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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2012

or

For the transition period from       to

Commission file number 1-31443

HAWAIIAN HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

(808) 835-3700

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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.  x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the past 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 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).  o Yes x No

As of April 18, 2012, 51,066,024 shares of the registrant’s common stock were outstanding.

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Hawaiian Holdings, Inc.

Form 10-Q

Quarterly Period ended March 31, 2012

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PART I. FINANCIAL INFORMATION

ITEM 1.               FINANCIAL STATEMENTS.

Hawaiian Holdings, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)

See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.

Consolidated Balance Sheets

(in thousands)

See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

1. Summary of Significant Accounting Policies

Business and Basis of Presentation

Hawaiian Holdings, Inc. (the Company or Holdings) is a holding company 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 Airlines, Inc. (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 fluctuations, 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 to be expected for the entire year.  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, 2011.

Recently Adopted Accounting Pronouncements

In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income — Presentation of Comprehensive Income (ASU 2011-05).  This update changes the requirements for the presentation of other comprehensive income, eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, amongst other things.  ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  These amendments are effective for fiscal years and interim periods beginning after December 15, 2011 and should be applied retrospectively.  The Company has adopted this guidance for the quarter ended March 31, 2012 and the two-statement approach is presented within this report.

In May 2011, the FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 amended Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures (ASC 820), to converge the fair value measurement guidance in GAAP and International Financial Reporting Standards (IFRSs). Some of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular principle in ASC 820. In addition, ASU 2011-04 requires additional fair value disclosures.  The amendments are to be applied prospectively and are effective for annual periods beginning after December 15, 2011.  The Company adopted ASU 2011-04 for the quarter ended March 31, 2012 and added additional fair value disclosures to the notes to the unaudited consolidated financial statements.

2. Earnings Per Share

Basic earnings per share, which excludes dilution, is computed by dividing net income or loss 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.

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The table below summarizes those common stock equivalents excluded from the computation of diluted earnings per share because the awards were antidilutive.

(1)                                  In March 2011, the Company entered into a Convertible Note transaction which included the sale of convertible notes, purchase of convertible note hedges and the sale of warrants.  These weighted common stock equivalents were excluded because their conversion price of $7.88 per share for the convertible notes and $10.00 for the warrants exceeded the average market price of our common stock during these periods, and the effect of their inclusion would be antidilutive. These securities could be dilutive in future periods.  The convertible note hedges will always be antidilutive and, therefore, will have no effect on diluted earnings per share.

3.  Fair Value Measurements

ASC 820 clarifies that fair value is 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 as of March 31, 2012 and December 31, 2011:

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Cash equivalents.  The Company’s cash equivalents consist of money market securities and are classified as Level 1 investments and are valued using inputs observable in markets for identical securities.

Fuel derivative contracts.  The Company’s fuel derivative contracts consist of heating oil, West Texas Intermediate (WTI) crude oil and Brent crude oil call options and collars (a combination of purchased call options and sold put options) which are not traded on a public exchange. The fair value of these instruments is determined based on inputs available or derived from public markets; therefore, they are classified as Level 2 in the fair value hierarchy.

The fair value of the Company’s debt (excluding obligations under capital leases) with a carrying value of $519.2 million and $461.5 million at March 31, 2012 and December 31, 2011, respectively, was approximately $504.6 million ($68.5 million as Level 2 and $436.1 million as Level 3 in the fair value hierarchy) and $445.2 million ($66.4 million as Level 2 and $378.8 million as Level 3 in the fair value hierarchy).  The Company’s fair value estimates were based on either market prices or the discounted amount of future cash flows using its current incremental rate of borrowing for similar liabilities.

The carrying amounts of cash and cash equivalents, restricted cash, other receivables and accounts payable approximate their fair value due to their short-term nature.

4.  Fuel Risk Management

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into derivative financial instruments such as heating oil and WTI crude oil and Brent crude oil call options and collars. During the three months ended March 31, 2012, the Company primarily used heating oil and crude oil call options and collars to hedge its aircraft fuel expense. As of March 31, 2012, the Company had outstanding fuel derivative contracts covering 80.8 million gallons of jet fuel that will be settled over the next 15 months. These derivative instruments were not designated as hedges under ASC Topic 815, Derivatives and Hedging (ASC 815), for hedge accounting treatment.  As a result, any changes in fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

The following table shows the amount and location of realized and unrealized gains and losses that were recognized during the three months ended March 31, 2012 and 2011, and where those gains and losses were recorded in the unaudited Consolidated Statements of Operations.

