 1,618,972 shares of Common Stock (the "Reorganization Warrant Shares") at $1.67 per share. As of December 31, 1997, all of the warrants had been exercised.
The AMR Warrant Shares have been included in a registration statement filed by the Company with the Securities and Exchange Commission, which became effective on December 31, 1998. Pursuant to piggyback rights, the registration statement also includes the Reorganization Warrant Shares and 2.2 million shares of Common Stock owned by Airline Investors Partnership, L.P.
DERIVATIVE FINANCIAL INSTRUMENTS
As of December 31, 1998, the Company utilized crude oil forward contracts to manage market risks and hedge its financial exposure resulting from fluctuations in its aircraft fuel costs. The Company employs a strategy whereby crude oil contracts are used to cover up to 45% of the Company's anticipated aircraft fuel needs on a rolling 12 month basis.
At December 31, 1998, the Company had petroleum forward contracts to purchase 45,000 barrels of crude oil in the aggregate amount of $722,000 through February 1999. These forward contracts represented approximately 1% of the Company's anticipated 1999 aircraft fuel needs. At December 31, 1998, the estimated fair value and carrying value of these outstanding contracts was a net receivable of $200,000. Included as a component of Aircraft Fuel Cost are net realized and unrealized losses on such contracts amounting to $2.3 million and $1.1 million for the years ended December 31, 1998 and 1997, respectively.
TICKET TAX
In 1997, legislation was enacted to, among other things, gradually reduce the Federal passenger excise tax from 10% to 7.5% and phase-in a $3 "head tax" per domestic flight segment by the year 2002. On October 1, 1998, the passenger excise tax decreased from 9% to 8%, with a correspondent increase in the "head tax" from $1 to $2 per domestic flight segment. The Company has and will adjust its fares accordingly due to these enacted tax changes based upon prevailing market conditions. There can be no assurance that the Company will be able to maintain its current fare levels or predict with any certainty the effects on its fares should the taxes again be adjusted, lapse and/or be reinstated.
FREQUENT FLYER PROGRAM
The Company's HawaiianMiles frequent flyer program was initiated in 1983. As of December 31, 1998 and 1997, HawaiianMiles had more than 693,000 and 642,000 members, respectively, including approximately 518,000 and 432,000 active members, respectively.
The HawaiianMiles program allows passengers to earn mileage credits by flying Hawaiian Airlines and other carriers, particularly Continental and Northwest. Members may also receive mileage credits pursuant to exchange agreements maintained by Hawaiian with a variety of entities, including hotels, car rental firms, credit card issuers and long distance telephone service companies. The Company also sells mileage credits to other companies participating in the program.
HawaiianMiles members are entitled to a choice of various awards based on accumulated mileage, with a majority of the awards being certain free air travel at a later date. Travel awards available in the HawaiianMiles program range from a 5,000 mile award, which offers a one-way Interisland flight, to 60,000 and 75,000 mile awards, which offer a round trip first-class Transpac flight and a round trip first-class Southpac flight, respectively. Miles traveled under the HawaiianMiles program are accounted for as revenue passenger miles, which, in turn, are used in the calculation of the Company's yield. Non-travel awards are valued at the incremental cost of tickets exchanged for such awards.
The Company recognizes a liability in the period in which members have accumulated sufficient mileage points to allow for award redemption. The liability is adjusted based on net mileage earned and utilized for award redemption on a monthly basis. The incremental cost method is used, computed primarily on the basis of fuel and catering costs, exclusive of any overhead or profit margin. In estimating the amount of such incremental costs to be accrued in the liability for potential future HawaiianMiles free travel, a current average cost per award mile is determined. Incremental fuel expended per passenger is based on engineering formulas to determine the quantity used for the weight of each added passenger and baggage. Such incremental quantity of fuel is priced at current levels. Catering is based on average cost data per passenger for the most recent 12-month period.
As of December 31, 1998 and 1997, HawaiianMiles members had accumulated approximately 3.7 billion and 3.0 billion miles, respectively, representing liabilities totaling approximately $1.1 million. The Company's accruals assume full redemption of mileage points. During the years ended December 31, 1998, 1997 and 1996, 1.2 billion, 736 million and 857 million award miles were redeemed, respectively.
The Company believes that the usage of free travel awards will not result in the displacement of revenue customers and, therefore, such usage will not materially affect the Company's liquidity or operating results. The use of free travel awards is subject to review by the Company to limit the possibility of displacing revenue passengers. HawaiianMiles travel redemption accounted for approximately 4.1%, 2.4% and 2.9% of Interisland traffic and a negligible percentage of Transpac and Southpac traffic in 1998, 1997 and 1996, respectively.
INFORMATION TECHNOLOGY SYSTEMS AND YEAR 2000
The Company is currently in the process of bringing a number of major information technology systems on line for strategic purposes as well as to address issues associated with the year 2000. These information technology projects are designed to either replace or enhance existing systems, including local and wide area networks, yield management and all or portions of revenue and financial accounting. Estimated external costs associated with these efforts is estimated to approximate $10 to $12 million, of which approximately $8 million had been incurred as of December 31, 1998.
In addition to replacing a number of core information systems, the Company has recognized the potential impact of the year 2000 on its operations and has established a dedicated director and Year 2000 Project Office to oversee the Company's compliance efforts. The Year 2000 Project Office operates on four tracks including 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. The strategy is to create a comprehensive review of mission critical systems as they apply to the continuum of Hawaiian Airlines' business operations.
STATE OF READINESS
The Company has and continues to perform constant awareness activities through regular informational briefings and newsletter updates, formal briefs of management and senior management, and the development of "personal Y2K kits" for all employees to address their concerns. The Company has initiated public relations activities, and is working with the Air Transport Association (the "ATA") 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 will be subjected to the same detailed audits.
Remediation of legacy systems is well underway with completion of all remediation expected before April 30, 1999. Hawaiian has contracted with external vendors to assist in its testing efforts and is currently developing the requisite background information prior to testing.
The Company continues an aggressive business partner management program and is in the process of following up with vital and important vendors via telephone survey. Critical vendors not covered under the ATA effort are planned for site visit by Hawaiian Airlines personnel.
Hardware assessments have found a very small amount of equipment being date aware, with no systems yet identified as requiring remediation. Currently, the Company believes that all mission critical systems will be remediated and tested by a target milestone of mid-1999.
ESTIMATED COSTS TO ADDRESS YEAR 2000 ISSUES
Because a substantial portion of the Company's information systems are being replaced by new applications that are represented to be Year 2000 compliant, the Company's remaining Year 2000 issues are primarily related to remediation of legacy code and assistance in conducting Year 2000 testing. The Company estimates that it will expend $1 to $2 million for such remediation and testing. This will be in addition to the $10 to $12 million for replacement of the Company's information systems as described above.
CONTINGENCY PLANS FOR HAWAIIAN AIRLINES
In addition to its normal operational disaster recovery plans, Hawaiian Airlines will be including Year 2000 specific 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, all critical, vital, and important systems will have appropriate contingency plans developed to address complete and partial systems failure. Contingency plans are expected to be completed in May 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. The Company is aggressively addressing both its supply and revenue chains to assess, to the best of the Company's knowledge, that both products and business operations of its partners are not adversely affected by the Year 2000 problem.
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 Federal Aviation Administration) to operate properly beyond 1999. There can be no assurance that such systems will be modified for Year 2000 operational requirements on a timely basis. Because of the variables associated with the year 2000 date problem, management cannot give assurance that in-progress
system transitions will be sufficient or assure that the Company will not be affected by the year 2000 issue in some form or manner.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to certain market risks related to its aircraft fuel. Refer to BUSINESS, OPERATIONS, FUEL contained in Part I, Item 1 of this Form 10-K and DERIVATIVE FINANCIAL INSTRUMENTS, as described above for further discussion on aircraft fuel and related financial instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Financial Statements, accompanying Notes and related Independent Auditors' Report and Selected Financial and Statistical Data are contained in Part IV, Item 14 of this Form 10-K and are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information provided in the Company's 1999 Proxy Statement is incorporated herein by reference other than the following, which comprise the Executive Officers of the Company.
