HRBR Harbor Diversified Inc (CE)

Item 1A. Risk Factors

Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in the Company’s common stock involves substantial risk. The Company’s stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Quarterly Report, as well as the other information we file with the SEC from time to time. If any of these risks are realized, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that case, the value of the Company’s common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within the 2019 Annual Report for additional information.

The risk factors set forth below marked with an asterisk (*) next to the title contain changes to the description of the risk factors previously disclosed in Part I, Item IA of the 2019 Annual Report.

Risks Related to Our Business

Our current business is highly dependent on the United capacity purchase agreement because United is currently Air Wisconsin’s sole airline partner.*

We derive nearly all of our operating revenue from the United capacity purchase agreement because United is currently Air Wisconsin’s sole airline partner. United accounted for approximately 99.9% of our operating revenue for the year ended December 31, 2019. The termination or non-renewal of the United capacity purchase agreement would have a material adverse effect on our business, financial condition, results of operations, and cash flows.

The United capacity purchase agreement expires in February 2023, unless United elects to exercise its option to extend the agreement for an additional period of no less than two years, but up to three years, in its discretion, in which case it expires between February 2025 and February 2026, unless United elects to exercise its second option to extend the agreement for a second additional two-year period, subject to mutual agreement on certain economic terms, in which case it expires between February 2027 and February 2028. United is also permitted, subject to certain conditions, including giving notice of 60 days or more, to terminate the agreement early in the event of Air Wisconsin’s material breach of the agreement, subject to Air Wisconsin’s right to cure.

The United capacity purchase agreement is also subject to termination prior to expiration in various circumstances, including if Air Wisconsin’s controllable flight completion factor or departure performance falls below certain pre-determined levels, and in the event of a non-carrier-specific grounding of at least a specified number of Air Wisconsin’s aircraft, in each case for a specified period of time. Air Wisconsin currently uses the systems, facilities and services of United to support a significant portion of its operations, including airport and terminal facilities and operations, information technology interface, ticketing and reservations, scheduling, dispatching interface, fuel purchasing and ground handling services. If United were to cease to maintain any of these systems, close any of these facilities, or no longer provide these services to Air Wisconsin, whether due to termination of the United capacity purchase agreement, a strike or other labor interruption by United personnel, bankruptcy or other financial hardship experienced by United, or for any other reason, Air Wisconsin may not be able to obtain access to alternative systems, facilities or services on terms and conditions as favorable as those it currently receives, or at all. Upon certain termination events described in the United capacity purchase agreement, United could require Air Wisconsin to sell or assign to United certain facilities and assets that Air Wisconsin uses in connection with the services it provides. As a result, in order to offer airline service after termination of the United capacity purchase agreement, Air Wisconsin may have to replace these facilities, assets and services. Air Wisconsin may be unable to arrange such replacements on satisfactory terms, or at all.

If the United capacity purchase agreement were to be terminated or not renewed, our business would be significantly impacted, and it is unlikely we would have an immediate source of revenue or earnings to offset the financial impact. United is not under any obligation to extend or renew the United capacity purchase agreement with Air Wisconsin, whether on similar terms or at all. The United capacity purchase agreement permits United to terminate the agreement upon certain changes of control of Air Wisconsin, which could limit Air Wisconsin’s ability to pursue certain acquisitions, sales or other corporate transactions. A termination or expiration of this agreement would likely have a material adverse effect on our financial condition, results of operations, cash flows and ability to satisfy debt and lease obligations, unless we are able to enter into satisfactory substitute arrangements for the utilization of Air Wisconsin’s aircraft and spare engines. We may not be able to enter into substitute arrangements, and any arrangements we are able to secure may not be as favorable to us as the current agreement.

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The COVID-19 pandemic has had a material adverse impact on the business, operating results, financial condition and liquidity of United, which is Air Wisconsin’s sole airline partner, and the duration and spread of the pandemic could result in additional adverse impacts to United, or cause it to declare bankruptcy, which may cause our business, financial condition and results of operations to be negatively impacted.*

We may be directly affected by the financial and operating performance of United, which is Air Wisconsin’s sole airline partner. Any events that negatively impact the financial or operating performance of United, including, but not limited to, the impact of the reduction in passenger flight demand due to pandemics or other widespread outbreaks of communicable diseases such as the COVID-19 pandemic, may have a material adverse effect on our business, financial condition and results of operations. United experienced significant decline in flight demand related to COVID-19 and a resulting material deterioration in its revenue for the first half of 2020. While there has been a modest demand recovery, this reduction in demand is expected to continue. United’s results of operations were materially impacted in the three months ended June 30, 2020, and three months ended September 30, 2020, and United expects its results of operations to be materially impacted through 2021.