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ASC 815 requires a reporting entity to elect a policy of whether to offset rights to reclaim cash collateral or obligations to return cash collateral against derivative assets and liabilities executed with the same counterparty, or present such amounts on a gross basis.  Based on the fair value of our fuel derivative contracts, our counterparties may require us to post collateral when the price of the underlying commodity decreases.  The Company’s accounting policy is to present its derivative assets and liabilities on a net basis including the collateral posted with the counterparty.  The Company had no collateral posted with counterparties as of March, 31, 2012 and December 31, 2011.

The following table presents the fair value of the asset and liability as well as the location of the asset and liability balances within the unaudited Consolidated Balance Sheets.

5.  Debt

In 2012, the Company borrowed $66.0 million through a secured loan agreement to finance a portion of the purchase price of an Airbus A330-200 aircraft that Hawaiian took delivery of in the first quarter of 2012.  This loan agreement has a fixed interest rate of 5.45%, and principal and interest payments due quarterly with a maturity date in 2024.

As of March 31, 2012, the scheduled maturities of long-term debt over the next five years are as follows (in thousands):

6. Leases

The Company leases aircraft, engines and other assets under long-term lease arrangements. Other leased assets include real property, airport and terminal facilities, maintenance facilities, training centers and general offices. Certain leases include escalation clauses and renewal options. When lease renewals are considered to be reasonably assured, the rental payments that will be due during the renewal periods are included in the determination of rent expense over the life of the lease.

The Company took delivery of two Boeing 717-200 aircraft in the first quarter of 2012 under capital leases.

As of March 31, 2012, the scheduled future minimum rental payments under capital leases and operating leases with noncancelable basic terms of more than one year were as follows:

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7. Employee Benefit Plans

The components of net periodic benefit cost for the Company’s defined benefit and other postretirement plans for the three months ended March 31, 2012 and 2011 included the following:

The Company made contributions of $2.4 million to its defined benefit and other postretirement plans during the three months ended March 31, 2012, and expects to make additional minimum required contributions of $7.8 million during the remainder of 2012.

8. Commitments and Contingent Liabilities

Commitments

As of March 31, 2012, the Company had capital commitments consisting of firm aircraft orders for fifteen wide-body Airbus A330-200 aircraft, six Airbus A350XWB-800 aircraft and five Rolls Royce spare engines scheduled for delivery through 2020.  The Company has purchase rights for an additional three A330-200 aircraft and six A350XWB-800 aircraft and can utilize these rights subject to production availability.  The Company has operating commitments with a third-party to provide aircraft maintenance services which include fixed payments as well as variable payments based on flight hours for our Airbus fleet through 2027.  The Company also has operating commitments with third-party service providers for reservations, IT, and accounting services through 2017.

Committed capital and operating expenditures include escalation and variable amounts based on estimates.  The gross committed expenditures for upcoming aircraft deliveries and committed financings for those deliveries during the remainder of 2012 and the next four years and thereafter are detailed below as of the date of filing:

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*                                         See below for a detailed discussion of the committed financings Hawaiian has received for its upcoming capital commitments for aircraft deliveries.

Airbus A330-200 Facility Agreement Commitments

Hawaiian has a commitment for a secured loan agreement entered into during June 2011, totaling $67 million, to finance a portion of its capital commitment for an upcoming Airbus A330-200 aircraft delivery during the second quarter of 2012. The loan agreement will bear interest, at Hawaiian’s election, at either a floating rate based on a margin over LIBOR or a fixed rate with a maturity date of April 2022.  The gross capital commitment for the purchase of the aircraft and the committed financing are shown in the table above.

The anticipated future principal payments and commitment fees for this facility agreement, not included in the table above, is approximately $3.0 million for the remaining months in 2012, $3.9 million in 2013, $4.1 million in 2014, $4.3 million in 2015, and $4.5 million in 2016 and $47.3 million thereafter.

