Hawaiian Holdings Inc (HA) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Hawaiian Holdings Inc. first quarter fiscal year 2006 earnings results conference call. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded. Now I would like to turn the conference over to Mr. Andrew Greenebaum of Integrated Corporate Relations. Please go ahead, sir.

Good afternoon, ladies and gentlemen. And thank you for joining us today to discuss Hawaiian Holdings' first quarter 2006 earnings results. On the call today from the Company are Mark Dunkerley, President and Chief Executive Officer, and Peter Ingram, Chief Financial Officer.

By now everyone have access to the press release which went out at 1 PM Pacific, 4 PM Eastern time. If you have not received a release, it is available on the Investor Relations portion of Hawaiian's website at www.HawaiianAirlines.com.

Before we begin today, we would like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The following prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance; therefore undue reliance should not be placed upon them. For a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements, we refer you to Hawaiian Holdings' recent filings with the Securities and Exchange Commission, including its most recent annual report filed on Form 10-K, as well as current reports filed on Form 8-K.

As a point of clarification, at various points during the call reference will be made to results for both Hawaiian Holdings, also known as Holdings, and Hawaiian Airlines, known as Hawaiian, its sole operating subsidiary.

From April 1, 2003 following Hawaiian's bankruptcy filings, through June 1, 2005, the day prior to Hawaiian's emergence from bankruptcy, Holdings deconsolidated Hawaiian and accounted for its interest using a cost method of accounting. As a result, the financial results of Holdings during that period do not include Hawaiian's financial results. For comparative purposes, reference will therefore be made to the combined results of Holdings and Hawaiian for the period prior to Hawaiian Airlines emergence from bankruptcy last year, when our airline results were not consolidated in Holdings' numbers. With that I would like to turn the call over to Mark Dunkerley.

Good afternoon everybody, and thank you for joining us today. This is our first earnings conference call since emerging from bankruptcy. And so I would like to spend a little time talking about how we see the Company positioned in today's market, as well as an overview of our performance in the first quarter. Peter is then going to discuss our first quarter financial results in more detail. And finally, of course we are going to open up the call for your questions.

As I'm sure all of you know, Hawaiian successfully emerged from bankruptcy on June 2 of last year. As a result of the bankruptcy proceedings our financials are fairly complex. Peter is going to address much of the detail later in the call, but for clarity I'm going to be talking about the results of the combined entity, that is Hawaiian Airlines and Hawaiian Holdings, which we believe is the most relevant for evaluating our business.

As I said in the press release, the first quarter of 2006 was a difficult one for Hawaiian Holdings, which is reflected in our operating pretax and net loss for the period. While part of the challenges are attributable to this being a seasonally weaker period of the year, and to significant non-recurring expenses that were included in our numbers, intense competition and the rising price of fuel have undermined our financial performance.

On a more positive note, the quarter was marked by several significant milestones, most notably our acquisition of four 767-300 aircraft and the restructuring of our balance sheet. We delivered an 11% increase in operating revenue in the first quarter to $210 million, and we maintained our industry-leading ranking in terms of on-time performance, baggage handling, and the avoidance of cancellations as reported by the U.S. Department of Transportation.

We continued to be better than any of our competitors at filling our airplanes. And that by a considerable margin is reflected in our strong load factor of 87.5% compared to 85.1% one year ago. Our yield also improved to $0.1166, resulting in a RASM increase of 5.7%. On the cost side, we saw a 3.8% increase in CHASM, excluding fuel, to $0.083. Much of this increase is attributable to several items which are less than 100% intuitive, and which Peter is going to elaborate more fully in a few minutes.

Fuel prices continued to be a big drag on performance. And as a result, we reported an operating and net loss for the quarter of approximately 4.6 million and $12.3 million, respectively. During the first quarter we expanded term borrowings at Hawaiian Airlines, and this has allowed us to redeem Hawaiian Holdings' outstanding convertible notes in this April just past.

This restructuring of our balance sheet was a major milestone for us, as we significantly increased our financial strength and flexibility, which provides the foundation for future growth of our business. One immediate benefit of our redeeming these notes this that it allowed our equity holders to avoid significant dilution that would have occurred upon the conversion of the notes.

Now before I get into our accomplishments for the quarter, let me give you a little perspective on our business and how we believe we are positioned in the airline industry. Hawaiian Airlines was founded in 1929 and is the 16th largest U.S. airline. In June of 2005 we successfully emerged from bankruptcy. During the two-year reorganization period, Hawaiian addressed key expense issues. But just as importantly, we refocused on the core airline principles of reliability, efficiency and profitability.