As a result of the impact of the COVID-19 pandemic on global passenger flight demand and United’s financial and operational performance, United may be unable to make payments due to Air Wisconsin under the United capacity purchase agreement in a timely manner or at all. Any failure by United to make timely payments due to Air Wisconsin may negatively impact our business, financial condition and results of operations. In addition, if United were to become bankrupt, the United capacity purchase agreement may not be assumed in bankruptcy and could be terminated, and such termination would have a material adverse effect on our business, financial condition and results of operations. The full extent of the impact of the COVID-19 pandemic on United’s, and therefore, on our longer-term operational and financial performance will depend on future developments, many of which are outside of Air Wisconsin’s control, including the effectiveness of United’s mitigation strategies, the duration and spread of COVID-19 and resulting impact on the financial health and operations of United’s and Air Wisconsin’s business partners, and future governmental actions in respect of the COVID-19 pandemic, all of which are highly uncertain and cannot be predicted.

If United continues to provide Air Wisconsin with inefficient flight schedules, or makes certain changes to the expected utilization of Air Wisconsin’s aircraft under the United capacity purchase agreement, our business, financial condition and results of operations may be adversely affected.

Under the terms of the United capacity purchase agreement, United has the ability, subject to certain reasonable operating constraints, to schedule Air Wisconsin’s flights in any manner that serves United’s purposes. These reasonable operating constraints do not prevent United from scheduling Air Wisconsin’s flights in a manner Air Wisconsin deems inefficient. From time to time, United schedules Air Wisconsin’s flights in a manner which creates operational inefficiencies for Air Wisconsin, such as by building in long crew layovers or overnights, or by providing Air Wisconsin with flight schedules that are inconsistent with Air Wisconsin’s existing operational footprint. These actions have had and may continue to have a material adverse effect on our business, financial condition and operations.

There are also certain factors, such as the COVID-19 pandemic, that have led, and may in the future lead, United to modify the anticipated utilization of Air Wisconsin’s aircraft under the United capacity purchase agreement, some of which are beyond Air Wisconsin’s control. Any factors that continue to cause United to schedule the utilization of Air Wisconsin’s aircraft on routes or at frequencies materially different than we have forecasted could further reduce our ability to realize operating efficiencies, which would continue to negatively impact our financial condition and operating results.

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Disagreements regarding the interpretation of the United capacity purchase agreement, as well as other business disputes with United, could have an adverse effect on our operating results and financial condition, and negatively impact Air Wisconsin’s relationship with United.

Long-term contractual agreements, such as the United capacity purchase agreement, are subject to interpretation, and disputes may arise if the parties apply different interpretations to the agreements. Until recently, disputes between United and Air Wisconsin existed under certain provisions of the United capacity purchase agreement. While the prior disputes have been resolved in connection with the execution of an amendment to the United capacity purchase agreement, it is possible that new disputes could arise under the terms of the agreement. To the extent Air Wisconsin experiences new disputes or disagreements with United, it may expend valuable management time and financial resources in its efforts to resolve them. Those disputes or disagreements may result in litigation, arbitration, settlement negotiations or other proceedings. We cannot predict the outcome of these events, or any related negotiations, on the terms of the United capacity purchase agreement or our relationship with United. An unfavorable result could require Air Wisconsin to further modify the terms of the United capacity purchase agreement, or change its business strategy, either of which could have a material adverse effect on our operating results and financial condition. In addition, regardless of the final outcome of any dispute or disagreement, the existence of a dispute with United could harm Air Wisconsin’s relationship with United, which could impact Air Wisconsin’s ability to renew or expand the relationship.

The amounts Air Wisconsin receives under the United capacity purchase agreement may be less than the corresponding costs Air Wisconsin incurs.*

Under the United capacity purchase agreement, a portion of the revenue Air Wisconsin receives is based upon predetermined rates calculated by reference to certain factors, such as the number of covered aircraft, the number of block hours flown and the number of departures. The primary operating costs intended to be compensated by the predetermined rates include labor costs, including salaries and benefits, training costs, crew room costs, maintenance expenses, simulator and spare parts costs and overhead costs. If Air Wisconsin’s costs for those items exceed the compensation paid at the rates set in the United capacity purchase agreement, our financial position and operating results will be negatively affected.