Purchase Aircraft Lease Financing Agreement and Aircraft Lease Commitment

In October 2011, Hawaiian entered into an agreement with a third-party aircraft lessor for the sale and leaseback of three Airbus A330-200 aircraft with scheduled delivery dates in the second quarter of 2012 and the first half of 2013 with total sale proceeds of $270 million.  Both the gross capital commitment for the purchase of the aircraft and the committed financing are shown in the table above.  These sale and leaseback transactions have initial lease terms of twelve years with the option to extend an additional twenty-four months. Rent under each lease is payable monthly at a fixed rate to be determined at delivery of each aircraft.

In addition to the aircraft purchase commitments and related financings described above, Hawaiian entered into a twelve-year lease agreement for an Airbus A330-200 aircraft with an expected delivery date in the second quarter of 2012, that is not included in the table above.  The Company will determine whether this lease will be classified as a capital or operating lease in the period it takes delivery of the aircraft.

The anticipated future payments for these leases, not included in the table above, are approximately $11.9 million for the remaining months in 2012, $34.4 million in 2013, $37.4 million in 2014, $37.4 million in 2015, and $37.4 million in 2016 and $291.6 million thereafter.

Litigation and Contingencies

The Company is subject to legal proceedings arising in the normal course of its operations.  Management does not anticipate that the disposition of any currently pending proceeding will have a material effect on the Company’s operations, business or financial condition.

General Guarantees and Indemnifications

In the normal course of business, the Company enters into numerous aircraft financing and real estate leasing arrangements that have various guarantees included in the contract.  It is common in such lease transactions for the lessee to agree to indemnify the lessor and other related third-parties for tort liabilities that arise out of or relate to the lessee’s use of the leased aircraft or occupancy of the leased premises.  In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct.  Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or

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relates to its use of the real estate leased premises.  The Company believes that it is covered by insurance (subject to deductibles) for most tort liabilities and related indemnities described above with respect to the aircraft and real estate that it leases.  Hawaiian cannot estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.

Credit Card Holdback

Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur.  These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $5.2 million at March 31, 2012 and $30.9 million at December 31, 2011.  The agreement with the Company’s largest credit card processor also contains financial triggers for additional holdbacks, which are based upon, among other things, the amount of unrestricted cash, level of debt service coverage and operating income measured quarterly on a trailing 12-month basis.  As of March 31, 2012, there were no amounts subject to this holdback.  As of December 31, 2011, the holdback was 25% of the applicable credit card air traffic liability.  Under the terms of this credit card agreement, the level of credit card holdback is subject to adjustment based on actual performance relative to these specific triggers.  Depending on the Company’s performance relative to these financial triggers in the future, the holdback could incrementally increase to an amount up to 100% of the applicable credit card air traffic liability, which would also cause an increase in the level of restricted cash.  If the Company is unable to obtain a waiver of, or otherwise mitigate the increase in restriction of cash, it could also cause a covenant violation under other debt or lease obligations and have a material adverse impact on the Company.

ITEM 2.                                  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views with respect to certain current and future events and financial performance.  Such forward-looking statements include, without limitation: any expectations of operating expenses, deferred revenue, interest rates, income taxes, deferred tax assets, valuation allowance or other financial items; statements regarding factors that may affect our operating results; estimates of fair value measurements; statements related to aircraft maintenance and repair costs and deposits and timing of maintenance activities; statements related to capital expenditures for software, improvement, maintenance materials, repairs and ramp and maintenance equipment; statements related to cash flow from operations and seasonality; estimates of required funding of and contributions to our defined benefit pension and disability plan; estimates of aircraft and passenger servicing expenses; estimates of annual fuel expenses and measure of the effects of fuel prices on our business; statements regarding the availability of fuel; statements regarding our wages and benefits and labor costs and agreements; statements regarding training and transition costs and productivity improvements; statements regarding costs of compliance with regulations promulgated by the FAA and other regulatory agencies; statements related to airport rent rates and landing fees at airports in Hawaii; statements regarding real estate leases and costs; statements regarding aircraft rent expense; statements regarding our total capacity and yields on routes; statements regarding compliance with potential environmental regulations; statements regarding commissions and other selling expenses; statements regarding potential dilution of our securities; statements regarding cost liability and deferred revenue estimates related to the frequent flyer program; statements related to our hedging program; statements concerning the impact of, and changes to, accounting principles, policies and estimates; statements regarding our tax valuation allowance; statements related to markets for and interest earned on auction rate securities; statements regarding credit card holdback; statements regarding the availability of financing; statements regarding our capital expenditures; potential violations under the Company’s debt or lease obligations; statements regarding our ability to comply with covenants under our financing arrangements; statements related to risk management, credit risks and air traffic liability; statements related to future U.S. and global economic conditions or performance; statements related to changes in our fleet plan and related cash outlays or financing arrangements; statements related to expected delivery of new aircraft; statements related to potential route expansion; statements related to the effects of any litigation on our operations or business; statements related to insurance coverage for tort liabilities and related indemnities; and statements as to other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing.  Words such as “expects,” “anticipates,” “projects,” “intends,” “plans,” “believes,” “estimates,” variations of such words, and similar expressions are also intended to identify such forward-looking statements.  These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to our operations and business environment, all of which may cause our actual results to be materially different from any future results, expressed or implied, in these forward-looking statements.