Rather than allowing bankruptcy to distract us from running the business day to day, we focused on blocking and tackling, as evidenced by our unparalleled results in terms of punctuality, baggage handling and schedule integrity.

During bankruptcy our financial performance improved significantly, as we posted year over year revenue starting in 2003, and returned to profitability, until the very high fuel prices put us back in the red in the fourth quarter of 2005 and, as we just said, again in the first quarter of this year. As a result of our financial performance [primes] arising from our bankruptcy were paid in full. And that is in stark contrast to the other reorganizations in the airline sector.

Reorganization presented us the opportunity and time to evaluate our business and refine our strategy. The first thing to note in this regard is that Hawaiian does not fit into the traditional categories of either low-cost or a network carrier. Instead, we would characterize Hawaiian as a destination carrier for the Hawaiian market. What we do is we sell Hawaii.

As Hawaii's national flag carrier, we believe we are uniquely positioned to provide a targeted Hawaii product, with conveniently timed schedules, and a brand of service that incorporates the Hawaii experience into air travel. In contrast, our competitors are appropriately pursuing network strategies that do not allow to the same degree of market specific focus.

Our active fleet today consists of 25 aircraft. That is fourteen wide body 767-300 ERs. It is a long-haul markets, and 11 717s that fly within the Hawaiian Islands. This total does not include the 476-300s acquired during the first quarter that are going to enter service with us later this year, thereby expanding our long-haul capacity.

Roughly 60% of our revenue comes from service between nine West Coast gateway cities and Hawaii, which we refer to as our transplant market. 30% comes from our interisland business, and the remainder from South Pacific and charter operations. We currently operate approximately 135 flights every day.

Not surprisingly, the competitive dynamic between the transpac and interisland markets is really quite different. In the transpac market we complete primarily with major network carriers. Over the last several years the capacity to Hawaii from the mainland has increased significantly, approximately 30% increased just in the last five years, as competition from low-cost carriers has motivated network carriers to move some of their aircraft out of the mainland domestic markets. Although seat capacity is continuing to increase between the mainland and Hawaii, the pace of increase has moderated to a much higher level seen over the past couple of years.

In contrast, the interisland market has experienced actual capacity declines ever the past few years, although this trend is going to end with the entry of Mesa next month. Currently the market is served primarily by us, Aloha, Island Air, and a couple of other smaller operators. The interisland market is unique in that it has seen a decline in traffic since the year 2000, and this is for a couple of reasons. First, there is more direct service from the mainland to the outer Islands, which reduces connecting traffic. And secondly, the expansion of the infrastructure in the outer Islands has reduced some of the demands for travel to Honolulu.

Despite this trend, the interisland market remains a core element of our business. And the strength of our brand and the quality of our service gives us the best position in this traditionally competitive market. We look forward to demonstrating these strengths in the face of the most recent competitive threat.

Now obviously Mesa's entry into the market is going to have a big effect on the competitive dynamic, driven both by the increase in available seats, as well as the changes in the pricing structure. This market already has high frequency service and several competitors. And with our market share about equal to that of Aloha's, the first structure is not above what would be common on the mainland for markets of similar stage lengths. As a result of an already high level service and the factors that have already caused this market's decline, we do not expect to lower fares initiated by Mesa to stimulate traffic over the medium or long-term.

From a competitive standpoint, however, we believe that our 717s give us a product advantage in terms of passenger comfort, and the lower costs associated with the larger gauge. Our presence in the community, consumer relationships, the strong frequent-flier program also position us solidly. And well-established relationships with several mainland carriers generate important levels of connecting traffic. Although we didn't pick this fight, we certainly intend to use these strengths to emerge from it in the very strongest position.

Having provided that background, I would like to spend just a couple of minutes talking about the first quarter operating environment before handing it over to Peter to touch on a few of the more detailed numbers.

Starting with the revenue environment, I mentioned earlier that our operating revenue for the quarter increased by 11% year-over-year to 210 million. Revenue per seat mile improved 5.7% on a 2.4 point increase in load factor and a 1.1% improvement in yield. The modest level of yielding reflects the challenges that we face, given the capacity increases in the transplant market over the past few years. Importantly, however, our industry-leading load factor demonstrates a sustained level of robust demand for travel to Hawaii.