JOHN W. ADAMS has been Chairman of the Board of Directors of Hawaiian Airlines since February 2, 1996 and he is also Chairman of the Executive Committee. He has been the President since 1984 of Smith Management Company, a private investment firm. He was a member of the Board of Directors of Harvard Industries, Inc. from October 1994 until November 1998, and was Chairman of the Board and Chief Executive Officer from February 1997 until November 1998. He served on the Board of Directors of Servico, Inc., a lodging owner and management company, from April 1994 until August 1997, being Chairman of the Board from December 1995 until he resigned from the Board. Mr. Adams was Chairman of the Board of Directors of Regency Health Services, Inc. from July 1994 until October 1997. Age 55.
PAUL J. CASEY has been President and Chief Executive Officer of Hawaiian Airlines since April 1997. He has also been a director and a member of the Executive Committee of Hawaiian Airlines since April 1997. He was the President and Chief Executive Officer of the Hawaii Visitors and Convention Bureau from 1995 until March 1997. He was Managing Director-Asia/Pacific of the Thomas Cook Group during 1994. He was Vice President-International Division of Continental Airlines from 1991 until 1994, and Vice President-Asia/Pacific of Continental Airlines from 1985 until 1991. Age 53.
JOHN L. GARIBALDI has been Executive Vice President and Chief Financial Officer of Hawaiian Airlines since May 1996. He was Vice President and Chief Financial Officer of the Queen's Health Systems from 1992 until 1996 and Senior Vice President-Finance and Planning and Chief Financial Officer of Aloha Airgroup, Inc./Aloha Airlines, Inc. from 1985 until 1992. Age 46.
JOHN B. HAPP has been Senior Vice President-Marketing & Sales of Hawaiian Airlines since December 15, 1997. He served dual roles of Vice President Market Planning for LTU Airlines and Vice President Marketing for their subsidiary, Go America, from 1996 to 1997. From 1989 to 1996, he held various senior marketing and business development positions at Continental Airlines, Inc., including most recently Managing Director of the Newark Business Unit. Age 43.
RUTHANN S. YAMANAKA has been Senior Vice President-Human Resources of Hawaiian Airlines since March 1, 1998. She was Senior Vice President-Assistant Director, Human Resources for Bank of Hawaii from July 1994 through February 1998 and Manager, Quality Assurance Administration from 1988 to 1994. Age 45.
LYN F. ANZAI has been Vice President-General Counsel and Corporate Secretary of Hawaiian Airlines since July 1997. She was Senior Counsel in the Corporate/Investment Legal Division of Kamehameha Schools Bishop Estate from November 1990 until July 1997. Age 56.
DAVID M. BOAZ has been Vice President-Flight Operations of Hawaiian Airlines since June 1997. He was Managing Director of Delta Airlines, Inc. in the People's Republic of China from 1996 to 1997. He was Chief Pilot in Los Angeles for Delta Airlines, Inc. from 1991 until 1996. Age 62.
H. NORMAN DAVIES JR. has been Vice President-Safety and Security of Hawaiian Airlines since January 6, 1997. He was Chief Pilot in New York for Delta Airlines, Inc. from November 1991 until June 1996. Age 62.
MICHAEL P. LOO has been Vice President-Controller of Hawaiian Airlines since 1996. He was Staff Vice President-Controller of Hawaiian Airlines from 1994 until 1995. He was previously with KPMG LLP until 1993. Age 34.
CLARENCE K. LYMAN has been Vice President-Finance, Treasurer and Assistant Corporate Secretary of Hawaiian Airlines since 1991. Age 53.
GLEN L. STEWART has been Vice President-Transpacific and Southpacific Marketing of Hawaiian Airlines since 1993. He was Senior Vice President-Transpacific of Hawaiian Airlines from 1991 to 1993. Age 56.
GLENN G. TANIGUCHI has been Vice President-Schedule Planning and Reservations of Hawaiian Airlines since 1995. He was Staff Vice President-Schedule Planning and Reservations of Hawaiian Airlines from 1991 until 1995. Age 56.
Effective February 1, 1999, Blaine J. Miyasato was appointed Vice President-In-Flight, Catering and Product Development of Hawaiian Airlines. From 1993 to 1998 he held various senior positions at the Company including most recently Senior Director-In-Flight, Product Development & Catering. Age 36.
Effective March 1, 1999, Edward W. Pinion was appointed Vice President-Purchasing of Hawaiian Airlines. He was manager of aviation fuels for BHP/Tesoro from March 1996 until 1999. From 1994 to 1996, he was Commander of the Defense Fuel Region, Pacific, and Commander of the Defense Logistics Agency, Pacific, at Camp H.M. Smith. Age 48.
All officers are appointed annually by the Board of Directors at their first meeting after the annual meeting of stockholders at which the Board of Directors is elected.
No executive officer of the Company bears any relationship by blood, marriage or adoption to any other executive officer or director, except that John W. Adams' sister is married to director Robert G. Coo.
In September 1993, the Company, HAL, INC. and West Maui Airport, Inc. filed a voluntary petition for relief under Chapter 11. At the time or within two years before the time of the Chapter 11 filing, Messrs. Lyman and Stewart were executive officers of the Company, HAL, INC. and/or West Maui Airport, Inc.
Information provided in the Company's 1999 Proxy Statement is incorporated herein by reference for Part III, Items 11 through 13 of this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
Independent Auditors' Report.
Balance Sheets, December 31, 1998 and 1997.
Statements of Operations for the Years ended December 31, 1998, 1997 and 1996.
Statements of Shareholders' Equity and Comprehensive Income for the Years ended December 31, 1998, 1997 and 1996.
Statements of Cash Flows for the Years ended December 31, 1998, 1997 and 1996.
Notes to Financial Statements.
Quarterly Financial Information (Unaudited).
Selected Financial and Statistical Data.
2. Financial Statement Schedule.
Independent Auditors' Report on Financial Statement Schedule for the Years Ended December 31, 1998, 1997 and 1996.
Schedule of Valuation and Qualifying Accounts.
Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
Exhibit 3 Articles of Incorporation, Bylaws
(1) Restated Articles of Incorporation of the Company filed as Exhibit 3(a) to the Company's Registration Statement on Form S-3 as filed December 31, 1998 is incorporated herein by reference.
(2) Amended and Restated Bylaws of the Company filed as Exhibit 3.1 to the Company's Current Report on Form 8-K as filed September 14, 1998 is incorporated herein by reference.
Exhibit 4 Instruments Defining the Rights of Security Holders Including Indentures
(1) Rights Agreement dated December 23, 1994 filed as Exhibit (1) to the Company's current report on Form 8-K during the fourth quarter of 1994 (date of report - December 23, 1994) is incorporated herein by reference.
(2) The following Agreements filed as Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 are incorporated herein by reference:
(a) Amendment No. 1 dated as of May 4, 1995 to Rights Agreement dated
as of December 23, 1994 by and between Hawaiian Airlines, Inc. and Chemical Trust Company of California;
(b) Amendment No. 1 to 1994 Stock Option Plan dated as of May 4, 1995;
(c) Amendment No. 1 dated as of May 4, 1995 to Warrants Nos. 1-10.
(3) 1994 Stock Option Plan, as amended, filed as Exhibit 4 to the Company's Registration Statement on Form S-8 as filed November 15, 1995 is incorporated herein by reference.
(4) The following Agreements filed as Exhibit 4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 are incorporated herein by reference:
(a) Rightsholders Agreement dated as of January 31, 1996, by and among Hawaiian Airlines, Inc., Airline Investors Partnership, L.P., AMR Corporation, Martin Anderson and Robert Midkiff;
(b) Amendment No. 2 to the Rights Agreement, as amended, dated as of January 31, 1996 by and between Hawaiian Airlines, Inc. and Chemical Trust Company of California;
(b) Amendment No. 2 to 1994 Stock Option Plan, as amended, dated as of December 8, 1995.