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The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements also include the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements, including our Annual Report on Form 10-K for the year ended December 31, 2011.  All forward-looking statements included in this document are based on information available to us as of the date hereof.  We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this quarterly report.  The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Overview

Our Company

Hawaiian Holdings, Inc. (the “Company,” “Holdings,” “we,” “us” and “our”) is a holding company 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 Airlines, Inc. (“Hawaiian”).  Hawaiian was originally incorporated in January 1929 under the laws of the Territory of Hawaii and became the Company’s indirect wholly-owned subsidiary pursuant to a corporate restructuring that was consummated in August 2002.  Hawaiian became a Delaware corporation and the Company’s direct wholly-owned subsidiary concurrent with its reorganization and reacquisition by the Company in June 2005.

Hawaiian is engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the Neighbor Island routes), between the Hawaiian Islands and certain cities in the Continental United States (the North America routes), and between the Hawaiian Islands and the South Pacific, Australia and Asia (the International routes), collectively referred to as our Scheduled Operations.  In addition, Hawaiian operates various charter flights.  Hawaiian is the largest airline headquartered in Hawaii and the twelfth largest domestic airline in the United States based on revenue passenger miles reported by the Research and Innovative Technology Administration Bureau of Transportation Statistics as of December 31, 2011, the latest available data.  At March 31, 2012, Hawaiian’s operating fleet consisted of eighteen Boeing 717-200 aircraft for its Neighbor Island routes and sixteen Boeing 767-300 aircraft and six Airbus A330-200 aircraft for its North America, International and charter routes.

Based in Honolulu, Hawaiian had 4,451 active employees as of March 31, 2012.

General information about us is available at http://www.hawaiianair.com/about.  Information contained on our website is not incorporated by reference into, or otherwise to be regarded as part of, this Quarterly Report on Form 10-Q unless expressly noted.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC.

First Quarter Financial Highlights

·                  Operating revenue increased 19.1% to $435.5 million from the prior-year period.

·                 Passenger revenue per available seat mile (PRASM) increased 6.5% to 12.45 cents from the prior-year period.

·                 Partially offsetting the improvement in revenue was a 28.3% increase in fuel expense due to an increase in both fuel costs and consumption from the prior-year period.

·                  Unrestricted cash and cash equivalents increased $71.9 million to $376.0 million at March 31, 2012 from December 31, 2011.

First Quarter Operational Highlights

·                  Ranked as the #1 carrier for on-time performance and fewest flight cancellations as reported by the U.S. Department of Transportation Air Travel Consumer for the month of January.

·                  Took delivery and placed into revenue service one Airbus A330-200 and two Boeing 717-200 aircraft during the quarter.

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Results of Operations

We recorded net income of $7.3 million, or $0.14 per diluted share, for the three months ended March 31, 2012, compared to $0.9 million, or $0.02 per diluted share in the prior-year period.  Our improved performance is primarily the result of higher unit revenues (passenger revenue per available seat mile) and increased passenger yield.  The increase in operating revenue was partially offset by a significant year-over-year increase in fuel prices from $2.82 per gallon in the three months ended March 31, 2011 to $3.27 per gallon in the three months ended March 31, 2012, including the effects of fuel derivatives settling in the period, and increases in other operating expenses due to the expansion of our fleet.

