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| HA > SEC Filings for HA > Form 10-K on 8-Feb-2013 | All Recent SEC Filings |
8-Feb-2013
Annual Report
Overview
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the Company and our operations. This discussion and analysis of our financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. We have based these forward-looking statements on our current expectations and projections of future events. However, our actual results could differ materially from those discussed herein as a result of the risks that we face, including but not limited to those risks stated in "Risk Factors." See "Cautionary Note Regarding Forward-Looking Statements," above. In addition, the following discussion should be read in conjunction with the audited consolidated financial statements and the related notes thereto included elsewhere in this report.
Our Business
Our goal is to be the number one destination carrier serving Hawaii. We are a
leisure airline devoted to the travel needs of the residents and visitors of
Hawaii and offer a unique travel experience. We are strongly rooted in the
culture and people of Hawaii and seek to provide quality service to our
customers which exemplifies the spirit of aloha. We currently operate a fleet of
18 Boeing 717-200 aircraft, 16 Boeing 767-300 aircraft, and nine Airbus A330-200
aircraft serving 25 domestic and international destinations. The Company also
has two ATR42 turboprop aircraft for pending service to new Neighbor Island
destinations in 2013. We are the state's longest-serving airline, as well as the
largest provider of passenger air service within Hawaii (Neighbor Island) and to
Hawaii from the state's primary visitor markets in the U.S. mainland (North
America). We offer non-stop service to Hawaii from more U.S. gateway cities
(11) than any other airline, as well as service to Japan, South Korea, the
Philippines, Australia, American Samoa, and Tahiti, and also provide
approximately 170 daily flights between the Hawaiian Islands.
Our revenue is derived primarily from transporting passengers on our aircraft. Revenue is recognized when either the transportation is provided or when the related ticket expires unused. We measure capacity in terms of available seat miles (ASMs), which represent the number of seats available for passengers multiplied by the number of miles the seats are flown. Yield, or the average amount one passenger pays to fly one mile, is calculated by dividing passenger revenue by revenue passenger miles (RPMs). We strive to increase passenger revenue primarily by increasing our yield per flight or by filling a higher proportion of available seats, which produces higher revenue per available seat mile
(RASM). Other revenue primarily consists of baggage fees, cargo revenue, ticket change and cancellation fees, incidental services revenue, sale of frequent flyer miles, revenue earned on reduced rate passengers, inflight revenue, contract services and charter services revenue.
The largest components of our operating expenses are aircraft fuel (including taxes and oil), wages and benefits provided to our employees and aircraft maintenance materials and repairs. The price and availability of aircraft fuel is extremely volatile due to global economic and geopolitical factors that we can neither control nor accurately predict. Maintenance and repair costs are expensed when incurred unless covered by third-party power-by-the-hour services contracts.
Year in Review
º •
º GAAP net income of $53.2 million or $1.01 per diluted share. Adjusted
net income, reflecting economic fuel expense, of $55.6 million or
$1.06 per diluted share, an increase of 28.7% year-over-year.
º •
º Passenger revenue increased 19.3% year-over-year.
º •
º Operating cost per available seat mile (CASM), decrease of 7.8%
year-over-year and CASM excluding fuel and lease termination costs,
decrease of 6.0% year-over-year.
º •
º Operating margin of 6.6% and adjusted operating margin of 7.0%,
reflecting economic fuel expense in 2012.
º •
º Unrestricted cash and cash equivalents increase of 33.5%
year-over-year.
See "Results of Operations" below for further discussion of changes in revenues and operating expenses and our reconciliation of non-GAAP measures.
Highlights and Accomplishments
Our highlights and accomplishments in 2012 are as follows:
º •
º Operational Excellence
º •
º Ranked #1 nationally for on-time performance, for 10 out of the
11 months reported in 2012, by the U.S. Department of
Transportation Air Travel Consumer Report.
º •
º First airline to receive carbon credits for reducing carbon
dioxide emissions.
º •
º Customer Focus
º •
º Ranked second overall in the 2012 Airline Quality Rating Report.