(5) 1996 Stock Incentive Plan, as amended, filed as Exhibit 4 to the Company's Amendment No. 1 to Registration Statement on Form S-2 as filed July 12, 1996 is incorporated herein by reference.
(6) Amendment No. 3 to the Rights Agreement, as amended, dated as of May 21, 1998, by and between Hawaiian Airlines, Inc. and ChaseMellon Shareholder Services, L.L., C., as successor to Chemical Trust Company of California, filed as Exhibit 4 to the Company's Amendment No. 2 to Registration Statement on Form 8-A as filed May 22, 1998 in incorporated herein by reference.
(7) Amendment No. 4 to the Rights Agreement, as amended, dated as of August 28, 1998, by and between Hawaiian Airlines, Inc. and ChaseMellon Shareholder Services, L.L., C., as successor to Chemical Trust Company of California, filed as Exhibit 5 to the Company's Amendment No. 3 to Registration Statement on Form 8-A as filed September 14, 1998 in incorporated herein by reference.
(8) The Company agrees to provide the Securities and Exchange Commission, upon request, copies of instruments defining the rights of security holders of long-term debt of the Company.
Exhibit 10 Material Contracts
(a) The following contracts filed as Exhibit 10 to the Company's Amendment No. 1 to Registration Statement on Form S-2 as filed July 12, 1996 are incorporated herein by reference:
(1) Aircraft Lease Agreement dated as of May 15, 1996 between American Airlines, Inc. and Hawaiian Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 406 for certain portions thereof;
(2) Cooperative Marketing Agreement between Northwest Airlines, Inc. and Hawaiian Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 406 for certain portions thereof;
(b) The following contracts filed as Exhibit 10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 are incorporated herein by reference:
(1) Code Sharing Agreement dated November 26, 1996 by and between Hawaiian Airlines, Inc. and Reno Air filed in redacted form since confidential treatment has been requested pursuant to Rule 24b-2 for certain portions thereof;
(2) Software Development, Maintenance, and License Agreement dated as of December 31, 1996 by and between SABRE Decision Technologies, a division of The SABRE Group, Inc. and Hawaiian Airlines, Inc.;
(3) Hawaiian Airlines, Inc. 1996 Nonemployee Director Stock Option Plan;
(4) Employment Agreement dated as of May 1, 1996 by and between John L. Garibaldi and the Company;
(5) Form of Secured Promissory Note dated September 12, 1996;
(6) Form of Stock Pledge Agreement dated as of September 12, 1996.
(c) The following contracts filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 are incorporated herein by reference:
(1) Code Share Agreement, dated January 6, 1997, between the Company and Wings West Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof;
(2) Amendment No. 1 to Code Share Agreement, dated as of January 21, 1997, between the Company and Wings West Airlines, Inc.;
(3) Information Technology Services Agreement, dated as of February 1, 1997, between the Company and Electronic Data Systems Corporation filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof;
(4) Aircraft Lease Agreement, dated as of January 3, 1997, between the Company and American Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof;
(5) Separation Agreement and Complete Settlement and Release of All claims, dated as of February, 1997, between the Company and Bruce R. Nobles;
(6) Employment Agreement, effective as of April 14, 1997, between the Company and Paul John Casey.
(d) Code Share Agreement, dated July 15, 1997, between the Company and American Airlines, Inc. filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 are incorporated herein by reference.
(e) The following contracts filed as Exhibit 10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 are incorporated herein by reference:
(1) Employment Agreement, effective as of December 15, 1997, between the Company and John B. Happ;
(2) Employment Agreement, effective as of March 1, 1998, between the Company and Ruthann S. Yamanaka;
(3) Form of warrant for the Purchase of 25,696 shares of Class A Common Stock issued to AMR Corporation;
(4) Form of Addendum to Warrant for the Purchase of Shares of Common Stock;
(5) Form of Amendment No. 1 to Warrant Certificate No. 12 for the Purchase of Shares of Common Stock;
(6) Form of Amendment No. 2 to Warrant Certificate No. 12 for the Purchase of Shares of Common Stock;
(7) Form of Amendment No. 1 to Warrant Certificate No. 23 for the Purchase of Shares of Common Stock;
(8) Form of Amendment No. 2 to Warrant Certificate No. 23 for the Purchase of Shares of Common Stock;
(9) Aircraft Lease Agreement dated as of May 9, 1997, between American Airlines, Inc. and Hawaiian Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof;
(10) Aircraft Lease Agreement dated as of December 12, 1997, between American Airlines, Inc. and Hawaiian Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof.
(f) Aircraft Loan Agreement dated December 29, 1998, between Bank of Hawaii and Hawaiian Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof;
(g) Aircraft Sale and Purchase Agreement dated November 18, 1998, between Fin 3 Limited and Hawaiian Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof.
(h) Form of Passenger Aircraft Charter Agreement dated November 9, 1997, effective February 1, 1998 between Hawaiian Vacations, Inc. and Hawaiian Airlines, Inc.
(i) Form of Passenger Aircraft Charter Agreement dated November 2, 1998 between Renaissance Cruises and Hawaiian Airlines, Inc.
Exhibit 23 Consent of KPMG LLP.
Exhibit 24 Power of Attorney.
Exhibit 27 Financial data schedule.
EXHIBIT INDEX
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
HAWAIIAN AIRLINES, INC.
March 29, 1999 By /s/ PAUL J. CASEY -------------------------------------- Paul J. Casey President and Chief Executive Officer (Principal Executive Officer)
March 29, 1999 By /s/ JOHN L. GARIBALDI -------------------------------------- John L. Garibaldi Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
INDEPENDENT AUDITORS' REPORT
The Board of Directors Hawaiian Airlines, Inc.:
We have audited the accompanying balance sheets of Hawaiian Airlines, Inc. as of December 31, 1998 and 1997, and the related statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hawaiian Airlines, Inc. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles.
/s/ KPMG LLP Honolulu, Hawaii March 11, 1999
HAWAIIAN AIRLINES, INC. BALANCE SHEETS (IN THOUSANDS) DECEMBER 31, 1998 AND 1997
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
HAWAIIAN AIRLINES, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, 1998 AND 1997
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
HAWAIIAN AIRLINES, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
HAWAIIAN AIRLINES, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NET INCOME (LOSS) PER COMMON STOCK SHARE:
* Includes shares reserved for issuance under the Consolidated Plan of Reorganization dated September 21, 1993, as amended.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
HAWAIIAN AIRLINES, INC. STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
HAWAIIAN AIRLINES, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
HAWAIIAN AIRLINES, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
HAWAIIAN AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Hawaiian Airlines, Inc. ("Hawaiian Airlines" or the "Company") was incorporated in January 1929 under the laws of the Territory of Hawaii and is the largest airline headquartered in Hawaii, based on operating revenues of $426.4 million for 1998. The Company is engaged primarily in the scheduled transportation of passengers, cargo and mail. The Company's passenger airline business is its chief source of revenue. Scheduled passenger service consists of, on average and depending on seasonality, approximately 130 to 150 flights per day among the six major islands of the State of Hawaii ("Interisland"), daily service to Las Vegas and four key United States ("U.S.") West Coast gateway cities ("Transpac"), twice weekly service to Pago Pago, American Samoa and weekly service to Papeete, Tahiti in the South Pacific ("Southpac"). In 1998, the Company also operated, on average, six charter flights per week to Las Vegas and two charter rotations per week to Anchorage ("Overseas Charter"). The Company operates a fleet consisting of DC-9 aircraft and DC-10 aircraft.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with an original maturity of three months or less to be cash equivalents. Short-term cash equivalent investments at December 31, 1998 and 1997 were valued at cost and amounted to $27.0 million and $11.6 million, respectively.
INVESTMENT SECURITIES
Investment securities at December 31, 1997 consist of U.S. Treasury and mortgage-backed securities. The Company classifies its debt securities as available-for-sale with such securities recorded at cost, which approximates fair-value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.
INVENTORIES
Inventories consisting of flight equipment expendable parts and supplies are stated at average cost, less an allowance for obsolescence.
ASSETS HELD FOR SALE
Assets held for sale consisting of expendable inventory parts and rotable flight equipment are stated at the lower of average cost or net realizable value for expendable inventory parts and the lower of average cost or fair value less cost to sell for rotable flight equipment. As of December 31, 1998 and 1997, the Company had approximately $3.5 million and $5.3 million, respectively, of expendable inventory parts and rotable flight equipment held for sale internally or on a consignment basis with a third party.
PROPERTY AND EQUIPMENT
Owned property and equipment are stated at cost. Costs of major improvements are capitalized. Depreciation and amortization are provided on a straight-line basis over the following estimated useful lives:
Maintenance and repairs are charged to operations as incurred, except that (1) costs of overhauling engines are charged to operations in the year the engines are removed for overhaul and (2) scheduled heavy airframe overhauls and major structural modifications on DC-9 aircraft are recorded under the deferral method whereby the cost of overhaul is capitalized and amortized over the shorter of the period benefited or the lease term. Additionally, provision is made for the estimated cost of scheduled heavy airframe overhauls required to be performed on leased DC-9 aircraft prior to their return to lessors. Maintenance and repairs on DC-10 aircraft are charged to operations on a flight hour basis.
In 1997, the Company commenced concentrated efforts to update its information technology systems for strategic reasons. Direct external costs subsequent to the preliminary stage of these projects are capitalized as property and equipment. Capitalized costs are amortized on a straight-line basis over the estimated useful life of each installation or module once it is complete and ready for its intended use.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
The Company emerged from Chapter 11 bankruptcy on September 12, 1994 (the "Effective Date") with Hawaiian Airlines being the sole surviving corporation. Under fresh start reporting, the reorganization value of the entity was allocated to the Company's assets and liabilities on a basis substantially consistent with the purchase method of accounting. The portion of reorganization value not attributable to specific tangible or identifiable intangible assets of the Company is reflected as reorganization value in excess of amounts allocable to identifiable assets ("Excess Reorganization Value") in the accompanying balance sheets. Excess Reorganization Value is amortized on a straight-line basis over 20 years. Accumulated amortization at December 31, 1998 and 1997 totaled approximately $15.0 million and $11.7 million, respectively. The estimated income tax benefit from the expected utilization of net operating loss carryforwards arising prior to the Effective Date has also been applied as a reduction to Excess Reorganization Value. The Company will continue to assess and evaluate whether the remaining useful life of the asset requires revision or, through the use of estimated future undiscounted cash flows over the remaining life of the asset, whether the remaining balance of the asset is recoverable. The assessment of the recoverability of the unamortized amount will be impacted if estimated future operating cash flows are not achieved.
ACCRUED VACATION LIABILITY
Accrued vacation in excess of the amount expected to be taken by employees during the following year is classified as a noncurrent liability.
FREQUENT FLYER AWARDS
A liability for frequent flyer awards is recognized on the incremental cost basis in the period during which passengers have accumulated sufficient mileage for award redemption. Incremental costs primarily include fuel and catering.
PASSENGER REVENUES
Passenger fares are recorded as operating revenues when the transportation is provided. The value of unused passenger tickets is included as air traffic liability.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments comprised of crude oil forward and options contracts to manage market risks and hedge its exposure to fluctuations in its aircraft fuel costs. Realized and unrealized changes
in the fair value of the derivative financial instruments are recognized in income in the period in which the change occurs. The Company's practice is to not hold or issue financial instruments for trading purposes.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
STOCK OPTION PLANS
The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (the "APB") No. 25, "Accounting for Stock Issued to Employees," in accounting for its fixed stock options. As such, compensation cost is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price.
EARLY EXTINGUISHMENT OF DEBT
In 1996, the Company paid approximately $4.7 million to GPA Group plc and its affiliate AeroUSA, Inc. to repurchase 827,221 shares of Common Stock and to repay approximately $4.5 million of long-term debt at a 15.0% discount, including any deferred costs and other expenses owed. These transactions resulted in an extraordinary gain, net of income taxes, of approximately $409,000.
Further, in December 1996, the Company exercised its option to prepay to American Airlines, Inc. ("American") a $10.25 million promissory note secured by certain assets of the Company (the "American Note"). The Company paid American $9.15 million plus accrued interest with all liens securing the American Note being released. Early extinguishment of the American Note resulted in an extraordinary gain, net of income taxes, of approximately $357,000.
BUSINESS PROCESS REENGINEERING COSTS
As promulgated by the Financial Accounting Standards Board's (the "FASB") Emerging Issues Task Force, in fourth quarter 1997, the Company wrote off business process reengineering costs which had been incurred and capitalized in the implementation of information technology projects. The write-off totaled approximately $450,000, net of income tax benefit of approximately $300,000 and is reflected as a cumulative effect of change in accounting principle in the accompanying statements of operations.
EARNINGS (LOSS) PER SHARE
Basic earnings per share represents income available to common shareholders divided by the weighted average number of Common Stock 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 shares were exercised or converted into Common Stock shares or resulted in the issuance of Common Stock shares that then shared in the earnings of the Company. Outstanding rights, warrants and options to purchase shares of the Company's Common Stock are not included in the computation of diluted earnings per share if inclusion of these rights, warrants and options is antidilutive. For 1998, 1997 and 1996, options and warrants to purchase approximately 1.4 million, 2.5 million and 4.0 million shares of Common Stock, respectively, were outstanding, but not included in the computation of diluted earnings per share as inclusion of these options and warrants would be antidilutive. See Note 9.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of air traffic liability, accruals for loss contingencies and the amounts reported for accumulated pension and other postretirement benefit obligations. Management believes that such estimates have been appropriately established in accordance with generally accepted accounting principles.
SEGMENT INFORMATION
Due to the centralization of the Company's operations in the State of Hawaii and the interdependence of its routes, management considers its operations to be one industry segment.
RECLASSIFICATIONS
Certain prior year amounts were reclassified to conform to the 1998 presentation. Such reclassifications had no effect on previously reported financial condition and/or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 requires reclassification of financial statements for earlier periods provided for comparative purposes.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 requires restatement of comparative information presented for earlier periods.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which amends the disclosure requirements of SFAS No. 87, "Employer's Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 addresses disclosure only and does not change any of the measurement or recognition provisions provided for in SFAS Nos. 87, 88 or 106. SFAS No. 132 requires restatement of comparative information presented for earlier periods.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
In March 1998, the American Institute of Certified Public Accountants Accounting Standards Executive Committee (the "AcSEC") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. SOP 98-1 also requires that costs related to the preliminary project stage and the post-implementation/operations stage, as defined, in an internal-use computer software development project be expensed as incurred. SOP 98-1 is effective for fiscal years beginning after December 15, 1998.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. The provisions of SOP 98-5 are effective for fiscal years beginning after December 15, 1998.
The Company adopted the provisions of SFAS Nos. 130, 131 and 132 effective January 1, 1998. Adoption of SFAS No. 130 did not result in the reclassification of comparative financial statement information presented for earlier periods. Adoption of SFAS No. 131 did not result in a modification to the Company's reporting segment and accordingly, comparative financial statement information presented for earlier periods was not restated. The Company's disclosures regarding pension and other postretirement benefits for prior periods have been restated to comply with the provisions of SFAS No. 132. Further, management does not expect the adoption of SFAS No. 133, SOP 98-1 or SOP 98-5 by the respective required dates to have a material impact on the Company's financial condition, results of operations, liquidity and/or previously reported financial information.