Statistical Data (unaudited)

(a)                    Includes applicable taxes and fees.

Operating Revenue

Operating revenue was $435.5 million for the three months ended March 31, 2012, a 19.1% increase over operating revenue of $365.6 million for the prior-year period, driven primarily by an increase in passenger revenue.

Passenger Revenue

Passenger revenue increased $65.6 million or 20.2% for the three months ended March 31, 2012 as compared to the prior-year period, primarily due to increased yields on our North America and International routes, an increase in the number of aircraft in our fleet and the expansion of our longer haul International routes.  The detail of these changes is described in the table below:

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North America — North America revenue increased by $11.7 million for the three months ended March 31, 2012, as compared to the prior-year period, primarily due to increased yield.

Neighbor Island — Neighbor Island revenue increased by $3.5 million for the three months ended March 31, 2012, as compared to the prior-year period, driven by increased capacity (ASMs) and traffic (RPMs) commensurate with the delivery of three new Boeing 717 aircraft during the fourth quarter 2011 and first quarter 2012.

International — International revenue increased by $50.4 million for the three months ended March 31, 2012, as compared to the prior-year period, due to increases in both yield and capacity.  The three months ended March 31, 2012 reflects our new route to Osaka, Japan, launched in July 2011, and daily service to Sydney that began in December 2011 from four times per week.

We expect passenger revenue to increase in future periods as we continue to add capacity with the introduction of additional aircraft to our fleet.  In the second quarter, we launched daily non-stop service from Honolulu to Fukuoka, Japan, that began in April 2012 and plan to launch daily non-stop service from Honolulu to New York City, New York beginning in June 2012.

Other Revenue

Other operating revenue increased by $4.2 million or 10.5% for the three months ended March 31, 2012 as compared to the prior-year period, primarily due to increased baggage revenue and an increase in cargo revenue due to the additional cargo capacity provided by the Airbus A330-200 aircraft.

Operating Expense

Operating expenses were $422.6 million and $370.6 million for the three months ended March 31, 2012 and March 31, 2011, respectively.  The changes in operating expenses for the three months ended March 31, 2012 as compared to the prior-year period are detailed below:

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Our operations have expanded by approximately 12.8% (measured in ASMs) during the three months ended March 31, 2012 as compared to the prior-year period, primarily due to the addition of three Airbus A330-200 aircraft (delivery dates in April 2011, October 2011 and March 2012) and three Boeing 717-200 aircraft (delivery dates in December 2011, January 2012 and February 2012) partially offset by the return of two leased Boeing 767-300 aircraft (May and October 2011) at the end of their lease terms.  Our expansion includes the addition of a new route to Osaka, Japan, in July 2011 as well as increased frequency on our Australia route in December 2011.  As a result of this expansion, we have experienced corresponding increases in our variable expenses such as aircraft fuel, wages and benefits, maintenance materials and repairs, aircraft and passenger servicing, commissions and other selling and other rentals and landing fees.

We expect operating expenses to increase with the continued expansion of our services and the increased number of aircraft in our fleet.

Aircraft Fuel

Aircraft fuel expense increased $31.0 million, or 28.3% in the three months ended March 31, 2012, as compared to the prior-year period, primarily due to the increase in the cost of aircraft fuel as well as an increase in consumption due to the additional aircraft in our fleet as illustrated in the following table:

During the three months ended March 31, 2012 and March 31, 2011, our fuel derivatives were not designated for hedge accounting under ASC 815 and were marked to fair value through nonoperating income (expense) in the unaudited Consolidated Statements of Operations.  We recorded gains of $5.8 million for the three months ended March 31, 2012, compared to gains of $8.4 million for the three months ended March 31, 2011.

We believe economic fuel expense is the best measure of the effect of fuel prices on our business as it most closely approximates the net cash outflow associated with the purchase of fuel for our operations in a period.  We define economic

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fuel expense as raw fuel expense plus (gains)/losses realized through actual cash payments to/(receipts from) hedge counterparties for fuel hedge derivatives settled in the period inclusive of costs related to hedging premiums.  Economic fuel expense for the three months ended March 31, 2012 is calculated as follows: