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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from       to       
 
Commission file number 1-31443
 HAWAIIAN HOLDINGS INC
(Exact Name of Registrant as Specified in Its Charter)
Delaware   71-0879698
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
3375 Koapaka Street, Suite G-350    
Honolulu, HI   96819
(Address of Principal Executive Offices)   (Zip Code)

(808) 835-3700
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:  
Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock ($0.01 par value) HA NASDAQ Stock Market, LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   Accelerated filer 
Non-accelerated filer    Smaller reporting company 
  Emerging growth company 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  No
 
As of July 21, 2020, 45,997,188 shares of the registrant’s common stock were outstanding.



Hawaiian Holdings, Inc.
Form 10-Q
Quarterly Period ended June 30, 2020
 
Table of Contents
 
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2


PART I. FINANCIAL INFORMATION

ITEM 1.                FINANCIAL STATEMENTS.
Hawaiian Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
  2020 2019 2020 2019
  (unaudited)
Operating Revenue:    
Passenger $ 29,762    $ 653,423    $ 533,231    $ 1,254,727   
Other 30,242    58,766    85,917    114,213   
Total 60,004    712,189    619,148    1,368,940   
Operating Expenses:    
Wages and benefits 30,329    180,070    218,583    355,135   
Aircraft fuel, including taxes and delivery 7,003    140,600    120,481    266,704   
Maintenance, materials and repairs 13,994    58,131    74,403    121,176   
Aircraft and passenger servicing 3,036    39,641    41,319    78,541   
Depreciation and amortization 39,333    39,527    78,782    77,678   
Aircraft rent 23,886    30,843    50,890    61,239   
Commissions and other selling 2,927    32,471    29,643    63,307   
Other rentals and landing fees 13,677    31,386    43,443    62,432   
Purchased services 19,887    32,733    54,128    65,186   
Special items 34,014    —    160,918    —   
Other 20,882    37,906    63,618    75,985   
Total 208,968    623,308    936,208    1,227,383   
Operating Income (Loss) (148,964)   88,881    (317,060)   141,557   
Nonoperating Income (Expense):    
Interest expense and amortization of debt discounts and issuance costs (8,221)   (7,300)   (15,016)   (14,830)  
Gains (losses) on fuel derivatives (184)   (3,220)   (6,636)   (2,650)  
Interest income 2,766    3,074    5,786    6,057   
Capitalized interest 921    1,257    1,752    2,542   
Other, net 1,161    (3,083)   3,465    (4,108)  
Total (3,557)   (9,272)   (10,649)   (12,989)  
Income (Loss) Before Income Taxes (152,521)   79,609    (327,709)   128,568   
Income tax expense (benefit) (45,617)   21,776    (76,433)   34,377   
Net Income (Loss) $ (106,904)   $ 57,833    $ (251,276)   $ 94,191   
Net Income (Loss) Per Share    
Basic $ (2.33)   $ 1.21    $ (5.47)   $ 1.96   
Diluted $ (2.33)   $ 1.21    $ (5.47)   $ 1.96   
Weighted Average Number of Common Stock Shares Outstanding:
Basic 45,971    47,854    45,969    48,122   
Diluted 45,971    47,889    45,969    48,158   

See accompanying Notes to Consolidated Financial Statements.
3


Hawaiian Holdings, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
  Three Months Ended June 30,
  2020 2019
  (unaudited)
Net Income (Loss) $ (106,904)   $ 57,833   
Other comprehensive loss, net:    
Net change related to employee benefit plans, net of tax expense of $242 and $218 for 2020 and 2019, respectively
736    669   
Net change in derivative instruments, net of tax benefit of $795 and $1,186 for 2020 and 2019, respectively
(2,419)   (3,646)  
Net change in available-for-sale investments, net of tax expense of $350 and $250 for 2020 and 2019, respectively
1,065    769   
Total other comprehensive loss (618)   (2,208)  
Total Comprehensive Income (Loss) $ (107,522)   $ 55,625   

  Six Months Ended June 30,
  2020 2019
  (unaudited)
Net Income (Loss) $ (251,276)   $ 94,191   
Other comprehensive income, net:    
Net change related to employee benefit plans, net of tax expense of $439 and $352 for 2020 and 2019, respectively
1,334    1,245   
Net change in derivative instruments, net of tax benefit of $682 and $811 for 2020 and 2019, respectively
(2,075)   (2,501)  
Net change in available-for-sale investments, net of tax expense of $478 and $425 for 2020 and 2019, respectively
1,454    1,309   
Total other comprehensive income 713    53   
Total Comprehensive Income (Loss) $ (250,563)   $ 94,244   


See accompanying Notes to Consolidated Financial Statements.