3. FINANCIAL INSTRUMENTS AND FAIR VALUES
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying amount of notes receivable from Common Stock sales approximates fair value as the terms of such instruments are reflective of terms offered for similar instruments of comparable maturities.
The cost of investment securities held at December 31, 1997, consisting of U.S. Treasury and mortgage-backed securities amounted to $3.0 million and $1.0 million, respectively, which approximates fair value. Investment securities held at December 31, 1997 are classified as available-for-sale and were sold during 1998. Realized gains and losses from the sale of such securities were not material in 1998 or 1997.
The estimated fair values of long-term debt amounted to $17.6 million and $6.3 million at December 31, 1998 and 1997, respectively. These fair values were estimated by discounting the future cash flow requirements of each instrument at rates currently offered at the respective year-end dates to the Company for similar debt instruments of comparable maturities.
In 1997, the Company began utilizing derivative financial instruments comprised of crude oil forward and options contracts to hedge its financial exposure resulting from fluctuations in its aircraft fuel costs. At December 31, 1998, the Company had petroleum forward contracts to purchase 45,000 barrels of crude oil in the aggregate amount of $722,000 through February 1999. The estimated fair value and carrying value of these outstanding contracts was a net receivable of $200,000 at December 31, 1998. Realized and unrealized losses on such contracts amounted to $2.3 million and $1.1 million in 1998 and 1997, respectively, and are included as a component of aircraft fuel expense. The estimated fair value of these contracts are based on quoted market prices and generally have maturities of one year or less. The contracts are either exchanged or traded with counterparties of high credit quality; therefore, the risk of non-performance by the counterparties is considered to be negligible.
4. FLIGHT EQUIPMENT
All of the Company's aircraft are leased except for one DC-10 and three DC-9s. At December 31, 1998 and 1997, the composition of the Company's aircraft fleet is as follows:
In November 1998, the Company entered into a purchase agreement for two used DC-10-30 aircraft. As of December 31, 1998, the Company had taken delivery of one DC-10-30 aircraft. Delivery of the second DC-10-30 aircraft took place during the first quarter 1999, subject to long term debt financing to be in place by the end of the first quarter 1999. Efforts have also commenced to acquire a third DC-10-30.
In December 1998, the Company entered into a purchase agreement to acquire two used DC-9-50 aircraft. The aircraft will be used in the Interisland market. At December 31, 1998, the first DC-9-50 had been delivered. Delivery of the second DC-9-50 is anticipated in first quarter 1999.
At December 31, 1998, the Company had purchase commitments for one DC-10-30 aircraft and one DC-9-50 aircraft in an aggregate amount of approximately $15 million.
5. LEASES
AIRCRAFT LEASES
Ten DC-10 aircraft are leased from American under operating leases which expire in 2001. Effective January 31, 1996, the Company and American agreed to a reduction in basic rents due on DC-10 operating leases by approximately 28% through January 31, 1999, at which time such rents revert to their original levels. Rent has been expensed under the straight line method. Five and six DC-9 aircraft and related flight equipment are leased under operating and capital leases, respectively, for various periods through the year 2004. Most of the operating leases for DC-9 aircraft include renewal options and fair market value purchase options at the end of the lease period.
OTHER LEASES
The Company leases office space for its headquarters, airport facilities, ticket offices and certain ground equipment in varying terms to 2008.
GENERAL
Rent expense for aircraft, office space, real property and other equipment during 1998, 1997 and 1996 was $28.4 million, $26.6 million and $26.7 million, respectively, net of sublease rental income from operating leases of $66,000, $50,000 and $102,000, respectively.
Scheduled future minimum lease commitments under operating and capital leases for the Company as of December 31, 1998, in thousands, are as follows:
In addition to scheduled future minimum lease payments, the Company is required to pay for, under agreement with American, monthly DC-10 maintenance charges. These charges are based on flight hours for the month and are expensed as incurred. See Note 11. For the years ended December 31, 1998, 1997 and 1996, the Company incurred $55.4 million, $50.9 million and $45.2 million, respectively, in maintenance charges under such agreement.
The net book value of property held under capital leases as of December 31, 1998 and 1997 totaled $19.8 million and $21.4 million, respectively. Amortization of property held under capital leases is included in depreciation and amortization expense in the accompanying statements of operations.
6. DEBT
At December 31, 1998 and 1997, the Company's long-term debt consists of the following, in thousands:
Secured obligations due 1999-2005 are as follows:
(1) A promissory note executed in 1998 for the acquisition of a used DC-10-30 aircraft. The note is secured by lien on the aircraft, as described in the security agreement. The note is due in 2005 and is payable in monthly installments of principal and interest of $131,553. Interest accrues at 8.15% per annum. At December 31, 1998, $8.4 million was outstanding;
(2) A promissory note executed in 1998 for the acquisition of a used DC-9-50 aircraft. The note is secured by first priority liens on the aircraft, other collateral as described in the security agreement and a $1.0 million letter of credit issued under the Credit Facility defined below. The note is due in 2005 and is payable in monthly installments of principal and interest ranging from $78,039 to $34,673. Interest accrues at 8.95% per annum. At December 31, 1998, $4.3 million was outstanding;
(3) A secured note executed in 1993 for the purchase of a DC-9 aircraft from a lessor. The mortgage note is due in 1999 and is payable in monthly installments of principal and interest of $59,876. Interest accrues at 10.315% per annum. At December 31, 1998 and 1997, $405,000 and $1.0 million, respectively, were outstanding;
(4) The Company maintains a Credit Facility with CIT Group/Credit Finance, Inc. (the "Credit Facility"). The Credit Facility consists of two secured term loans and a secured revolving line of credit including up to $6.0 million of letters of credit. The term loans will amortize in equal installments over periods of 48 and 60 months, respectively. The outstanding principal amounts of the term loans will become due and payable upon termination of the Credit Facility. Available credit is subject to change determined by recalculation of the borrowing base, repayments due under the term loans and repayments arising from the disposition and other changes in the related collateral securing the Credit Facility. The Credit Facility has an initial term of three years from April 29, 1996 and renews automatically for successive terms of two years each, unless terminated by either party on at least 60 days notice prior to the end of the then-current term. Interest accrues at prime plus 2.0% (8.16% at December 31, 1998). The Company may terminate the Credit Facility at any time, on 30 days notice and payment of certain early termination fees during the initial term and without termination fees during any renewal term.
As of December 31, 1998, the total availability under the Credit Facility was $11.1 million with aggregate term loans and letters of credit outstanding in the amounts of $4.9 million and $1.1 million, respectively. As of December 31, 1997, the total availability under the Credit Facility was $11.9 million with aggregate term loans and letters of credit outstanding in the amounts of $5.2 million and $100,000, respectively.
The Credit Facility is secured by a first lien on substantially all of the Company's property, excluding the Company's owned and leased aircraft, the Company's aircraft engines while installed on an aircraft and certain
security deposits. In addition, terms of the Credit Facility restrict the Company from paying any cash or stock dividends on its Common Stock.
Other obligations paid in 1998 represented priority tax claims for various taxing jurisdictions recognized upon the Company's emergence from Chapter 11 bankruptcy. The obligations bore interest at 7.0% per annum and were payable in 24 quarterly installments commencing on the first anniversary of the Effective Date.
Maturities of long-term debt for the Company, including those estimated for the Credit Facility, as of December 31, 1998, in thousands, are as follows:
7. INCOME TAXES
Income tax expense is based on an estimated annual effective tax rate, which differs from the federal statutory rate of 35% in 1998 and 34% in 1997 and 1996, primarily due to state income taxes and certain nondeductible expenses. The Company's reorganization and the associated implementation of fresh start reporting gave rise to significant items of expense for financial reporting purposes that are not deductible for income tax purposes.