On the cost side of the equation, fuel prices continue to be an overriding concern. Our average cost per gallon in the first quarter was $2.09, which is an increase 42% from already high levels a year earlier. With fuel now more than one-fourth of our costs, we have a number of conservation initiatives in progress, and we continue to be focused on the efficient sourcing of our fuel requirements. These efforts include taking advantage of our size in the Hawaiian market to purchase our Honolulu fuel requirements from Singapore, which has allowed us to benefit from better pricing than the West Coast over the past couple of years.

Since our ability to control fuel prices is limited, we are keenly aware of the need to manage other areas of our cost structure aggressively. In this regard we continue to apply automation throughout the business to improve efficiency. These efforts include the usual suspects, such as booking through our website, and the use of self service kiosks for check-in at the airport.

Deployment of kiosks at our West Coast gateways, for example, is well under way, and is completed here in the Hawaiian Islands. Also in the first quarter we started accepting baggage at four Honolulu hotels, to further enhance customer convenience, and importantly to reduce activity in our airport lobby during the peak part of our day.

With regard to automation in general, we believe that our size and focus allows us to be ability to reduce time to market relative to our larger competitors, such that what we lack in terms of financial resources can be offset by nimble deployment.

Finally, on the cost front we have begun a top to bottom process review of our business, which we expect will produce a number of cost reduction initiatives later this year and into next year, 2007. We are too early in the process to get into specifics, but suffice it to say that we going to be looking at what we spend on a wide variety of expense over the next few months. I expect to have much more to report about this at the end of the next quarter.

From a unit cost standpoint, one of the things we will benefit from starting later this year, the additional capacity from the four used 767-300 aircraft, which will enter our long-haul fleet in the fall. These aircraft are currently being modified for over water operation, and outfitted to meet our standard interior configuration of 18 seats in first-class and 242 seats in coach.

The acquisition of these planes is a significant milestone for us. And we are excited about the growth potential that we can enjoy with the added aircraft. Since we are operating at load factors close to 90%, it is clear to us that there is ample demand to fill these planes.

Last week we published schedules revealing our market intentions for this new capacity. And beginning in September we are going to extend our seasonal San Diego to Maui service to year-round. In October we are going -- we will transition our Seattle to Maui and Portland to Maui service to daily from the current schedules of three and four times a week, respectively. And in November we are going to add three additional weekly frequencies respectively to our Seattle to Honolulu and Sacramento to Honolulu schedules.

The fact that we're deploying additional capacity within our existing network demonstrates confidence in our West Coast to Hawaii franchise. And the commitment to tap the strong unfilled fill demands that is evidence by our industry leading load factor.

Before I turn the call over to Peter, I would like to thank all of our employees. We're a relatively small Company for an airline, and our employees are very, very important to us. All of the efforts they are making to reduce costs, to grow revenue, and to provide superior service to our customers are the key to our long-term success.

The market environment remains challenging, but we are pleased with our progress, and we will continued to stay focused and believe we will be successful over the longer term. Thanks again for joining us today. And with that, I will turn it over to Peter.

I will try not to spend too much time rehashing numbers you can read in our press release or other filings. But I would like to spend a few minutes talking about our balance sheet and a couple of the less intuitive aspects of our financial statements that are a function of the complicated accounting following our emergence from bankruptcy last year and our various financing activities.

First, the balance sheet. In March of this year we increased the size of Hawaiian's two term financings. Looking at the two loans combined, we increased the principal amount outstanding by about $91 million, which broadly speaking we intend to channel in three directions. First, we have used a portion of the proceeds to redeem the subordinated convertible note issued by Holdings as a bridge financing upon Hawaiian's emergence from bankruptcy. The net cash outlay from the redemption was $55.9 million, which includes redeeming the notes at 105% of par, plus accrued interest through the redemption date. This redemption will lead to a onetime charge in our second quarter result that I will discuss in a minute.

Second, 10 million of the new loan proceeds remain held in escrow. Release of these funds to us is conditioned on a specific asset acquisition. If this acquisition does not occur by mid-July, then we would return the money to the lenders, and the principal balance will be reduced accordingly. Finally, the remaining proceeds will go toward funding the acquisition and modification of the four 767-300s we purchased in February.

The essential elements of these transactions were the redemption of the convertible note bridge financing. Had we not redeemed the notes before in June 2 of this year, we have the potential of about 12 million shares of dilution at a conversion price of 4.35 per share, which has now been avoided. As I mentioned a moment ago, we will record a charge in the second quarter related to the redemption of the converts, which will be about $28.3 million. The biggest piece of this charge is a non-cash write-off of what remains of the substantial debt discount that was recorded when these notes were issued.

Turning to the income statement, one of the unfortunate side effects of our bankruptcy is that upon emergence our financial statements have become a bit confusing, and they will continue to be so until we have a couple of years of post emergence numbers under our belts. As Mark mentioned, Hawaiian emerged from bankruptcy on June 2, 2005. From April 1, 2003 following Hawaiian's bankruptcy filing through June 1, of 2005, the day prior to Hawaiian's emergence, Hawaiian Holdings, the Airline's parent company deconsolidated Hawaiian and accounted for its interest in Hawaiian using the cost method of accounting.

As a result, Holdings' financials results based on GAAP during that period do not include Hawaiian's financial results. Thus our GAAP financials for the first quarter a year ago show no revenue, and the operating expenses consist primarily of professional fees related to Hawaiian's bankruptcy case and maintaining holding status as a public company.

Hawaiian's emergence from bankruptcy was accounted for as a business combination, essentially the acquisition of Hawaiian by Holdings. From June 2, 2005 forward the GAAP results include Hawaiian Airlines operations. Because of this, and as Mark talked about earlier, when I discuss our financials I will be talking about GAAP first quarter 2006 numbers, but will compare those numbers to the combined Hawaiian and Holdings results from 2005. We believe this is the most useful comparison from the perspective of evaluating the ongoing business. All of these numbers are available in the press release issued earlier today.

The combination of Hawaiian into Holdings last year was accounted for using purchase accounting. And under this treatment the assets and liabilities of Hawaiian were adjusted to there fair values as of June 2, last year. As you'll see in the table we've included in today's press release, the year-over-year impact of the application of purchase accounting on our numbers is a $7.3 million reduction in operating income.

The most significant piece of this are as follows. First, a $2.6 million reduction in revenue due to the reduced realization of deferred frequent-flier revenue, which was incorporated on the June 2, 2005 balance sheet as its fair value. Second, a $4.3 million increase in amortization of intangible assets, as recognized as a component of depreciation and amortization expense. We will continue to see these differences until we passed the anniversary of our emergence from bankruptcy, after which the year-over-year numbers will become more comparable.

Turning to our operating results. I will focus on the expense numbers, since Mark already touched on revenue. Operating expenses were up 17.1% year-over-year to 214.3 million on a capacity increase of 4.8%. Our increase in operating expenses was primarily driven by three lines. Fuel expense increased $18.6 million, due to a combination of a consumption increase of 4.1%, and a cost per gallon increase of 42% from $1.47 per gallon to 2.09 per gallon. Although our consumption has risen with increased flying, on a per block hour basis we did the consumption improvement year-over-year.

The fuel line includes a $3.4 million loss related to our hedges, which isn't very intuitive given recent price trends. This is a function of a timing difference between when we entered into several of our forward contracts, and when we designated them for hedge accounting, which was at a point when prices were high during the third quarter of last year.

As a result, our first quarter hedges, which had an average settlement price of $1.67, were designated for hedges at 2.13 per gallon, which is the difference -- but the difference recorded as a mark-to-market game last year. So in the first quarter, although we received settlements in our favor of $1.9 million related to these hedges, we took a $3.4 million hit to our fuel expenses.

Depreciation and amortization increased 4.6 million, almost entirely as the result of the purchase accounting implications I discussed earlier. And maintenance expenses increased 2.7 million, due primarily to an increase in airframe overhaul events, and an increase in our power by the hour engine maintenance expenses. The power by the hour increases are driven by a combination of more hours, as we've added engines to the program, as well as rate changes under our contract.

From a unit cost perspective, operating CASM increased 11.7% to $0.1130 from $0.1012 a year ago. Excluding fuel, our operating CASM was $0.0830, a 3.8% increase versus a year ago. And further adjusting that number for the year-over-year differences attributable to purchase accounting that I talked about earlier, the CASM increase was a more reasonable 0.6%. Again, you can find all of those numbers in the press release, including a reconciliation of the non-GAAP numbers to GAAP.

Nonoperating expenses for the first quarter of this year totaled 7.5 million. And that line includes $3.1 million of non-recurring expenses related to the term loan refinancing.

On April 14 of this year, we issued an 8-K summarizing our fuel hedge position in order to provide a bit of information for those of you trying to understand our fuel line. Since that time we haven't added any new hedges, so I will take a moment to reiterate those details.