4


Hawaiian Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except shares)
June 30, 2020
(unaudited)
December 31, 2019
ASSETS    
Current Assets:    
Cash and cash equivalents $ 592,520    $ 373,056   
Short-term investments 168,410    245,599   
Accounts receivable, net 28,467    97,380   
Income taxes receivable 92,365    64,192   
Spare parts and supplies, net 35,660    37,630   
Prepaid expenses and other 45,431    56,849   
Total 962,853    874,706   
Property and equipment, less accumulated depreciation and amortization of $823,757 and $762,544 as of June 30, 2020 and December 31, 2019, respectively
2,267,826    2,316,772   
Other Assets:    
Operating lease right-of-use assets 592,933    632,545   
Long-term prepayments and other 159,383    182,438   
Intangible assets, net 13,500    13,500   
Goodwill —    106,663   
Total Assets $ 3,996,495    $ 4,126,624   
LIABILITIES AND SHAREHOLDERS’ EQUITY    
Current Liabilities:    
Accounts payable $ 101,641    $ 148,748   
Air traffic liability and current frequent flyer deferred revenue 553,554    606,684   
Other accrued liabilities 221,881    161,430   
Current maturities of long-term debt, less discount 60,079    53,273   
Current maturities of finance lease obligations 21,667    21,857   
Current maturities of operating leases 78,655    83,224   
Total 1,037,477    1,075,216   
Long-Term Debt 792,766    547,254   
Other Liabilities and Deferred Credits:    
Noncurrent finance lease obligations 131,631    141,861   
Noncurrent operating leases 476,401    514,685   
Accumulated pension and other post-retirement benefit obligations 200,411    203,596   
Other liabilities and deferred credits 80,350    97,434   
Noncurrent frequent flyer deferred revenue 179,740    175,218   
Deferred tax liability, net 271,786    289,564   
Total 1,340,319    1,422,358   
Commitments and Contingencies
Shareholders’ Equity:    
Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of June 30, 2020 and December 31, 2019
—    —   
Common stock, $0.01 par value per share, 45,996,537 and 46,121,859 shares outstanding as of June 30, 2020 and December 31, 2019, respectively
460    461   
Capital in excess of par value 143,374    135,651   
Accumulated income 785,269    1,049,567   
Accumulated other comprehensive loss, net (103,170)   (103,883)  
Total 825,933    1,081,796   
Total Liabilities and Shareholders’ Equity $ 3,996,495    $ 4,126,624   
See accompanying Notes to Consolidated Financial Statements.
5


Hawaiian Holdings, Inc.
Consolidated Statements of Shareholders' Equity
(in thousands)
Common
Stock(*)
Special
Preferred
Stock(**)
Capital In Excess of Par Value Accumulated Income Accumulated Other Comprehensive Income (Loss) Total
(unaudited)
Balance at December 31, 2019 $ 461    $ —    $ 135,651    $ 1,049,567    $ (103,883)   $ 1,081,796   
Net Loss —    —    —    (144,372)   —    (144,372)  
Dividends declared on common stock ($0.12 per share)
—    —    —    (5,514)   —    (5,514)  
Other comprehensive income, net —    —    —    —    1,331    1,331   
Issuance of 88,141 shares of common stock, net of shares withheld for taxes
  —    (1,231)   —    —    (1,230)  
Repurchase and retirement of 259,910 shares common stock
(2)   —    —    (7,508)   —    (7,510)  
Share-based compensation expense —    —    (135)   —    —    (135)  
Balance at March 31, 2020 $ 460    $ —    $ 134,285    $ 892,173    $ (102,552)   $ 924,366   
Net Loss —    —    —    (106,904)   —    (106,904)  
Other comprehensive loss, net —    —    —    —    (618)   (618)  
Issuance of 46,447 shares of common stock, net of shares withheld for taxes
—    —    (83)   —    —    (83)  
CARES Act PSP warrant issuance —    —    7,403    —    —    7,403   
Share-based compensation expense —    —    1,769    —    —    1,769   
Balance at June 30, 2020 $ 460    $ —    $ 143,374    $ 785,269    $ (103,170)   $ 825,933   

(*) Common Stock—$0.01 par value; 118,000,000 authorized as of June 30, 2020 and December 31, 2019.
(**) Special Preferred Stock—$0.01 par value; 2,000,000 shares authorized as of June 30, 2020 and December 31, 2019.

6


Hawaiian Holdings, Inc.
Consolidated Statements of Shareholders' Equity
(in thousands)
Common
Stock(*)
Special
Preferred
Stock(**)
Capital In Excess of Par Value Accumulated Income Accumulated Other Comprehensive Income (Loss) Total
(unaudited)
Balance at December 31, 2018 $ 485    $ —    $ 128,448    $ 912,201    $ (93,140)   $ 947,994   
Net Income —    —    —    36,358    —    36,358   
Dividends declared on common stock ($0.12 per share)
—    —    —    (5,811)   —    (5,811)  
Other comprehensive income, net —    —    —    —    2,261    2,261   
Issuance of 65,517 shares of common stock, net of shares withheld for taxes
  —    (983)   —    —    (982)  
Repurchase and retirement of 403,598 shares common stock
(4)   —    —    (11,082)   —    (11,086)  
Share-based compensation expense —    —    1,426    —    —    1,426   
Cumulative effect of accounting change (ASU 2016-02), net of tax
—    —    —    4,900    —    4,900   
Balance at March 31, 2019 $ 482    $ —    $ 128,891    $ 936,566    $ (90,879)   $ 975,060   
Net Income —    —    —    57,833    —    57,833   
Dividends declared on common stock ($0.12 per share)
—    —    —    (5,743)   —    (5,743)  
Other comprehensive loss, net —    —    —    —    (2,208)   (2,208)  
Issuance of 28,927 shares of common stock, net of shares withheld for taxes
—    —    (32)   —    —    (32)  
Repurchase and retirement of 725,105 shares common stock
(7)   —    —    (19,597)   —    (19,604)  
Share-based compensation expense —    —    1,384    —    —    1,384   
Balance at June 30, 2019 $ 475    $ —    $ 130,243    $ 969,059    $ (93,087)   $ 1,006,690   

(*) Common Stock—$0.01 par value; 118,000,000 authorized as of June 30, 2019 and December 31, 2018.
(**) Special Preferred Stock—$0.01 par value; 2,000,000 shares authorized as of June 30, 2019 and December 31, 2018.

See accompanying Notes to Consolidated Financial Statements.
7


Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
Six Months Ended June 30,
  2020 2019
(unaudited)
Net cash provided by Operating Activities $ 3,458    $ 311,212   
Cash flows from Investing Activities:    
Additions to property and equipment, including pre-delivery payments (93,956)   (151,577)  
Proceeds from the disposition of aircraft related equipment —    4,350   
Purchases of investments (64,215)   (189,929)  
Sales of investments 143,679    225,706   
Other —    (6,275)  
Net cash used in investing activities (14,492)   (117,725)  
Cash flows from Financing Activities:    
Long-term borrowings 283,964    —   
Repayments of long-term debt and finance lease obligations (39,129)   (77,471)  
Dividend payments (5,514)   (11,554)  
Debt issuance costs —    (33)  
Repurchases of common stock (7,510)   (30,690)  
Other (1,313)   (1,012)  
Net cash provided by (used in) financing activities 230,498    (120,760)  
Net increase in cash and cash equivalents 219,464    72,727   
Cash, cash equivalents, and restricted cash - Beginning of Period 373,056    268,577   
Cash, cash equivalents, and restricted cash - End of Period $ 592,520    $ 341,304   
 
See accompanying Notes to Consolidated Financial Statements.

8


Hawaiian Holdings, Inc. 
Notes to Consolidated Financial Statements (Unaudited)
 
1. General
 
Business and Basis of Presentation

Hawaiian Holdings, Inc. (the Company, Holdings, we, us and our) and its direct wholly-owned subsidiary, Hawaiian Airlines, Inc. (Hawaiian), are incorporated in the State of Delaware. The Company’s primary asset is its sole ownership of all issued and outstanding shares of common stock of Hawaiian. The accompanying unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC). Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented. Due to seasonal variations in the demand for air travel, among other factors common to the airline industry, the results of operations for the periods presented are not necessarily indicative of the results of operations for the entire year. Furthermore, the severe impacts of the global coronavirus (COVID 19) pandemic make any comparison to prior or future periods unreliable. The accompanying unaudited Consolidated Financial Statements should be read in conjunction with the financial statements and the notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

2. Impact of the COVID-19 Pandemic

Due to the rapid and unprecedented spread of COVID-19, what began with the Company's suspension of service to South Korea and Japan in late February accelerated in March when governments instituted requirements of self-isolation or quarantine for incoming travelers. This was followed by the announcement in March 2020 of a 14-day mandatory quarantine for all travelers to, from and within the State of Hawai‘i. While quarantine requirements have ceased for travel within the State of Hawai‘i, restrictions related to travel to the State of Hawai‘i continued through the second quarter. As a result, travel demand declined precipitously to historically low levels and has remained depressed through the second quarter.

On June 10, 2020, the Governor of Hawai‘i extended the quarantine requirements for passengers traveling to Hawai‘i until at least July 31, 2020, but lifted them for Neighbor Island travel effective June 16, 2020. Following this announcement, the Company saw increases in bookings of Neighbor Island flights in June and have slowly begun rebuilding its Neighbor Island flight schedule commensurate with increases in demand. While the Governor of Hawai‘i announced the near-term possibility of lifting the quarantine requirement for passengers traveling to Hawai‘i upon demonstration of a negative COVID-19 test, on July 13, 2020, the Governor’s office announced that the mandatory quarantine would extend through at least the end of August 2020. The exact timing and pace of the recovery remains uncertain as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing extended quarantines for most U.S. residents. See Note 6, for a discussion of the recognition of passenger revenue, the Company's air traffic liability and ticket breakage.

In response to the COVID-19 pandemic, the Company implemented various measures to mitigate declining demand through capacity and cost reductions, while managing cash flow and liquidity.

Capacity Reductions. Beginning in the second half of March, the Company experienced a significant decline in demand as COVID-19 spread globally. In response, the Company significantly reduced system capacity to a level that maintained essential services to align capacity with expected demand. During the three and six months ended June 30, 2020, the Company reduced capacity by 92% and 46%, respectively, as compared to the same period in 2019. As a result of our capacity reductions, the Company temporarily parked approximately 38% of its fleet as of June 30, 2020.

Expense Management. In response to the reduction in revenue, the Company has implemented, and will continue to implement cost savings and liquidity measures, including:

In March 2020, the Company instituted a hiring freeze, except for operationally critical and essential positions.
Reduced capital expenditures for 2020 and continue to evaluate non-essential, non-aircraft capital expenditures. During the six months ended June 30, 2020, capital expenditures were approximately $94.0 million.
The Company currently has aircraft deliveries scheduled between 2021 to 2025 and is in discussions regarding the potential deferment of deliveries initially scheduled in 2021.
9


Offered voluntary unpaid leave and float day purchase programs to each work group, including early retirement options for eligible employees.
All of the Company’s officers have reduced their base salaries by between 10% and 50% through at least September 30, 2020. Members of the Board of Directors have also temporarily reduced their compensation.
In July 2020, the Company announced a Voluntary Separation Program (VSEP), which will provide eligible, non-contract employees compensation in exchange for voluntary separation, and is currently in negotiations with labor unions related to voluntary separation packages.

The Company anticipates it may implement further discretionary changes and other cost reduction and liquidity preservation measures as needed to address the volatile and quickly-changing dynamics of passenger demand and changes in revenue, regulatory and public health directives and prevailing government policy and financial market conditions.

Cash Flow and Liquidity Management. Our cash, cash equivalents and short-term investments as of June 30, 2020 was $760.9 million as a result of various actions taken to increase liquidity and strengthen financial position during the six months ended June 30, 2020, including, but not limited to:

On March 16, 2020, the Company drew down fully from its previously undrawn $235.0 million revolving credit facility. Refer to Note 9 for additional discussion.
On March 18, 2020, the Company suspended its stock repurchase program and on April 22, 2020, the Company suspended payment of dividends.
During the three and six months ended June 30, 2020, the Company received $214.2 million in grants and $49.0 million in loans pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) Payroll Support Program (PSP), as discussed in further detail below. As of June 30, 2020, we have approximately $124.2 million remaining in PSP proceeds to be utilized and expects to receive an additional $29.2 million in July 2020.

The Company continues to explore and pursue options to raise additional financing by leveraging its unencumbered assets, which as of June 30, 2020, included 36 aircraft with an estimated fair value of approximately $860.0 million.

In June 2020, the Company entered into a Letter of Intent (LOI) with the U.S. Department of the Treasury (Treasury), and is eligible to receive up to $364 million in loans through the CARES Act Economic Relief Program (ERP), which is expected to be collateralized by the Company's non-aircraft assets. The Company has not yet made a determination as to whether to accept the ERP loans and continues to evaluate the terms of the financing. The Company has until September 30, 2020 to decide if it will accept the ERP loans.

Based on these actions, including recovery assumptions made for the impact of COVID-19, the Company has concluded that it will be able to generate sufficient liquidity to satisfy its obligations and remain in compliance with existing covenants in the Company's financing agreements for more than the next twelve months, prior to giving effect to any additional financing that may occur. The Company's assumptions about future conditions used to estimate liquidity requirements, including the impact of the COVID-19 pandemic and other ongoing impacts to the business, are subject to uncertainty, and actual results could differ from these estimates. The Company will continue to monitor these conditions as new information becomes available, and will update its analyses accordingly.