Air Wisconsin’s current growth opportunities and future growth opportunities may be limited by a number of factors impacting the airline industry, including the COVID-19 pandemic.*

Growth opportunities within United’s current flight network may be limited by various factors, including “scope” clauses in United’s current collective bargaining agreements with its pilots that restrict the number and size of regional aircraft that may be operated in its flight systems that are not flown by its pilots. Although United currently has significant room under its scope clauses with respect to 50-seat aircraft, which currently comprise Air Wisconsin’s fleet, these clauses could limit Air Wisconsin’s ability to operate larger aircraft for United which would limit Air Wisconsin’s expansion opportunities. United is under no obligation to provide Air Wisconsin with an opportunity to fly additional aircraft within its system or to otherwise expand its relationship with Air Wisconsin.

Further, Air Wisconsin’s ability to expand its operations in the future may be limited by a number of factors impacting the airline industry, including access to airport terminals and facilities, terms of United’s collective bargaining agreements limiting the usage of regional carriers, required capital expenditures to maintain or expand fleet operations, significant changes in variable costs, regulatory changes, changes in the availability of necessary parts and equipment, and intense competition and pricing pressure. Given the competitive nature of the airline industry, and the excess capacity in the industry due to the significantly depressed passenger demand for air travel as a result of the COVID-19 pandemic, we believe limited growth opportunities exist. In order to take advantage of these opportunities, to the extent and in the event that passenger demand for air travel rebounds, Air Wisconsin may be required to accept less favorable contract terms in order to secure new or additional flying opportunities. Due to the significant decline in passenger demand for air travel and the resulting economic disruption, there may not be any new or additional flying opportunities available to Air Wisconsin. In addition, even if Air Wisconsin is offered these growth opportunities in the future, they may involve economic terms or financing commitments that are unfavorable to Air Wisconsin or do not result in profitable operations.

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Air Wisconsin currently operates only one aircraft type, and relies on one aircraft manufacturer and one engine manufacturer, and any operating restrictions or safety concerns applicable to this aircraft or engine type, or any failure to receive sufficient maintenance and support services from these manufacturers, would negatively impact our business and financial condition.*

Air Wisconsin currently relies on a single aircraft type, the CRJ-200 regional jet, and a single engine type, the General Electric (“GE”) CF34-3B1 engine. The issuance of Federal Aviation Administration (“FAA”) or manufacturer directives restricting or prohibiting the use of this aircraft type or engine type would negatively impact our business and financial results. In addition, any concerns raised regarding the safety or reliability of the CRJ-200 regional jet or the GE CF34-3B1 engine, whether or not directly associated with Air Wisconsin’s fleet, could result in concerns about Air Wisconsin’s fleet that could negatively impact our business.

Air Wisconsin has been highly dependent upon Bombardier, Inc. (“Bombardier”), as the sole manufacturer of Air Wisconsin’s aircraft, and GE, as the sole manufacturer of Air Wisconsin’s aircraft engines, to provide sufficient parts or related maintenance and support services to it in a timely manner. Air Wisconsin’s operations could be materially and adversely affected by the failure or inability of Mitsubishi Heavy Industries. Ltd (“Mitsubishi”), as Bombardier’s successor in ownership of the CRJ-200 program, or GE to provide required maintenance or support services, or the interruption of Air Wisconsin’s operations as a result of unscheduled or unanticipated maintenance requirements for Air Wisconsin’s aircraft or engines. On June 1, 2020, Bombardier consummated an agreement with Mitsubishi, pursuant to which Mitsubishi purchased Bombardier’s regional jet program, including all aspects of the CRJ-200 regional jet, including type certificates, maintenance, support, refurbishment, marketing and sales activities. We cannot predict what effect, if any, the closing of this transaction may have on Mitsubishi’s continued support of the CRJ-200 regional jet or Air Wisconsin’s continued ability to obtain required parts and services.

Additionally, GE Aviation, an operating unit of GE, recently announced, in response to the COVID-19 pandemic, that it would lay off a significant percentage of its workforce. We cannot predict what effect these layoffs will have on the availability of parts and services to Air Wisconsin from the manufacturer of its aircraft engines.

Air Wisconsin has a significant amount of debt and other contractual obligations that could impair its liquidity and ability to obtain additional financing and, in the event Air Wisconsin is unable to repay its debt and other contractual obligations, our business, results of operations and financial condition may be adversely impacted.*

The airline business is capital intensive and, as a result, Air Wisconsin is highly leveraged. As of March 31, 2020, Air Wisconsin had approximately $120.7 million (including capitalized interest of $16.5 million) in total third-party current and long-term debt, which was incurred primarily in connection with the acquisition of aircraft, and which is secured by substantially all of Air Wisconsin’s aircraft, engines and parts. During the three months ended March 31, 2020, no principal payments were made on Air Wisconsin’s third-party debt. For future annual cash obligations relating to third-party debt, see the section entitled “Management Discussion and Analysis of Financial Condition and Results of Operations – Commitments and Capital Obligations” within this Quarterly Report and the 2019 Annual Report.

As of March 31, 2020, Air Wisconsin leased 10 aircraft pursuant to operating leases, with an average remaining term of less than one year. During the three months ended March 31, 2020, Air Wisconsin’s aircraft operating lease payments totaled approximately $0.7 million. As of March 31, 2020, future minimum lease payments due under all operating leases were approximately $16.7 million. For future annual cash obligations relating to all operating leases, see the section entitled “Management Discussion and Analysis of Financial Condition and Results of Operations – Commitments and Capital Obligations” within this Quarterly Report and the 2019 Annual Report. In January 2020, the Company acquired ownership of three aircraft which were previously leased by Air Wisconsin from Southshore. In May 2020, Air Wisconsin acquired ownership of eight of its leased aircraft from the lessor and, in September, Air Wisconsin acquired ownership of two of its leased aircraft from the lessor. As a result, as of September 30, 2020, Air Wisconsin had no aircraft under lease.

Air Wisconsin is subject to various covenants under its financing agreements and leases. Its ability to comply with these covenants may be affected by events beyond its control. Air Wisconsin’s failure to comply with obligations under these credit facilities could result in an event of default under the facilities. A default, if not cured or waived, could permit the lender to accelerate payment of the loans. In addition, the lender would have the right to proceed against the collateral security granted to a trustee for its benefit, which consists of substantially all of the aircraft, engines and parts owned by Air Wisconsin. If this debt is accelerated, we cannot be certain that Air Wisconsin will have funds available to pay the debt or that it will have the ability to refinance the debt on terms favorable to it, or at all. If Air Wisconsin could not repay or refinance the accelerated debt, it could be insolvent and could seek to file for bankruptcy protection.

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In addition, the Payroll Support Program Agreement (the “PSP Agreement”) that Air Wisconsin entered into in April 2020 with the U.S. Department of the Treasury (“Treasury”) pursuant to the federal Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) contains various covenants. If Air Wisconsin fails to comply with its obligations under the PSP Agreement, it may be required to repay the funds provided to it under that agreement. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Debt and Credit Facilities” within the 2019 Annual Report for additional information.

We cannot be certain that Air Wisconsin’s operations will generate sufficient cash flow to make its required payments under its debt and other contractual arrangements. Air Wisconsin currently does not have sufficient liquidity to repay all of its outstanding debt in full if such debt were accelerated. If Air Wisconsin is unable to pay its debts as they come due, or is unable to obtain waivers or extensions of time for such payments, its secured lenders could foreclose on any of Air Wisconsin’s assets securing such debt. Additionally, a failure to pay Air Wisconsin’s property leases, debt or other fixed cost obligations, or a breach of its other contractual obligations, could result in a variety of further adverse consequences, including the exercise of remedies by its creditors and lessors, such as acceleration. In such a situation, Air Wisconsin may not be able to cure its breach, fulfill its contractual obligations, make required lease payments or otherwise cover its fixed costs, which could have a material adverse effect on our business, results of operations and financial condition.

If Air Wisconsin is unable to source financing on acceptable terms, or at all, our business could be materially adversely affected. To the extent Air Wisconsin finances its activities with additional debt, it would become subject to additional debt service obligations, as well as additional covenants that may restrict its ability to pursue its business strategy or otherwise constrain its growth and operations. Air Wisconsin’s ability to pay the high level of fixed costs associated with operating a regional airline will therefore depend on its operating performance, cash flows and ability to secure adequate financing, which will in turn depend on, among other things, the success of its current business strategy, availability and cost of financing, as well as general economic and political conditions and other factors that are, to some extent, beyond its control. Such factors include disease outbreaks and pandemics, such as the COVID-19 pandemic, which has caused significant volatility in the U.S. and global financial markets.

A significant portion of Air Wisconsin’s workforce is represented by labor unions and the terms of Air Wisconsin’s collective bargaining agreements may increase our operating expenses and negatively impact our financial results.*

As of September 30, 2020, 964 of Air Wisconsin’s employees were represented by labor unions, including the Air Line Pilots Association, International (“ALPA”), the Association of Flight Attendants (“AFA”), the International Association of Machinists and Aerospace Workers AFL-CIO (“IAMAW”), and the Transport Workers Union of America (“TWU”). In November 2019, Air Wisconsin’s pilots, represented by ALPA, ratified a new three-year extension to the collective bargaining agreement. In September 2018 and November 2018, Air Wisconsin reached an agreement with the technical stores clerks and dispatchers, represented by the TWU, with new amendable dates of September 20, 2022 and November 1, 2020, respectively, and in September 2020, Air Wisconsin reached an agreement with its flight attendants, represented by the AFA, with a new amendable date of October 1, 2022. The terms and conditions of future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency, or other factors, to bear higher costs than Air Wisconsin, which may result in higher industry wages and increased pressure on Air Wisconsin to increase the wages and benefits of its employees. Future agreements with represented employees may be on terms that are less favorable to Air Wisconsin than its current agreements or not comparable to agreements entered into by its competitors. Moreover, we cannot predict the outcome of any future negotiations relating to union representation or collective bargaining agreements. Any agreements reached in collective bargaining may increase our operating expenses and negatively impact our financial results.

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Air Wisconsin’s collective bargaining agreement with its mechanics and related employees, who are represented by the IAMAW, has been amendable since October 2015 and is in mediated negotiation under the auspices of the National Mediation Board. If Air Wisconsin is unable to reach agreement with any of its unionized work groups in current or future negotiations regarding the terms of their collective bargaining agreements, it may be subject to work interruptions, stoppages or shortages.

Through notices given pursuant to the federal Worker Adjustment and Retraining Notification (WARN) Act, Air Wisconsin informed approximately 871 employees that they might be furloughed on October 1, 2020, due to the COVID-19 pandemic and the decreased demand for air travel. On October 1, 2020, Air Wisconsin furloughed approximately 305 employees. The duration of these furloughs, and the scope of any additional furloughs, is highly uncertain and will be impacted by a number of factors, including the actual and estimated block hours for which Air Wisconsin is scheduled under the United capacity purchase agreement, the level of demand for air travel generally, and the timing and extent of any additional governmental assistance provided under the CARES Act or otherwise.

Maintenance costs will likely increase as the age of Air Wisconsin’s fleet increases.*

The average age of Air Wisconsin’s CRJ-200 regional jets as of September 30, 2020 was approximately 18.1 years. As Air Wisconsin’s fleet continues to age, its maintenance costs may increase, both on an absolute basis and as a percentage of our operating expenses, and may result in out-of-service periods during which aircraft are dedicated to maintenance activities and unavailable for flying under the United capacity purchase agreement. Any unexpected increase in Air Wisconsin’s maintenance costs as its fleet ages, or decreased revenue resulting from out-of-service periods, could have an adverse effect on our financial condition and operating results.

The loss of key personnel upon whom Air Wisconsin depends to operate its business or the inability to attract additional qualified personnel could adversely affect our business.*

We believe that our future success may depend on our ability to retain or attract highly qualified management, technical and other personnel. We may not be successful in retaining key personnel or in attracting other highly qualified personnel. Among other things, the CARES Act imposes significant restrictions on Air Wisconsin’s executive compensation. Such restrictions, over time, will likely result in lower executive compensation in the airline industry than is prevailing in other industries, which may present retention challenges in the case of executives presented with alternative, non-airline opportunities. In addition, Air Wisconsin’s decision to furlough approximately 305 employees on October 1, 2020 may have a negative impact on employee morale and adversely impact our ability to recruit management personnel or other employees in the future. Any inability to attract or retain qualified management personnel and other employees would have a material adverse effect on our business, results of operations and financial condition.

Air Wisconsin may experience disruption in service with any of its key third-party service providers, which could have a material adverse effect on our business, financial condition and results of operations.*

Air Wisconsin’s reliance on outside vendors to provide essential services critical to its operations may limit its ability to control the efficiency and timeliness of these contracted services. Air Wisconsin’s agreements with service providers are generally subject to termination upon the occurrence of certain events and, in a few cases, at the convenience of the provider. If Air Wisconsin’s third-party service providers terminate these contracts, experience bankruptcy or other financial hardship, or do not provide timely or consistently high-quality service for any reason, Air Wisconsin may not be able to replace them in a timely or cost-efficient manner, which could result in increased costs, service delays, or maintenance issues, any of which could have a material adverse effect on our business, financial condition and results of operations.

Regulatory changes or tariffs could increase the costs and result in delivery delays of necessary parts and aircraft and negatively impact our business and financial condition.*

Air Wisconsin imports a substantial quantity of the parts it needs. For example, the sole manufacturer of Air Wisconsin’s aircraft, Bombardier, is headquartered in Canada, and has sold its regional jet program, which includes the CRJ-200 regional jets comprising Air Wisconsin’s aircraft fleet, and the related services and support programs located in Canada to Mitsubishi. Although Mitsubishi is headquartered in Japan, we believe it intends to operate the regional jet operation it has acquired from Bombardier out of Canada. Air Wisconsin’s current engine maintenance agreement is with a maintenance and repair organization that performs its services in Canada. We cannot predict the impact of potential regulatory changes, or action by U.S. regulatory agencies, including the potential impact of tariffs or changes in international trade treaties on the costs or timing associated with acquiring aircraft parts and services. Our business may be subject to additional costs and uncertainty as a result of potential regulatory changes, which could have an adverse effect on our operations and financial results.

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Should the passenger demand for air travel rebound following the COVID-19 pandemic, Air Wisconsin may experience difficulty hiring, training and retaining a sufficient number of qualified pilots, which may negatively affect our operations and financial condition.

Historically, the supply of qualified pilots to the airline industry has been limited, which created difficulty hiring, training and retaining a sufficient number of qualified pilots. In July 2013, the FAA issued stringent pilot qualification and crew member flight training standards, which increased the required training time for new airline pilots (the “FAA Qualification Standards”), and the FAA also mandated stricter rules to minimize pilot fatigue, increasing the number of pilots required to be employed for Air Wisconsin’s operations as they existed prior to the COVID-19 pandemic and correspondingly increasing Air Wisconsin’s labor costs. As a result of the significant decline in passenger demand due to the COVID-19 pandemic, there is no current shortage of qualified pilots in the airline industry.

If passenger demand for air travel increases following the COVID-19 pandemic, Air Wisconsin may again experience challenges in hiring and maintaining sufficient numbers of qualified pilots due to a number of factors, including the increased flight hour requirements under the FAA Qualification Standards, the statutory mandatory retirement age of 65, and attrition resulting from the hiring needs of other airlines. Air Wisconsin has historically also experienced increases in time and resources required to train pilots due to several factors, including limited availability of flight simulators and instructors. If future pilot attrition rates outpace Air Wisconsin’s ability to hire and retain qualified pilots, Air Wisconsin may be unable to fly the number of flights required under the United capacity purchase agreement, which may result in penalties under the agreement that would negatively impact our operations and financial condition.

Information technology security breaches, hardware or software failures or other information technology infrastructure disruptions may negatively impact Air Wisconsin’s business, operations and financial condition.*

The performance and reliability of Air Wisconsin’s technology, and the technology of United, are critical to Air Wisconsin’s ability to compete effectively. Any internal technological error or failure or large-scale external interruption in the technological infrastructure we depend on, such as power, telecommunications or the internet, may disrupt Air Wisconsin’s internal network. Any individual, sustained or repeated failure of Air Wisconsin’s technology, or that of United, could impact Air Wisconsin’s ability to conduct its business, lower the utilization of Air Wisconsin’s aircraft and result in increased costs. Air Wisconsin’s technological systems and related data, and those of United, may be vulnerable to a variety of sources of interruption due to events beyond its control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues.

In addition, as a part of Air Wisconsin’s ordinary business operations, it collects and stores sensitive data, including personal information of its employees and information of United. Air Wisconsin’s information systems are subject to an increasing threat of evolving cybersecurity attacks. Unauthorized parties may attempt to gain access to Air Wisconsin’s systems or information through fraud or other means of deception. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and may be difficult to anticipate or to detect for long periods of time. Air Wisconsin may not be able to prevent all data security breaches or misuse of data. The compromise of Air Wisconsin’s technology systems resulting in the loss, disclosure, misappropriation of, or access to, employees’, passengers’ or business partners’ information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information and disruption to its operations any or all of which could adversely affect our business and financial condition.

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We may become involved in litigation that may materially adversely affect us.

From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including employment, class action and other litigation and claims, as well as governmental and other regulatory investigations and proceedings. Such matters can be time-consuming to resolve, divert management’s attention and resources, cause us to incur significant expenses or liability, and require us to change our business practices. Because of the potential risks, expenses and uncertainties associated with litigation, we may, from time to time, settle disputes, even where we believe that we have meritorious claims or defenses. Because litigation is inherently unpredictable, we cannot be certain that the results of any of these actions will not have a material adverse effect on our business, results of operations and financial condition.

Risks Related to Our Industry

The duration and severity of the COVID-19 pandemic, and similar public health threats that we may face in the future, could result in additional adverse effects on the business, operating results, financial condition and liquidity of Air Wisconsin and United.*

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic, and by March 19, 2020, the U.S. Department of State issued a Level 4 “do not travel” advisory for all international travel due to the global impact of COVID-19.

Our business, as well as the industry in which Air Wisconsin operates, remains significantly impacted by the COVID-19 pandemic. United, Air Wisconsin’s sole airline partner, began experiencing a significant decline in domestic and international demand related to the COVID-19 pandemic, during the first quarter of 2020, resulting in a first quarter net loss. As of the date of this filing, United expects demand will remain suppressed for the remainder of 2020 and likely into 2021. As a result of lowered demand, United cut approximately 90% of its scheduled capacity for June 2020, approximately 75% for July 2020, approximately 70% for August 2020 and approximately 60% for September 2020. Since March 2020, United has significantly reduced the number of Air Wisconsin’s scheduled departures and block hours flown, and United may impose continued reductions.