For the second quarter we have about 59% of our consumption hedged with forward purchases of jet fuel. The average settlement price of those hedges is $1.73 per gallon. But because these contracts were not all designated for hedge accounting at the time se entered into them, the average designation price is $1.99.

For the third quarter we are 42% hedged, with an average settlement price of 2.02 and an average designation price of 2.05. And for the fourth quarter we are 10% hedged, with an average settlement price of 2.04 and an average designation price of 1.92.

If you are trying to project the fuel line going forward, about 58% of our fuel supply is Singapore pricing based. The remainder is based on L.A. prices. On top of the market price, we pay an average of about $0.09 per gallon in taxes, and on average about $0.06 per gallon differential above the spot market prices based on specifics of our supply contract. If you take a weighted average of Singapore and L.A. prices, and add the $0.15, you should have a sense for our spot prices before the impact of the hedges I just talked about.

In conclusion, I would like to reiterate Mark's sentiments that while the environment remains challenging, we are continuing to move forward and make steady progress towards our goals. With that, I would like to turn the call over to the operator for questions.

(OPERATOR INSTRUCTIONS). [Nick Kapawano] from Imperial Capital.

The first question is relative to the rollout schedule that he supplied us, did this account for the full utilization of the three of the four planes that you were putting into service? And what, if anything -- I know the fourth is considered a spare. I was just wondering if we will see any seasonal duty from that.

Let me see if I understood your question. Can you actually just try and say it again?

What you gave relative to the rollout -- the additions to your schedule, based on employing the new aircraft --.

Yes. That is right.

Have all the flights that you've given, does that account for bringing on three of those planes? Is that assuming that -- your full utilization of three of those planes?

Yes it does. There is -- obviously, it is not quite as simple as bringing on an airplane and saying each incremental airplane just does one new route or another new route. We will always be looking to massage the schedule to see if there are other opportunities that arise. That has to do with maintenance and maintenance scheduling. But basically, you're right. That is the three airplanes flying as 21 services, and the fourth will go as a spare.

The outlook for further expansion -- do you continue to look for more planes for potentially more fleet additions?

I think I would answer that by saying that we do continue to look for additional aircraft. The market for 767-300 ERs is extremely tight. And the prices of the used airplanes reflect the high degree of demand for them. We are out there looking, but we're pretty picky purchasers at the moment. We clearly don't want to do anything that would bake in a loss making route. We are out there. We are just looking for the right opportunities.

Great. I will just ask one more question for now. Relative to Mesa's entry into the interisland market, if you could just give us some qualitative commentary on how that is going relative to impacting your bookings, and whether you are seeing an expected impact relative to the entry? Just give us some qualitative observations about that.

We're really steering away from giving forward -- what would amount to forward projections on what is happening. And that really goes for bookings as well. I think what I could say is that clearly a $39 fare in the marketplace that has led the competitors to also drop their fares to $39 is bound to get a degree of interest.

But we are again are reiterating what we have just said in our statements on the conference call, which is we don't believe the addition of capacity over the medium to long-term will actually stimulate the market. We think the market is in decline for structural reasons, and we may get a short-term bump, but not anything in the medium or long-term.

Raymond Neidl from Calyon Securities.

Just a quick thing about Mesa Airlines coming to the market in June. One is, what do you think he is up to? What is he trying to do, being a third airline, using ER jets coming into a market that, as you talked about, is not a growth market? If anything it is contracting a little bit. Do you think he is in there for the long-haul? Is he in there to do a deal with Hawaiian or Aloha, or just what do you think is going on there?

You would really have to ask Mesa and Jonathan Ornstein as to what they're doing. I think we have been pretty clear about what we think. And that is that we think that this is a market which in terms of the available capacity is already very well served. It is not so much a question of how many airlines, but the total amount of capacity in the market. And we don't believe that in a market that is declining for structural reasons, adding capacity in this market is a sensible thing to do. He will have his own motivations, and I'm afraid you'll have to ask him for what those are.

You had mentioned that you're going to be price competitive with him. Do you think it is going to really have a negative effect on the local pricing, not through traffic, but local pricing?

Clearly when you have fares coming down the way they have come down. It is promotional fare now that has been run on for over a month. That is going to have an impact on our pricing and what we can sell tickets for. But clearly we are -- equally clearly we're working pretty hard in our revenue management department to limit the effects of that. And exactly where that balance will settle out, actually we don't even know yet. That will be the dynamics of supply and demand, particularly as we get close to their entry. Mesa hasn't entered the market yet. We are as yet unsighted as to how everything will exactly settle out.