º •
º Executing our plan for profitability and growth
º •
º Added four Airbus A330-200 aircraft for our International and
North America routes and two Boeing 717-200 for our Neighbor
Island routes to our fleet during 2012.
º •
º Launched new non-stop service on our International routes from
Honolulu to Fukuoka, Japan (April 2012), Sapporo, Japan (October
2012), and Brisbane, Australia (November 2012).
º •
º Launched new non-stop service on our North America routes from
Honolulu to New York City, New York (June 2012).
º •
º Announced three-times-weekly non-stop service to Auckland, New
Zealand (beginning in March 2013) and Taipei, Taiwan (beginning
in July 2013).
º •
º Expanded our operations at Hawaii's second largest airport to
create a new Maui hub offering improved connections between Maui
and Neighbor Island destinations, as well as flights to and from
the West Coast.
In 2012, we focused on our International expansion with the addition of new non-stop International routes from Honolulu to Fukuoka, Japan, Brisbane, Australia and Sapporo, Japan and increased frequency to daily on our routes to Sydney, Australia (May 2012) and Seoul, South Korea (July 2012). We continue to diversify our mix of passenger revenue and have increased our international revenue by 56.1% to 29.8% of total passenger revenue compared to 2011.
In 2012, we launched new non-stop service from Honolulu to New York City, New York. Also, we implemented a new inflight hospitality program on our North America routes that embraces the celebration of the culture, people and spirit of Hawaii and continued to provide a complimentary island inspired hot meal.
In 2012, we introduced our new Maui hub offering improved connections between Maui and Neighbor Island destinations, as well as flights to and from the West Coast, and launched a Neighbor Island travel program offering a specialized fare structure designed to stimulate increased travel for the residents of Hawaii. We continue to search for ways to provide value to both our customers and our business on our Neighbor Island routes as we maintain a significant presence and market share on these routes.
We took delivery and placed into revenue service four Airbus A330-200 aircraft for service on our North America and International routes and two Boeing 717-200 aircraft for service on our Neighbor Island routes. The Company also took delivery of two ATR42 turboprop aircraft with service on our Neighbor Island routes previously unserved by us to begin in 2013. We financed two of the Airbus A330-200 aircraft under secured debt and two Airbus A330-200 aircraft under lease agreements, and both Boeing 717-200 aircraft under lease agreements, and did not finance our ATR42 turboprop aircraft which resulted in a decrease in our unrestricted cash.
In January 2013, we signed a memorandum of understanding for the purchase of 16 new Airbus A321neo aircraft scheduled for delivery between 2017 and 2020, with rights to purchase an additional nine aircraft. We plan to execute a purchase agreement in the first quarter of 2013. The A321neo aircraft will be used to complement Hawaiian's existing fleet of wide-body aircraft for travel to the West Coast on our North America routes. These aircraft are excluded from the table below.
The table below summarizes our total fleet as of December 31, 2011, 2012 and expected 2013 (based on existing agreements):
December 31, 2011 December 31, 2012 December 31, 2013
Aircraft Type Leased(5) Owned Total Leased(5) Owned Total Leased(5) Owned Total
A330-200(4) 3 2 5 5 4 9 7 7 14
767-300ER(2)(3) 9 7 16 9 7 16 6 6 12
717-200 1 15 16 3 15 18 3 15 18
ATR42(1) - - - - 2 2 - 2 2
Total 13 24 37 17 28 45 16 30 46
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º (2)
º The decrease in the number of leased 767-300ER aircraft from 2012 to 2013
is due to the return of leased aircraft at the end of their lease terms.
º (3)
º The decrease in the number of owned 767-300ER aircraft from 2012 to 2013 is
due to the planned retirement of one aircraft at the end of its estimated
useful life.
º (4)
º In 2011, we entered into a commitment to assign the purchase of two
A330-200 aircraft at delivery and simultaneously enter into lease
agreements for the respective aircraft with scheduled delivery dates in
2013. Currently these two aircraft are reported as leased in the 2013 table
above. See Note 11-Commitments and Contingencies for further discussion on
the Purchase Aircraft and Lease Financing Agreement.
º (5)
º Leased aircraft include both aircraft under capital and operating leases.
See Note 7-Leases for further discussion of our aircraft leases.
Outlook
Our mission every year is to grow a profitable airline with a passion for excellence, our customers, our people and the spirit of Hawaii. For 2013, we will focus on managing our growth strategy, controlling our costs, integrating new aircraft into our fleet, growing into new and existing markets and operating an innovative business to meet the needs of our new and existing customers.
Results of Operations
Our consolidated net income for 2012 was $53.2 million, or $1.01 per diluted share, compared to a net loss of $2.6 million, or $0.05 per diluted share, in 2011 and net income of $110.3 million, or $2.10 per diluted share, in 2010. Significant items impacting the comparability between the periods are as follows:
º •
º All periods include adjustments to reflect the timing of unrealized
mark-to-market gains or losses related to our outstanding fuel hedge
positions.
º •
º Our 2011 results reflect a $70.0 million non-recurring, pre-tax lease
termination charge related to the purchase of fifteen Boeing 717-200
aircraft previously under lease agreements.
º •
º Our 2010 results reflect a tax benefit of $28.3 million from the
release of our entire remaining tax valuation allowance of
$57.5 million.
Adjusted (non-GAAP) results and per-share amounts
We believe the disclosure of non-GAAP financial measures is useful information to readers of our financial statements because:
º •
º We believe it is the basis by which we are evaluated by industry
analysts and investors;
º •
º Our results excluding these items are often used in management and
board of director's decision making analysis;
º •
º It is useful to monitor performance without these items as it improves
a reader's ability to compare our results to other airlines; and
º •
º It is consistent with how we present information in our quarterly
earnings press releases.
See table below for reconciliation between GAAP consolidated net income to adjusted consolidated net income, including per share amounts for the year ended December 31, 2012, 2011 and 2010 (in thousands unless otherwise indicated).
Year ended December 31,
2012 2011 2010
Diluted
Diluted Net earnings Diluted
earnings income (loss) earnings
Net income per share (loss) per share Net income per share
As
reported-GAAP $ 53,237 $ 1.01 $ (2,649 ) $ (0.05 ) $ 110,255 $ 2.10
Add: lease
termination
expenses
related to
Boeing
717-200
aircraft
purchase, net
of tax - - 42,008 0.83 - -
Reflecting
lease
termination
costs
adjustment $ 53,237 $ 1.01 $ 39,359 $ 0.78 $ 110,255 $ 2.10
Less:
unrealized
(losses)
gains on fuel
derivative
contracts,
net of tax (2,375 ) (0.05 ) (3,859 ) (0.07 ) 2,304 0.04
Less:
Non-recurring
tax benefits - - - - 62,546 1.19
Reflecting
economic fuel
expense and
excluding
non-recurring
tax benefits
and lease
termination
charges $ 55,612 $ 1.06 $ 43,218 $ 0.85 $ 45,405 $ 0.87
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Selected Consolidated Statistical Data (unaudited)
Below are the operating statistics we use to measure our operating performance.
Year ended December 31,
2012 2011 2010
(in thousands, except as otherwise indicated)
Scheduled Operations:
Revenue passengers flown 9,476 8,659 8,418
Revenue passenger miles (RPM) 12,195,875 10,139,949 8,665,869
Available seat miles (ASM) 14,660,030 12,022,194 10,134,601
Passenger revenue per RPM
(Yield) 14.49 ¢ 14.60 ¢ 13.33 ¢
Passenger load factor (RPM/ASM) 83.2 % 84.3 % 85.5 %
Passenger revenue per ASM
(PRASM) 12.05 ¢ 12.32 ¢ 11.40 ¢
Total Operations:
Revenue passengers flown 9,484 8,666 8,424
RPM 12,217,635 10,151,218 8,675,427
ASM 14,687,472 12,039,933 10,150,659
Operating revenue per ASM (RASM) 13.36 ¢ 13.71 ¢ 12.91 ¢
Operating cost per ASM (CASM)(b) 12.48 ¢ 13.54 ¢ 12.01 ¢
CASM excluding aircraft
fuel(b)(c) 8.18 ¢ 9.28 ¢ 8.83 ¢
CASM excluding lease termination
costs and aircraft fuel(c) 8.18 ¢ 8.70 ¢ 8.83 ¢
Aircraft fuel expense per ASM 4.30 ¢ 4.26 ¢ 3.18 ¢
Revenue block hours operated
(actual) 147,810 125,375 113,158
Gallons of jet fuel consumed 199,465 164,002 140,995
Average cost per gallon of jet
fuel (actual)(a) $ 3.17 $ 3.13 $ 2.29
--------------------------------------------------------------------------------
º (a)
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º (b)
º Includes lease termination charges of $70.0 million incurred in 2011.
º (c)
º Represents adjusted unit costs, a non-GAAP measure.
Operating Revenue
Operating revenue increased over the past three years to $1.96 billion, $1.65 billion and $1.31 billion for the years ended December 31, 2012, 2011 and 2010, respectively, driven primarily by an increase in passenger revenue.
Passenger Revenue
Passenger revenue increased over the past three years to $1.77 billion, $1.48 billion and $1.15 billion for the years ended December 31, 2012, 2011 and 2010, respectively.
The increase in passenger revenue of $286.4 million, or 19.3%, for the year ended December 31, 2012, as compared to 2011, is primarily due to increased capacity across our network with a flat overall yield as we faced increased competition on certain of our North America and International routes, which led to a decreased load factor and decreased average fare throughout our network.
The increase in passenger revenue of $325.7 million, or 28.2%, for the year ended December 31, 2011, as compared to 2010, is primarily due to increased yield throughout our network and increased capacity on our North America and International routes due to increased demand which led to an increased load factor and increased average fare throughout our network.
The detail of these changes is described in the table below:
Year Ended December 31, 2012 as compared Year Ended December 31, 2011 as compared
to December 31, 2011 to December 31, 2010
Change in Change in
scheduled scheduled
passenger Change in Change in Change in passenger Change in Change in Change in
revenue Yield RPM ASM revenue Yield RPM ASM
(millions) (millions)
North America $ 79.5 (0.1 )% 10.9 % 10.2 % $ 73.1 9.9 % 1.0 % 0.7 %
Neighbor Island 17.5 (2.2 ) 6.7 10.9 29.9 9.5 (1.4 ) (0.3 )
International 189.4 3.6 50.7 54.5 222.7 26.1 133.0 136.5
Total scheduled $ 286.4 (0.8 )% 20.3 % 21.9 % $ 325.7 9.5 % 17.0 % 18.6 %
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North America
North America revenue increased by $79.5 million in 2012, as compared to 2011, due to increased capacity. The increase in capacity was primarily due to the initiation of non-stop daily routes from Honolulu to New York City, New York (launched in June 2012), the addition of a third daily year-round flight from Honolulu to Los Angeles, California (launched in June 2012), increased frequency from Maui to San Jose and Oakland, California (launched in January 2012), and seasonal summer service from Maui to Los Angeles, California, which was partially offset by increased competition on these routes which led to a decrease in load factor.
North America revenue increased $73.1 million in 2011, as compared to 2010, primarily due to increased yield due to improved demand.
Neighbor Island
Neighbor Island revenue increased by $17.5 million in 2012, as compared to 2011, primarily due to increased capacity provided by three Boeing 717-200 aircraft that entered the fleet in the fourth quarter of 2011 and first quarter of 2012, partially offset by decreased yield.
The $29.9 million increase in 2011, as compared to 2010, was due to increased yield and was partially offset by decreases in capacity.
International
International revenue increased by $189.4 million in 2012, as compared to 2011, primarily due to increased capacity and yield. The increase in capacity was primarily due to the delivery of new Airbus A330-200 aircraft that entered the fleet during 2011 and 2012 and the initiation of non-stop daily routes from Fukuoka, Japan (April 2012), the initiation of three-times weekly service to Sapporo, Japan and Brisbane, Australia (November 2012), the increase in our Seoul, Korea service to daily from four times per week (launched in August 2012), the increase in our Sydney, Australia service to daily from four times weekly (launched in December 2011) and the effects of the full year results from routes initiated in 2011.
The $222.7 million increase in 2011, as compared to 2010, was primarily due to increases in both yield and capacity with the initiation of new routes to Tokyo, Japan in the fourth quarter 2010, and Seoul, South Korea and Osaka, Japan in 2011, and increased frequency on our Sydney, Australia routes in 2011.
Other Operating Revenue
Other operating revenue increased over the past three years to $195.3 million, $169.8 million and $155.1 million for the years ended December 31, 2012, 2011 and 2010, respectively.
The increase in other operating revenue for 2012, as compared to 2011, is primarily due to increased baggage revenue and increased cargo revenue due to the additional cargo capacity provided by the Airbus A330-200 and the expansion of our network.
The increase in other operating revenue for 2011, as compared to 2010, is primarily due to increased baggage revenue, increased cargo revenue due to the additional cargo capacity provided by the Airbus A330-200 aircraft and the expansion of our network and increased charter revenue, which was partially offset by decreases in our cancellation penalties revenue and the marketing component of our frequent flyer revenue.
Operating Expenses
Operating expenses were $1.83 billion, $1.63 billion and $1.22 billion, for the
years ended December 31, 2012, 2011, and 2010, respectively. Increases
(decreases) in operating expenses from 2011 to 2012 and 2010 to 2011 are
detailed below.
Changes in operating Changes in operating
expenses for the Year expenses for the Year
Ended December 31, Ended December 31,
2012 as compared to 2011 as compared to
December 31, 2011 December 31, 2010
$ % $ %
(in thousands) (in thousands)
Operating expense:
Aircraft fuel, including taxes
and oil $ 118,457 23.1 % $ 190,285 58.9 %
Wages and benefits 55,333 17.2 23,674 8.0
Aircraft rent (14,097 ) (12.5 ) 162 0.1
Maintenance materials and
repairs 13,701 8.1 45,876 37.0
Aircraft and passenger
servicing 21,575 26.2 20,090 32.3
Commissions and other selling 18,060 18.8 18,067 23.1
Depreciation and amortization 19,337 29.2 8,550 14.8
Other rentals and landing fees 13,178 18.2 14,612 25.3
Other 27,249 21.7 20,031 19.0
Lease termination charges(1) (70,014 ) NM 70,014 NM
Total $ 202,779 12.4 % $ 411,361 33.8 %
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º (1)
º Amount reflects the impact of a non-recurring and non-cash pre-tax lease
termination expense of $70.0 million related to the purchase of fifteen
Boeing 717-200 aircraft previously under lease agreements recorded during
the second quarter of 2011.
Our operations have expanded by approximately 22.0% (measured in ASMs) in 2012, as compared to 2011. As a result of this expansion, we have experienced corresponding increases in our variable expenses such as aircraft fuel, wages and benefits, maintenance materials and repairs, aircraft and passenger servicing, commissions and other selling expenses, other rentals and landing fees and other expenses (which primarily consists of purchased services, personnel and communication expenses).
We expect operating expenses to increase with the continued expansion of our services and the increase in the number of aircraft in our fleet.
Aircraft Fuel
Aircraft fuel expense increased during each of the past three years due to a
combination of an increase in fuel price and an increase in consumption as
illustrated in the following table:
% Change from
Year Ended December 31, Year Ended
2012 2011 2010 2011 2010
(in thousands, except
per-gallon amounts)
Fuel gallons consumed 199,465 164,002 140,995 21.6 % 16.3 %
Fuel price per gallon, including
taxes and delivery $ 3.17 $ 3.13 $ 2.29 1.3 % 36.7 %
Aircraft fuel expense $ 631,741 $ 513,284 $ 322,999 23.1 % 58.9 %
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The increase in fuel expense from 2011 to 2012 is primarily due to an increase in fuel consumption due to the additional aircraft in the fleet (four additional A330-200 and two additional B717-200 aircraft).
The increase in fuel expense from 2010 to 2011 is due to an increase in fuel price and an increase in consumption of fuel due to the additional aircraft in the fleet (four additional A330-200 aircraft and one additional B717-200 partially offset by two B767 returned at the end of their lease terms).
. . .
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