The estimated income tax benefit from the expected utilization of net operating loss carryforwards arising prior to the Effective Date has been, and will continue to be, applied as a reduction to Excess Reorganization Value, not as a reduction to income tax expense. While generally accepted accounting principles require that a provision for income tax be recorded, a majority of the provision for 1998, 1997 and 1996 will not require cash outlay as it will be offset by net operating loss carryforwards available to the Company. As noted, in 1998 and in 1997 and 1996, approximately $7.4 million and $1.3 million, respectively, of estimated income tax benefit from the expected utilization of these net operating loss carryforwards has been applied as a reduction to Excess Reorganization Value.
Income tax expense in 1998, 1997 and 1996 differs from the "expected" tax expense (benefit) for that year computed by applying the respective year's U.S. federal corporate income tax rate to income (loss) before income taxes, extraordinary items and cumulative effect of change in accounting principle as follows:
The tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below, in thousands:
The valuation allowance for deferred tax assets as of January 1, 1998, 1997 and 1996 was $34.1 million, $35.3 million and $47.2 million, respectively. The net change in the total valuation allowance for the years ended December 31, 1998, 1997 and 1996 were decreases of $12.6 million, $1.2 million and $11.9 million, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
The Company underwent an ownership change in January 1996, as defined under Section 382 of the Internal Revenue Code ("IRC Section 382"). IRC Section 382 places an annual limitation on the amount of income that can be offset by net operating loss carryforwards generated in pre-ownership change years. The ownership change resulted in an IRC Section 382 limitation of approximately $1.7 million plus certain "built-in" income items. This new limitation applies to all net operating losses incurred prior to the ownership change. As of December 31, 1998, the Company has total net operating loss carryovers of approximately $33.4 million to offset future taxable income. If not utilized to offset future taxable income, the net operating loss carryforwards will expire between the years 2003 and 2009. If, in future years, the Company were to recognize income tax benefit from the utilization of net operating loss carryforwards arising prior to the Effective Date, such benefit will be applied as a reduction to Excess Reorganization Value.
8. BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS
The Company sponsors three defined benefit pension plans covering its Air Line Pilots Association, International ("ALPA"), International Association of Machinists and Aerospace Workers (AFL-CIO) ("IAM") and salaried personnel. The plans for the IAM and salaried employees were frozen effective October 1, 1993. As a result of the freeze, there will be no further benefit accruals and no additional participants in those plans. Pension cost for the pilots plan is funded on a current basis based on the amortization of prior service cost over 20 years. Funding for the ground personnel plans is based on minimum Employee Retirement Income Security Act of 1974 requirements. Plan assets
consist primarily of common stocks, government and convertible securities, insurance contract deposits and cash management and mutual funds.
In addition to providing pension benefits, the Company sponsors two unfunded defined benefit postretirement medical and life insurance plans. Employees in the Company's pilot group are eligible for certain medical and life insurance benefits under one plan if they become disabled or reach normal retirement age while working for the Company. Employees in the Company's non-pilot group are eligible for certain medical benefits under another plan if they meet specified age and service requirements at the time of retirement.
The following tables summarize changes to benefit obligations, plan assets, funded status and amounts included in the accompanying balance sheets as of December 31, 1998 and 1997, in thousands:
At December 31, 1996, the discount rate, expected return on plan assets and rate of compensation increase for pension benefits was 7.75%, 9.0% and 4.5%, respectively. At December 31, 1996, the discount rate and rate of compensation increase for other benefits was 7.75% and 4.5%, respectively. The rate of compensation increase is not applicable to the frozen plans. At December 31, 1998, the health care cost trend rate was assumed to increase by 7.3% for 1999 and decrease gradually to 4.0% over 7 years and remain level thereafter.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets, in thousands, were $136,087, $122,719 and $105,197, respectively, as of December 31, 1998 and $107,009, $95,440 and $91,107, respectively, as of December 31, 1997.
The following table sets forth the net periodic benefit cost for the years ended December 31, 1998, 1997 and 1996:
Assumed health care cost trend rates have a significant impact on the amounts reported for other benefits. A one-percentage point change in the assumed health care cost trend rates would have the following effects:
OTHER BENEFIT PLANS
The Company sponsors separate deferred compensation plans (401(k)) for its pilots, flight attendants and ground and salaried personnel. Participating employer cash contributions are not required under the terms of the pilots' plan. The Company is required to contribute up to 7.0% of defined compensation pursuant to the terms of the flight attendants' plan. Contributions to the flight attendants' plan are funded currently and totaled approximately $1.3 million in 1998 and $1.1 million in 1997 and 1996, respectively. The Company is also required to contribute 4.0% of eligible earnings to the ground and salaried plan for eligible employees as defined by the plan. Contributions to the ground and salaried 401(k) plan totaled $2.0 million, $1.8 million and $1.6 million in 1998, 1997 and 1996, respectively.
The Company further sponsors a profit sharing plan, which provides all employees (other than senior management) with cash bonuses if the Company achieves certain pre-tax profit levels. At December 31, 1998, the Company has provided for approximately $760,000 under the provisions of the profit sharing plan, with distribution of the amounts, as defined by the plan, to occur in first quarter 1999.
9. CAPITAL STOCK, WARRANTS, RIGHTS AND OPTIONS
AUTHORIZED CAPITAL STOCK
As of December 31, 1998 and 1997, the authorized capital stock of the Company consists of 60,000,000 shares of Common Stock, par value $.01 per share, and 2,000,000 shares of Special Preferred Stock, par value $.01 per share.
Under the terms of the Credit Facility, the Company is restricted from paying any cash or stock dividends. No dividends were paid by the Company in 1998 or 1997.
SPECIAL PREFERRED STOCK
Four shares of Series B Special Preferred Stock are owned by Airline Investors Partnership, L.P. ("AIP") with such shares entitling AIP to nominate directors. The Association of Flight Attendants ("AFA"), IAM and ALPA each hold one share of Series C Special Preferred Stock, Series D Special Preferred Stock and Series E Special Preferred Stock, respectively, (collectively the "Special Preferred Stock") which entitle each union to nominate one director. The holders of each series of the Special Preferred Stock are entitled to fill a vacancy on the Board of Directors caused by the removal, resignation or death of a director nominated by that series if the Board fails to fill such vacancy within 30 days. AIP has agreed with each of IAM, ALPA and AFA that so long as the right to have a representative on the Board is in its respective collective bargaining agreement, AIP will vote its shares in favor of such union's nominee for the Board of Directors. In addition to the rights described above, the Special Preferred Stock (1) is senior to Common Stock and each series is PARI PASSU with each other with respect to rights on liquidation, dissolution and winding up and will be entitled to receive $.01 per share, and no more, before any payments are made to holders of any stock ranking junior to the Special Preferred Stock; (2) has no dividend rights other than at any time that a dividend is declared and paid on the Common Stock dividends in an amount per share equal to twice the dividend per share paid on the Common Stock will be paid on the Special Preferred Stock; (3) is entitled to one vote per share and votes with the Common Stock as a single class on all matters submitted to the shareholders of the Company; (4) automatically converts into one share of Common Stock upon the transfer of such share from the person to whom originally issued to any person that is not an affiliate of such person; and (5) does not have preemptive rights in connection with future issuances of the Company's capital stock.
SHAREHOLDER RIGHTS PLAN
In December 1994, the Board of Directors of the Company authorized adoption of a shareholder rights plan (the "Rights Plan") pursuant to which there would be attached to each share of Common Stock of the Company one preferred stock purchase right (a "PSP Right"). The Rights Plan, as amended, provides that in the event any person (with certain exceptions) becomes the beneficial owner of 15.0% or more of the outstanding common shares, each PSP Right (other than a PSP Right held by the 15.0% shareholder) will be exercisable, on and after the close of business on the tenth business day following such event, to purchase Hawaiian Airlines Common Stock at 50% of the market value of such stock. The Rights Plan further provides that if, on or after the occurrence of such event, the Company is merged into any other corporation or 50.0% or more of the Company's assets or earning power are sold, each PSP Right (other than a PSP Right held by the 15.0% shareholder) will be exercisable to purchase common shares of the acquiring corporation at 50% of the market value of such stock. The PSP Rights expire on December 1, 2004 (unless previously triggered) and are subject to redemption by the Company at $0.01 per PSP Right at any time prior to the first date upon which they become exercisable.
WARRANTS
In January 1996, due to its participation in certain recapitalization efforts of the Company, American's parent company, AMR Corporation ("AMR"), received, among other things, warrants (the "AMR Warrants") which, subject to certain conditions, entitled AMR to purchase up to 1,949,338 shares of the Company's Common Stock at $1.07 per share, as adjusted pursuant to applicable anti-dilution provisions. One-half of the warrants were exercisable immediately and the remaining one-half were to become exercisable only if American and the Company entered into a code sharing arrangement. In July 1997, the Company consummated the code share marketing agreement with American. All of the warrants became exercisable upon implementation of the code share agreement with American on March 2, 1998. If not exercised, the warrants expire on September 11, 2001. The estimated fair value of the codeshare agreement and the underlying warrants approximated $2.3 million and has been reflected in the accompanying balance sheets as warrants and other assets. The amount included in other assets is being amortized on a straight-line basis over five years from the implementation date of the code share agreement.
Pursuant to its reorganization in 1994, the Company granted warrants to certain individuals (the "Reorganization Warrants"), which entitled such individuals to purchase 1,618,972 shares of Common Stock at an exercise price of $1.67 per share, as adjusted for applicable anti-dilution provisions. As of December 31, 1997, all Reorganization Warrants to purchase 1,618,972 shares of Common Stock had been exercised.
STOCK OPTION PLANS
Under the 1994 Stock Option Plan, 600,000 shares of Common Stock were reserved for grants of options to officers and key employees of the Company. Under the 1996 Stock Incentive Plan, as amended, 4,500,000 shares of Common Stock were reserved for issuance of discretionary grants of options to the Company's employees. The Company also has a 1996 Nonemployee Director Stock Option Plan which reserves 500,000 shares of Common Stock for issuance and grants of options to members of the Board of Directors. Stock options are granted with an exercise price equal to the Common Stock's fair market value at the date of grant, generally vest over a period of four years and expire, if not previously exercised, 10 years from the date of grant.
Stock option activity during the periods indicated is as follows:
As of December 31, 1998, vesting requirements and exercise periods under each respective plan are as follows:
At December 31, 1998, the range of exercise prices and weighted-average remaining contractual lives of outstanding options was $1.62 to $4.06 and 7.8 years, respectively.
At December 31, 1998, 1997 and 1996, the number of options exercisable was 252,000, 322,500 and 485,000, respectively, with weighted-average exercise prices of $3.14, $2.53 and $2.36, respectively.
The Company applies APB Opinion No. 25 in accounting for stock options. Had the Company determined compensation cost based on the fair value at the grant date of the respective options under SFAS No. 123, the Company's net income (loss) would have been reduced or increased to the pro forma amounts indicated below:
The per share weighted-average fair value of stock options granted during 1998, 1997 and 1996 was $1.78, $1.81 and $0.79, respectively, on the date of grant using a Black Scholes option-pricing model with the following weighted-average assumptions:
Pro forma net income (loss) reflects only options granted since December 31, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts presented above because compensation cost is reflected over the various options' vesting periods and compensation cost for options granted prior to January 1, 1996 is not considered.
10. COMMITMENTS AND CONTINGENT LIABILITIES
LITIGATION AND CONTINGENCIES
All claims asserted against the Company for alleged prepetition and/or administrative claims on or before the Effective Date of the Company's reorganization have been resolved utilizing reserved Common Stock shares and the Company's Chapter 11 Bankruptcy proceeding has been closed.
The Company is party to several other claims and legal actions. Also, the Company is involved in discussions with the State of Hawaii regarding general excise tax as it relates to leased aircraft. The matter is subject to continued discussion with no discernable amounts and/or arguments at this time. In the opinion of management, and after consultation with legal counsel, the Company believes that the ultimate disposition of these matters will not have a material adverse effect on the Company's operations or financial condition.
AIRCRAFT MAINTENANCE
Maintenance on the Company's DC-10 aircraft fleet is performed by American in accordance with the Federal Aviation Administration's (the "FAA") regulations and Hawaiian Airlines' approved maintenance program.
The Company anticipates that in the period 1999 through 2001, eight of its DC-9 aircraft will require heavy airframe overhaul checks (the "C5-Check", previously referred to as a D-Check). The C5-Check for a DC-9 requires more than 20,000 man-hours of maintenance work and includes stripping the airframe, extensively testing the airframe structure and a large number of parts and components, and reassembling the overhauled airframe with new or rebuilt components. The Company anticipates each C5-Check to cost approximately $1.0 million.
The FAA has and is expected to continue to require structural modifications and the replacement of certain parts, as well as the implementation of additional maintenance programs or changes to current programs, with respect to various types of aircraft over a certain age. These requirements vary, depending on the type of aircraft covered. Based on information currently available, the Company estimates that the total cost of complying with the aging aircraft requirements over the 1999 through 2003 period will approximate $660,000 per DC-9 aircraft.
The Company expects to incur approximately $100,000 per DC-9 aircraft per year for maintenance required under a corrosion prevention and control program. This program is anticipated to continue indefinitely in the future.
The FAA has mandated the installation of smoke detection and fire suppression systems in the cargo compartments of both DC-10 and DC-9 aircraft by December 2000. The cost for systems and installation is estimated to be $130,000 and $83,000 per each DC-10 and DC-9 aircraft, respectively.
As a result of certain incidents where Digital Flight Data Recorder ("DFDR") information was insufficient to determine the cause of the accident, the FAA has also mandated additional recording parameters for the DC-10 and DC-9 aircraft by the first heavy maintenance check after August 1999 but no later than August 2001. The DC-10 DFDR will be upgraded from 17 to 22 parameters at an estimated cost of $60,000 per aircraft. The DC-9 DFDR will be upgraded from 11 to 18 parameters at an estimated cost of $47,000 per aircraft.
During the period from 1999 through 2003, the Company anticipates continued implementation of its supplemental inspection document program for certain of its DC-9 aircraft, which is estimated to range up to $27,000 per aircraft.
The estimated future cost of complying with FAA regulations as discussed in the preceding paragraphs will be in addition to the costs of the Company's current DC-10 and DC-9 fleet maintenance programs.
LOS ANGELES AIRPORT OPERATING TERMINAL
On December 1, 1985, the Company entered into an interline agreement with other airlines for, among other things, the sharing of costs, expenses and certain liabilities related to the acquisition, construction and renovation of certain passenger terminal facilities at the Los Angeles International Airport ("Facilities"). Current tenants and participating members of LAX Two Corporation (the "Corporation"), a mutual benefit corporation, are jointly and severally obligated to pay their share of debt service payments related to Facilities Sublease Revenue Bonds issued to finance the acquisition, construction and renovation of the Facilities which totaled $111.9 million at completion. The Corporation
leases the Facilities from the Regional Airports Improvement Corporation under a lease agreement. In addition, the Corporation is also obligated to make annual payments to the city of Los Angeles for charges related to its terminal ground rental. All leases of the Corporation are accounted for as operating leases with related future commitments as of December 31, 1998 amounting to approximately $214.5 million. Rent expense relating to these operating leases totaled $4.9 million, $5.0 million and $4.8 million in 1998, 1997 and 1996, respectively.
Member airlines pay the expenses associated with the Facilities on a prorata share basis calculated primarily upon their respective numbers of passengers utilizing the Facilities. The Company accounts for its obligation under this agreement as an operating lease and incurred $592,000, $338,000 and $750,000 of rent expense in 1998, 1997 and 1996, respectively.
FREQUENT FLYER PROGRAM
The Company's HawaiianMiles frequent flyer program was initiated in 1983. As of December 31, 1998 and 1997, HawaiianMiles had more than 693,000 and 642,000 members, respectively, including approximately 518,000 and 432,000 active members, respectively.