Valuation of Goodwill and Indefinite-Lived Intangibles

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

During the first quarter of 2020, the adverse economic impact and declining passenger demand attributed to the COVID-19 pandemic drove the Company's stock price to 52-week lows and significantly reduced future cash flow projections. The Company qualitatively assessed that an impairment loss may have been incurred as of March 31, 2020 and performed an interim test of the recoverability of its goodwill and indefinite-lived intangible assets. The Company determined that the estimated fair value of the Company's one reporting unit was less than its carrying value and that the deficit between fair value and the carrying value of the reporting unit exceeded the amount of goodwill on the unaudited Consolidated Balance Sheet, leading to the recognition of a goodwill impairment charge of $106.7 million in the first quarter of 2020.

10


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

As of June 30, 2020, the Company had approximately $13.5 million in indefinite-lived intangible assets subject to impairment. The Company determined that the fair value of its indefinite-lived intangible assets exceeded its carrying value and was not impaired.

Valuation of Long-Lived Assets

The Company's long-lived assets, consisting principally of aircraft and other non-aircraft equipment, are classified as property and equipment, net on the unaudited Consolidated Balance Sheet, and have a recorded value of approximately $2.3 billion at June 30, 2020. The Company reviews long-lived assets used in operations for impairment when events and circumstances indicate the assets may be impaired.

As part of the Company's response to COVID-19, discussed above, including substantial capacity reductions and the temporary grounding of the majority of its fleet, as well as reduced cash flow projections, the Company identified indicators of impairment of its long-lived assets. To determine whether impairment exists for aircraft used in operations, assets are grouped at the fleet-type level (the lowest level for which there are identifiable cash flows) and future cash flows are estimated based on projections of capacity, passenger mile yield, fuel costs, labor costs and other relevant factors. Based on the Company's evaluation, including consideration of the continuing impact of the COVID-19 pandemic and revised financial projections, it was determined that the net carrying values of the Company's ATR-42 and ATR-72 fleets, and assets held under its commercial real estate subsidiary were not recoverable through the generation of undiscounted future cash flows as of June 30, 2020.

The Company estimated the fair value of its ATR-42 and ATR-72 fleets using a 3rd party valuation, which resulted in a $27.5 million impairment charge. The Company estimated the fair value of the assets held in its commercial real-estate subsidiary using a combination of a market and income-based approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to its present value, resulting in a $3.4 million impairment charge. The principal assumptions used in the Company's discounted cash flow analysis consisted of (a) the long-term projections of future financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which it operates.

In addition, during the three and six months ended June 30, 2020, the Company identified and wrote-off $3.1 million related to software-related projects that were discontinued as a result of the COVID-19 pandemic.

The Company will continue to monitor the duration and extent of the impact of COVID-19 on its business, and will continue to evaluate its current fleet and other long-lived assets for impairment accordingly.

CARES Act

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

Payroll Support Program

On April 22, 2020 (PSP Closing Date), the Company entered into a Payroll Support Program agreement (the PSP Agreement) with the Treasury under the CARES Act. In connection with the PSP Agreement, the Company entered into a Warrant Agreement (the Warrant Agreement) with the Treasury, and the Company issued a promissory note to the Treasury (the Note). Pursuant to the PSP Agreement, the Treasury will provide the Company with financial assistance to be released in installments expected to total approximately $292.5 million, to be used exclusively for the purpose of continuing to pay employee salaries, wages and benefits. Under the PSP Agreement, the Company agreed to (i) refrain from conducting involuntary furloughs or
11


reducing employee rates of pay or benefits through September 30, 2020, (ii) limit executive compensation through March 24, 2022 and (iii) suspend payment of dividends and stock repurchases through September 30, 2021. The PSP Agreement also imposes certain Treasury-mandated reporting obligations on the Company. Finally, the Company is required to continue to provide air service to markets served prior to March 1, 2020 until March 1, 2022, to the extent determined reasonable and practicable by the U.S. Department of Transportation (DOT) and subject to exemptions granted by the DOT to the Company given the absence of demand for such services.

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

As compensation to the U.S. government for providing financial relief under the PSP Agreement, and pursuant to the Warrant Agreement, the Company agreed to issue to the Treasury a total of 488,477 warrants to purchase shares of the Company’s common stock at an exercise price of $11.82 per share (the Warrants). The Warrants are non-voting, freely transferable, may be settled as net shares or in cash at the Company’s option, expire five years from the date of issuance, and contain registration rights and customary anti-dilution provisions. Refer to Note 9 for additional discussion.

Economic Relief Program

In June 2020, the Company entered into an LOI with the Treasury, and is eligible to receive up to $364 million in loans under the CARES Act ERP. Conditions of the loan are consistent with the PSP; certain restrictions, however, including prohibition of share repurchases and dividend payments for 12 months after the loan is no longer outstanding. The Company has not yet made a determination on whether to accept the ERP loans and continues to evaluate the terms of the financing. The Company has until September 30, 2020 to decide if it will accept the ERP loans.