Through notices given pursuant to the federal WARN Act, Air Wisconsin informed approximately 871 employees that they might be furloughed on October 1, 2020, due to the COVID-19 pandemic and the decreased demand for air travel. On October 1, 2020, Air Wisconsin furloughed approximately 305 employees. The duration of these furloughs, and the scope of any additional furloughs, is highly uncertain and will be impacted by a number of factors, including the actual and estimated block hours for which Air Wisconsin is scheduled under the United capacity purchase agreement, the level of demand for air travel generally, and the timing and extent of any additional governmental assistance provided under the CARES Act or otherwise. Moreover, the severity and duration of global health and financial impacts of the COVID-19 pandemic are difficult to predict; thus, the magnitude and scope of the impact of the COVID-19 pandemic on our business and future results of operations are highly uncertain and subject to change.

The full extent of the ongoing impact of the COVID-19 pandemic on our longer-term operational and financial performance will depend on future developments, many of which are outside of our control, including the effectiveness of the mitigation strategies employed by United, the duration and spread of COVID-19, the impact of COVID-19 on overall long-term demand for air travel, the impact of the COVID-19 pandemic on our financial health and operations and those of United, United’s compliance with the United capacity purchase agreement, and future governmental actions, all of which are highly uncertain and cannot be predicted. A long-term continuation of reduced passenger demand for air travel could have a material adverse effect on our business, operating results, financial condition and liquidity. Moreover, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks set forth herein.

In addition, a further outbreak of COVID-19, an outbreak of another disease or similar public health threat, or any other event that would affect travel demand, travel behavior or travel restrictions, could have a material adverse impact on our business, financial condition and operating results and those of United. For additional information, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Economic Conditions, Challenges and Risks Impacting Financial Results – COVID-19 Global Pandemic” within this Quarterly Report.

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The airline industry is often negatively impacted by numerous factors that could have a material adverse effect on our business, results of operations and financial condition.

The business of airlines is affected by numerous factors, many of which are beyond Air Wisconsin’s control, including air traffic congestion at airports, air traffic control inefficiencies, facility disruptions, acts of war or terrorism, increased security measures, adverse weather conditions, natural disasters and the outbreak of disease. Factors that cause flight delays frustrate passengers and increase operating costs and decrease revenue, which in turn could adversely affect profitability. Because Air Wisconsin’s revenue (other than the portion of its revenue based on the number of aircraft covered under the United capacity purchase agreement) depends primarily on Air Wisconsin’s completion of flights, and secondarily on service factors such as timeliness of departure and arrival, customer satisfaction, cancellations or delays could have a material adverse effect on our business, results of operations and financial condition.

In addition to the factors noted above, while Air Wisconsin is to some extent protected from certain market conditions under the United capacity purchase agreement, its operations and our financial condition are currently affected, and may in the future be affected, by many other industry factors and conditions beyond Air Wisconsin’s control, including, among others:

The effect of any of the foregoing factors or conditions on Air Wisconsin’s operations is difficult to forecast; however, the occurrence of any or all of such factors or conditions could materially and adversely affect its operations and our financial condition.

The airline industry is highly competitive and has undergone a period of consolidation and transition leaving fewer potential major airline partners.*

The airline industry is highly competitive. Air Wisconsin competes primarily with other regional airlines, some of which are owned or operated by major airlines. The airline industry has undergone substantial consolidation, including the mergers between Alaska Airlines and Virgin America in 2016, American Airlines and US Airways in 2013, Southwest and AirTran Airways in 2011, United and Continental Airlines in 2010 and Delta and Northwest Airlines in 2008. Any additional consolidation or significant alliance activity within the airline industry could further limit the number of potential partners with whom Air Wisconsin could enter into capacity purchase agreements. In addition, any further consolidation activity involving United, or reduction in the size of its network, could alter its business strategy or its perception of the value of its relationship with Air Wisconsin, which could limit opportunities for Air Wisconsin to provide additional service to United. Similarly, any further consolidation or restructuring of any major air carrier’s regional jet programs could negatively impact Air Wisconsin’s future growth opportunities.

In the course of consolidation, major airlines may also make other strategic changes, such as relocating or consolidating hubs. For example, in May 2020, United temporarily ceased Air Wisconsin’s operations at Washington-Dulles and significantly reduced Air Wisconsin’s average daily scheduled departures. Air Wisconsin resumed operations at Washington-Dulles in August, but we cannot be certain United will not make future changes to Air Wisconsin’s operations. If United were to make changes such as these in its strategy and operations, or otherwise decide to reduce the size of its network, Air Wisconsin’s operations and our financial results could be adversely impacted.

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Terrorist activities or warnings have dramatically impacted the airline industry and will likely continue to do so.

The terrorist attacks of September 11, 2001 and their aftermath have negatively impacted the airline industry in general. If additional terrorist attacks are launched against the airline industry, there may be lasting consequences of the attacks, which may include loss of life, property damage, increased security measures, higher insurance costs, increased concerns about future terrorist attacks and additional government regulation, among other factors. Additional terrorist attacks, and warnings that such attacks may occur, could negatively impact the airline industry, and result in decreased passenger traffic, increased flight delays or cancellations, as well as increased security, fuel and other costs. If a terrorist attack were to occur, whether or not involving Air Wisconsin’s aircraft, it could have a material adverse impact on our business and operations.

The occurrence of an aviation accident or incident involving Air Wisconsin or its aircraft type could negatively impact our financial condition and operating results.

An accident or incident involving Air Wisconsin’s aircraft could result in significant potential claims of injured passengers and others, as well as negative impacts on its operations resulting from the repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. In the event of an accident, Air Wisconsin’s liability insurance may not be adequate to offset its exposure to potential claims, and it may be forced to bear substantial losses from the accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our operational and financial results. Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that Air Wisconsin’s operations are less safe or reliable than other airlines, which could negatively impact our operations and financial condition and operating results.

Furthermore, given that Air Wisconsin currently operates a single aircraft type, any accident or incident involving the CRJ-200 regional jet aircraft type, whether or not operated by Air Wisconsin, may result in Air Wisconsin temporarily or permanently suspending service on all or a large portion of its fleet. Any grounding of Air Wisconsin’s aircraft could have an adverse impact on Air Wisconsin’s operations, its relationship with United, and our financial results.

Air Wisconsin is subject to significant governmental regulation and potential regulatory changes.*

All interstate air carriers, including Air Wisconsin, are subject to regulation by the U.S. Department of Transportation (“DOT”), the FAA and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA is responsible for regulating and overseeing matters relating to the safety of air carrier flight operations, including the control of navigable air space, the qualification of flight personnel, flight training practices, compliance with FAA airline operating certificate requirements, aircraft certification and maintenance requirements. We cannot predict whether Air Wisconsin will be able to comply with all present and future laws, rules, regulations and certification requirements or whether the cost of continued compliance will have a material adverse effect on our operations. Air Wisconsin incurs substantial costs in maintaining its current certification and otherwise complying with the laws, rules and regulations to which it is subject. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, all or any of Air Wisconsin’s aircraft for any reason may have a material adverse effect on our operations. Air Wisconsin’s business may also be subject to additional costs as a result of potential regulatory changes, which could have an adverse effect on Air Wisconsin’s operations and our financial results.

In addition to state and federal regulation, airports and municipalities enact rules and regulations that affect Air Wisconsin’s operations and require that it incur substantial ongoing costs.

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Air Wisconsin is subject to various environmental and noise laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition.

Air Wisconsin is subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment and noise, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water and the use, management, disposal and release of, and exposure to, hazardous substances, oils and waste materials. Air Wisconsin is or may be subject to new or proposed laws and regulations that may have a direct effect on its operations (or an indirect effect through its third-party providers of goods or services or airport facilities at which it operates). Any such existing, future, new or potential laws and regulations could have an adverse impact on our business, results of operations and financial condition.

Similarly, Air Wisconsin is subject to environmental laws and regulations that require it to investigate and remediate soil or groundwater to meet certain remediation standards. Under certain laws, generators of waste materials, and current and former owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. Liability under these laws may be strict and joint and several, meaning that Air Wisconsin could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of wastes directly attributable to it, which liability could have an adverse impact on our results of operations and financial condition.

Risks Related to the Company’s Common Stock

Because there is no active trading market for the Company’s common stock, the common stock may continue to be illiquid.*

Although the Company’s common stock is traded under the symbol “HRBR” as part of a market network referred to as the “Over-The-Counter” or the OTC Market, the trading volume for the common stock has historically been very limited. The Company has not listed, and does not currently intend to list, the Company’s common stock for trading on any national securities exchange. Accordingly, we expect the common stock to continue to be illiquid for the foreseeable future. Investors should be aware that an active trading market for the common stock may never develop or be sustained.

The price of the Company’s common stock has been and may continue to be volatile.

The trading price of the Company’s common stock has been volatile. We believe the Company’s stock price will be subject to wide fluctuations in response to a variety of factors, including the following:

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