The HawaiianMiles program allows passengers to earn mileage credits by flying Hawaiian Airlines and other carriers, particularly Continental Airlines, Inc. and Northwest Airlines, Inc. ("Northwest"). Members may also receive mileage credits pursuant to exchange agreements maintained by Hawaiian with a variety of entities, including hotels, car rental firms, credit card issuers and long distance telephone service companies. The Company also sells mileage credits to other companies participating in the program.
HawaiianMiles members are entitled to a choice of various awards based on accumulated mileage, with a majority of the awards being certain free air travel at a later date. Travel awards available in the HawaiianMiles program range from a 5,000 mile award, which offers a one-way Interisland flight, to 60,000 and 75,000 mile awards, which offer a round trip first-class Transpac flight and round trip first-class Southpac flight, respectively. Miles traveled under the HawaiianMiles program are accounted for as revenue passenger miles, which, in turn, are used in the calculation of the Company's yield. Non-travel awards are valued at the incremental cost of tickets exchanged for such awards.
The Company recognizes a liability in the period in which members have accumulated sufficient mileage points to allow for award redemption. The liability is adjusted based on net mileage earned and utilized for award redemption on a monthly basis. The incremental cost method is used, computed primarily on the basis of fuel and catering costs, exclusive of any overhead or profit margin. In estimating the amount of such incremental costs to be accrued in the liability for potential future HawaiianMiles free travel, a current average cost per award mile is determined. Incremental fuel expended per passenger is based on engineering formulas to determine the quantity used for the weight of each added passenger and baggage. Such incremental quantity of fuel is priced at current levels. Catering is based on average cost data per passenger for the most recent 12-month period.
As of December 31, 1998 and 1997, HawaiianMiles members had accumulated approximately 3.7 billion and 3.0 billion miles, respectively, representing liabilities totaling approximately $1.1 million. The Company's accruals assume full redemption of mileage points. During the years ended December 31, 1998, 1997 and 1996, 1.2 billion, 736 million and 857 million award miles were redeemed, respectively.
The Company believes that the usage of free travel awards will not result in the displacement of revenue customers and, therefore, such usage will not materially affect the Company's liquidity or operating results. The use of free travel awards is subject to review by the Company to limit the possibility of displacing revenue passengers. HawaiianMiles travel redemption accounted for approximately 4.1%, 2.4% and 2.9% of Interisland traffic and a negligible percentage of Transpac and Southpac traffic in 1998, 1997 and 1996, respectively.
11. RELIANCE ON THIRD PARTIES
The Company has entered into agreements with contractors, including American, Northwest and certain other airlines, to provide certain facilities and services required for its operations, including aircraft, code sharing, reservations, computer services, frequent flyer programs, aircraft maintenance, passenger processing, fuel, ground facilities, baggage and cargo handling and personnel training. This reliance on third parties to provide
services subjects the Company to various risks, including the risk that such services could be discontinued without adequate replacement services being available.
The Company leases ten DC-10 aircraft from American. American is responsible for maintenance on all of the Company's DC-10 aircraft (leased and owned) with the Company having access to spare parts, engines and rotables for the maintenance of these aircraft. As such, the Company does not maintain large inventories of spare engines or parts to support the operation of the DC-10 aircraft. The Company pays a minimum monthly charge for maintenance services, monthly in arrears. During 1998, the Company incurred approximately $69.6 million of lease and maintenance expenses under the American DC-10 aircraft leases. American has the right to terminate its obligation to provide aircraft maintenance services on and after January 1, 1999, upon 180 days prior notice. American has indicated to the Company its intent to provide maintenance services through September 2001, although it may still exercise its right to terminate upon 180 days prior notice. If American terminated the maintenance arrangement, the Company would have to seek an alternate source of maintenance service or maintain its DC-10s by itself. No assurance can be given that the Company would be able to do so on a basis that is as cost-effective as the American maintenance arrangement. See Notes 4 and 5. The Company also participates in American's AAdvantage frequent flyer program and SABRE reservation system. Commencing March 2, 1998, the Company and American also effected a code sharing agreement. These programs and services make the Company more competitive, but increases its reliance on third parties.
The Company purchases almost all of its aviation fuel from Northwest pursuant to an agreement which provides that, in case of shortages, Northwest will provide fuel to its own fleet first and then a portion of the remaining fuel available will be allocated between Hawaiian Airlines and any other applicable airlines. The agreement requires Northwest to provide Hawaiian Airlines with aviation fuel at Northwest's actual acquisition cost without markup for profit and with reimbursement only for out-of-pocket costs. The agreement is renewed automatically on December 31 of each year unless canceled by either of the parties with 90 days, written notice. Hawaiian Airlines is prohibited from reselling such fuel. No assurance can be given that the Company would be able to secure an adequate supply of fuel from alternate sources if a fuel shortage were to cause the supply from Northwest to be inadequate or if Northwest were to cancel the agreement. The Company paid Northwest approximately $60.7 million, $72.6 million and $70.9 million for the fuel supplied under this agreement in 1998, 1997 and 1996, respectively. Further, effective July 1996, the Company entered into a cooperative marketing agreement with Northwest, which provides for extensive marketing cooperation, including a code sharing arrangement and frequent flyer participation.
In 1998 and in both 1997 and 1996, a majority of the Company's ticket sales were made by travel agents, including approximately 40% and 30% by six large wholesalers. In 1998, one particular Hawaii-based wholesaler constituted approximately 13% of the Company's total operating revenues. Travel agents generally have a choice between one or more airlines when booking a customer's flight. Accordingly, any effort by travel agencies to favor another airline or to disfavor the Company could adversely affect the Company. Although management intends to continue to offer an attractive and competitive product to travel agencies and to maintain favorable relations with travel agencies, there can be no assurance that travel agencies will not disfavor the Company or favor other airlines in the future, either of which could have an adverse effect on the Company's operations.
12. CONCENTRATION OF BUSINESS RISK
The Company's scheduled service operations are primarily focused on providing air transportation service to, from, or throughout the Hawaiian Islands. Therefore, the Company's operations, including its ability to collect its outstanding receivables, are significantly affected by economic conditions in the State of Hawaii and by other factors affecting the level of tourism in Hawaii.
13. SEGMENT INFORMATION
Due to the centralization of the Company's operations in the State of Hawaii and the interdependence of its routes, management considers its operations to be one industry segment. The Company is engaged principally in one line of business, the scheduled and chartered transportation of passengers, which constitutes more than 90% of its operating revenues. The following table delineates scheduled and chartered passenger revenue of the Company, in thousands:
HAWAIIAN AIRLINES, INC. SUPPLEMENTAL FINANCIAL INFORMATION UNAUDITED QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
*Includes shares reserved for issuance under the Consolidated Plan of Reorganization dated September 21, 1993, as amended.
HAWAIIAN AIRLINES, INC. SELECTED FINANCIAL AND STATISTICAL DATA (IN THOUSANDS)
HAWAIIAN AIRLINES, INC. SELECTED FINANCIAL AND STATISTICAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
* Not Meaningful - Per share data is not meaningful as the Predecessor was recapitalized and adopted fresh start reporting as of September 12, 1994. ** Includes shares reserved for issuance under the Consolidated Plan of Reorganization dated September 21, 1993, as amended.
HAWAIIAN AIRLINES, INC. SELECTED FINANCIAL AND STATISTICAL DATA (IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED) (CONTINUED)
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors Hawaiian Airlines, Inc.:
Under date of March 11, 1999, we reported on the balance sheets of Hawaiian Airlines, Inc. as of December 31, 1998 and 1997, and the related statements of operations, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1998, which are included herein. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule as listed in item 14(a)(2). The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP Honolulu, Hawaii March 11, 1999
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HAWAIIAN AIRLINES, INC. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(a) Doubtful accounts written off, net of recoveries
(b) Obsolete parts and supplies written off
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