3. Significant Accounting Policies
 
Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (ASU 2016-13), which requires the use of an "expected loss" model on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 replaces the incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates over the lifetime of the asset. The Company adopted ASU 2016-13 effective January 1, 2020. The adoption of this standard did not have a material impact on its financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (ASU 2017-04), which simplifies the measurement of goodwill as Step 2 of the goodwill impairment test was eliminated. ASU 2017-04 replaces the implied fair value of goodwill method with a methodology that compares the fair value of a reporting unit with its carrying amount. The Company adopted ASU 2017-04 effective January 1, 2020. Refer to Note 2 for discussion of the goodwill impairment recognized during in the first quarter of 2020.

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4. Accumulated Other Comprehensive Income (Loss)
 
Reclassifications out of accumulated other comprehensive income (loss) by component are as follows: 
Details about accumulated other comprehensive (income) loss components Three months ended June 30, Six months ended June 30, Affected line items in the statement where net income is presented
2020 2019 2020 2019
  (in thousands)  
Derivative instruments under ASC 815          
Foreign currency derivative gains, net $ (1,961)   $ (1,749)   $ (3,075)   $ (3,336)   Passenger revenue
Foreign currency derivative gains, net (1,577)   —    (4,363)   —    Nonoperating Income (Expense), Other, net
Total before tax (3,538)   (1,749)   (7,438)   (3,336)    
Tax expense 875    426    1,840    817     
Total, net of tax $ (2,663)   $ (1,323)   $ (5,598)   $ (2,519)    
Amortization of defined benefit plan items          
Actuarial loss $ 922    $ 831    $ 1,844    $ 1,662    Nonoperating Income (Expense), Other, net
Prior service cost 56    56    112    112    Nonoperating Income (Expense), Other, net
Total before tax 978    887    1,956    1,774     
Tax benefit (242)   (218)   (484)   (386)    
Total, net of tax $ 736    $ 669    $ 1,472    $ 1,388     
Short-term investments          
Realized losses (gain) on sales of investments, net $ (384)   $ 69    $ (371)   $ (28)   Nonoperating Income (Expense), Other, net
Total before tax (384)   69    (371)   (28)    
Tax expense (benefit) 95    (17)   92       
Total, net of tax $ (289)   $ 52    $ (279)   $ (21)    
Total reclassifications for the period $ (2,216)   $ (602)   $ (4,405)   $ (1,152)    

A roll-forward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and six months ended June 30, 2020 and 2019 is as follows:
Three months ended June 30, 2020 Foreign Currency Derivatives Defined Benefit
Plan Items
Short-Term Investments Total
  (in thousands)
Beginning balance $ 3,685    $ (107,430)   $ 1,193    $ (102,552)  
Other comprehensive income before reclassifications, net of tax 244    —    1,354    1,598   
Amounts reclassified from accumulated other comprehensive income (loss), net of tax (2,663)   736    (289)   (2,216)  
Net current-period other comprehensive income (loss) (2,419)   736    1,065    (618)  
Ending balance $ 1,266    $ (106,694)   $ 2,258    $ (103,170)  
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Three months ended June 30, 2019 Foreign Currency Derivatives Defined Benefit Plan Items Short-Term Investments Total
  (in thousands)
Beginning balance $ 4,462    $ (95,279)   $ (62)   $ (90,879)  
Other comprehensive income (loss) before reclassifications, net of tax (2,323)   —    717    (1,606)  
Amounts reclassified from accumulated other comprehensive income (loss), net of tax (1,323)   669    52    (602)  
Net current-period other comprehensive income (loss) (3,646)   669    769    (2,208)  
Ending balance $ 816    $ (94,610)   $ 707    $ (93,087)  
Six months ended June 30, 2020 Foreign Currency Derivatives Defined Benefit
Plan Items
Short-Term Investments Total
  (in thousands)
Beginning balance $ 3,341    $ (108,028)   $ 804    $ (103,883)  
Other comprehensive income (loss) before reclassifications, net of tax 3,523    (138)   1,733    5,118   
Amounts reclassified from accumulated other comprehensive income (loss), net of tax (5,598)   1,472    (279)   (4,405)  
Net current-period other comprehensive income (loss) (2,075)   1,334    1,454    713   
Ending balance $ 1,266    $ (106,694)   $ 2,258    $ (103,170)  
Six months ended June 30, 2019 Foreign Currency Derivatives Defined Benefit Plan Items Short-Term Investments Total
  (in thousands)
Beginning balance $ 3,317    $ (95,855)   $ (602)   $ (93,140)  
Other comprehensive income (loss) before reclassifications, net of tax 18    (143)   1,330    1,205   
Amounts reclassified from accumulated other comprehensive income (loss), net of tax (2,519)   1,388    (21)   (1,152)  
Net current-period other comprehensive income (loss) (2,501)   1,245    1,309    53   
Ending balance $ 816    $ (94,610)   $ 707    $ (93,087)  

5. Earnings (Loss) Per Share
 
Basic earnings (loss) per share, which excludes dilution, is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three and six months ended June 30, 2020, there were 105,235 and 123,450 potentially dilutive shares, respectively, that were excluded from the computation of diluted weighted average common stock shares outstanding because their effect would have been antidilutive given the Company's net loss. The following table shows the computation of basic and diluted earnings (loss) per share:
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  Three Months Ended June 30, Six Months Ended June 30,
  2020 2019 2020 2019
  (in thousands, except for per share data)
Numerator:        
Net Income (Loss) $ (106,904)   $ 57,833    $ (251,276)   $ 94,191   
Denominator:        
Weighted average common stock shares outstanding - Basic 45,971    47,854    45,969    48,122   
Assumed exercise of stock options and awards —    35    —    36   
Weighted average common stock shares outstanding - Diluted 45,971    47,889    45,969    48,158   
Net Income (Loss) Per Share        
Basic $ (2.33)   $ 1.21    $ (5.47)   $ 1.96   
Diluted $ (2.33)   $ 1.21    $ (5.47)   $ 1.96   

Stock Repurchase Program

In November 2018, the Company's Board of Directors approved the repurchase of up to $100 million of its outstanding common stock over a two-year period through December 2020. On March 18, 2020, the Company announced the suspension of its stock repurchase program and pursuant to its receipt of financial assistance under the CARES Act, it is restricted from making any stock repurchases through at least September 30, 2021. Accordingly, the Company will not be making any further repurchases under its current stock repurchase program.

The Company had no stock repurchase activity during the three months ended June 30, 2020. During the three months ended June 30, 2019, the Company spent $19.6 million to repurchase and retire approximately 725 thousand shares of the Company's common stock in open market transactions. During the six months ended June 30, 2020 and 2019, the Company spent $7.5 million and $30.7 million, respectively, to repurchase and retire approximately 260 thousand shares and 1.1 million shares, respectively, of the Company's common stock in open market transactions.

Dividends

During the six months ended June 30, 2020, the Company declared a cash dividend of $0.12 per share for stockholders of record as of February 14, 2020, which was paid on February 28, 2020, totaling $5.5 million. The Company’s receipt of financial assistance under the CARES Act precludes the Company from making any further dividend payments through at least September 30, 2021.

6. Revenue Recognition
The Company’s contracts with customers have two principal performance obligations, which are the promise to provide transportation to the passenger and the frequent flyer miles earned on the flight. In addition, the Company typically charges additional fees for items such as baggage. Such items are not capable of being distinct from the transportation provided because the customer can only benefit from the services during the flight. The transportation performance obligation, including the redemption of HawaiianMiles awards for flights is satisfied, and revenue is recognized, as transportation is provided. In some instances, tickets sold by the Company can include a flight segment on another carrier which is referred to as an interline segment. In this situation, the Company acts as an agent for the other carrier and revenue is recognized net of cost in other revenue. Tickets sold by other airlines where the Company provides the transportation are recognized as passenger revenue at the estimated value to be billed to the other airline when travel is provided. Differences between amounts billed and the actual amounts may be rejected and rebilled or written off if the amount recorded was different from the original estimate.
The majority of the Company's passenger revenue is derived from passenger ticket sales. Other revenue is primarily derived from the Company's cargo operations and loyalty program. The Company's primary operations are that of its wholly-owned subsidiary, Hawaiian. Principally all operations of Hawaiian either originate and/or end in the State of Hawai‘i. The management of such operations is based on a system-wide approach due to the interdependence of Hawaiian's route structure in its various markets. As Hawaiian is engaged in only one significant line of business (i.e., air transportation), management has concluded that it has only one segment. The Company's operating revenues by geographic region (as defined by the DOT) are summarized below:
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Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Geographic Information (in thousands)
Domestic $ 55,106    $ 531,725    $ 457,120    $ 1,009,245   
Pacific 4,898    180,464    162,028    359,695   
Total operating revenue $ 60,004    $ 712,189    $ 619,148    $ 1,368,940   

Hawaiian attributes operating revenue by geographic region based on the destination of each flight segment. Hawaiian's tangible assets consist primarily of flight equipment, which is mobile across geographic markets, and therefore has not been allocated to specific geographic regions. During the three months ended June 30, 2020 and 2019, North America routes accounted for approximately 57% and 73% of domestic revenue, respectively.
Other operating revenue consists of cargo revenue, ground handling fees, commissions, and fees earned under certain joint marketing agreements with other companies. These amounts are recognized when the service is provided.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Passenger Revenue by Type (in thousands)
Passenger revenue, excluding frequent flyer $ 26,169    $ 613,574    $ 500,304    $ 1,181,429   
Frequent flyer revenue, transportation component 3,593    39,849    32,927    73,298   
Passenger Revenue $ 29,762    $ 653,423    $ 533,231    $ 1,254,727   
Other revenue (e.g., cargo and other miscellaneous) $ 17,436    $ 36,571    $ 51,619    $ 72,802   
Frequent flyer revenue, marketing and brand component 12,806    22,195    34,298    41,411   
Other Revenue $ 30,242    $ 58,766    $ 85,917    $ 114,213   

For the three months ended June 30, 2020 and 2019, the Company's total revenue was $60.0 million and $712.2 million, respectively. As of June 30, 2020 and December 31, 2019, the Company's Air traffic liability balance, as it relates to passenger tickets (excluding frequent flyer liability), was $351.5 million and $426.9 million, respectively, which generally represents revenue that is expected to be realized over the next 12 months. Prior to the second quarter of 2020, passenger tickets sold and credits issued were generally valid for one year from the date of issuance or flight, as applicable. In April 2020, we announced the waiver of certain change fees and extended ticket validity for up to 24 months. Management assessed the impact of this change and believes that the classification of ATL as a current liability continues to remain appropriate. Management will continue to monitor customers' travel behavior and may adjust its estimates in the future.

During the three months ended June 30, 2020 and 2019, the amount of passenger ticket revenue recognized that was included in Air traffic liability as of the beginning of the respective period was $0.4 million and $333.9 million, respectively. During the six months ended June 30, 2020 and 2019, the amount of passenger ticket revenue recognized that was included in Air traffic liability as of the beginning of the respective period was $253.6 million and $389.8 million, respectively.
Passenger revenue associated with unused tickets, which represent unexercised passenger rights, is recognized in proportion to the pattern of rights exercised by related passengers (e.g., scheduled departure dates). To calculate the portion to be recognized as revenue in the period, the Company utilizes historical information and applies the trend rate to the current Air traffic liability balances for that specific period.

Frequent Flyer Revenue

The Company's frequent flyer liability is recorded in Air traffic liability and current frequent flyer deferred revenue and Noncurrent frequent flyer deferred revenue in the Company's unaudited Consolidated Balance Sheet based on estimated and expected redemption patterns using historical data and analysis. As of June 30, 2020 and December 31, 2019, the Company's frequent flyer liability balance was $375.2 million and $349.8 million, respectively.
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June 30, 2020 December 31, 2019
(in thousands)
Air traffic liability (current portion of frequent flyer revenue) $ 195,500    $ 174,588   
Noncurrent frequent flyer deferred revenue 179,740    175,218   
Total frequent flyer liability $ 375,240    $ 349,806   

Frequent flyer program deferred revenue classified as a current liability represents the Company's current estimate of revenue expected to be recognized in the next 12 months based on projected redemptions, while the balance classified as a noncurrent liability represents the Company's current estimate of revenue expected to be recognized beyond 12 months. Due to the effects of the COVID-19 pandemic, including changes to the Company's ticket validity and exchange policies, management continues to monitor customers' travel behavior and may adjust its estimates in the future as additional information becomes available.

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

The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis:
  Fair Value Measurements as of June 30, 2020
  Total Level 1 Level 2 Level 3
  (in thousands)
Cash equivalents $ 280,701    $ 280,701    $ —    $ —   
Short-term investments
Corporate debt securities 86,905    —    86,905    —   
U.S. government and agency securities 59,285    —    59,285    —   
Other fixed income securities 22,220    —    22,220    —   
Total short-term investments 168,410    —    168,410    —   
Fuel derivative contracts 337    —    337    —   
Foreign currency derivatives 1,105    —    1,105    —   
Total assets measured at fair value $ 450,553    $ 280,701    $ 169,852    $ —   
Foreign currency derivatives 113    —    113    —   
Total liabilities measured at fair value $ 113    $ —    $ 113    $ —   
 
17


  Fair Value Measurements as of December 31, 2019
  Total Level 1 Level 2 Level 3
  (in thousands)
Cash equivalents $ 216,491    $ 205,943    $ 10,548    $ —   
Short-term investments
Corporate debt securities 100,713    —    100,713    —   
U.S. government and agency securities 75,481    —    75,481    —   
Other fixed income securities 69,405    —    69,405    —   
Total short-term investments 245,599    —    245,599    —   
Fuel derivative contracts 5,878    —    5,878    —   
Foreign currency derivatives 4,424    —    4,424    —   
Total assets measured at fair value $ 472,392    $ 205,943    $ 266,449    $ —   
Foreign currency derivatives 593    —    593    —   
Total liabilities measured at fair value $