Without having looked particularly at your Company, you're revenue stream, just roughly percentagewise what is interisland revenues represent of your total revenue stream?

It is about 30%.

[Harry Layman] from Morgan Stanley.

I was just wondering what your outlook for pricing was going forward in the transpacific market in particular?

Our outlook for pricing, I'm a firm advocate of the belief that pricing reflects how much supply there is out there for the available demand. I think what we have is a situation where demand has so far been generally robust. We have mentioned that we enjoy the industry's leading load factors. That is obviously a very good thing.

That is balanced by the fact that many of our competitors have seen fit to add quite a lot of capacity in the last couple of years. The good news -- if there is -- out there at the moment is that the rate at which that transpac capacity is growing this year, at least what has already been filed or scheduled, seems to be less than last year.

I appreciate that, but with your load factors as high as they are, don't you think you could increase prices somewhat, especially given oil where it is?

Yes, first of all we are always looking to increase prices, and indeed, in a number of markets we have increased prices as recently as in the last couple of weeks. The dynamics of the marketplace however, in general is that we are in a -- we service a very price sensitive group of customers. There tends to be a market clearing price. It is very difficult to sustain prices above that market clearing price. But if you do, if you do meet the market clearing price, customers have very strong preferences between carriers. One of the reasons why I spend so much time acknowledging the contribution of our employees is because we do fill our airplanes fuller than the competitors do at the market clearing price.

(OPERATOR INSTRUCTIONS) Jamie Mendola from Watershed Asset Management.

A couple of quick questions on the cost side. It sounds like over the last few quarters you guys have been spending a lot of money on Sarbanes-Oxley costs and other professional advisers. Can you give us a sense for how much of that is one time and how much of that is going to be recurring over the next year?

Most of it is going to be one time. I will let Peter deal with the -- something with greater calibration than that.

I think if you look back over the 2005 results, I think we disclosed a number of about $15 million that was related to not just Sarbanes-Oxley, but also catching up on some of the back filings with the SEC Holdings had fallen behind during the pendency of Hawaiian's bankruptcy, and some other work like that. We would expect that number to come down, specifically, considerably. Obviously there is still some continuation of Sarbanes-Oxley costs as we go from the first year for us documentation mode into more of a maintenance mode. You see some of that reflected in our other expense line of this quarter, as we were finishing the compliance and filing the 10-K March. You can probably -- I wouldn't want to speculate that more than half of that number goes away, but it is probably somewhere in that ballpark.

Great, thanks. And on the capacity front it looks like you're adding three or four new planes starting in the second half of year. Can you give us a sense for how that translates into capacity growth in the third and fourth quarters?

Peter, do you want to address that?

Let me just grab that number. It really will affect us more in the fourth quarter, since the first new service with the incremental aircraft comes on, on the September 6, then the second one comes on in October. Basically in the first quarter of this year we had a little under 5% capacity growth. That will be moderated to between 1 and 2% we would expect over the second and third quarters. And then we have about what looks like about a 13 to 14% increase in capacity in the fourth quarter.

You probably expect starting more in the fourth quarter than earlier to start seeing some leverage in your current infrastructure?

Yes, that's right. The first of the four airplanes comes into service on September 6. It is pretty late in the third quarter before the capacity starts to kick in from those new airplanes. And then it builds as we add them roughly one per month beyond that.

Helene Becker from the Benchmark Company.

Two questions I think. First, what is the incremental capacity growth for '07? If you have a full year number with the two aircraft that come in the third -- I guess in fourth quarter that you just talked about. The second question is could you just touch base on your growth opportunities longer-term? Do you think you can do more service into the middle part of the U.S. on a one-stop basis over your nine gateways, or how can you tap the U.S. domestic market, if at all?

Let me deal with the second question first, and then answer your first question. In terms of new opportunities, I think most of the new opportunities are -- all the new opportunities that we see would be in the long-haul business. When you look at the interisland business, we reiterate what we said from the outset, which is it is a very important part of our business, but it is declining, so we're not looking for particularly new opportunities interisland.

Looking long-haul, we have our established market, which is the West Coast. It is no accident that we're applying our additional aircraft onto the West Coast routes. We have, as we mentioned, I think a couple times on the call, the highest load factors of any airline in the industry at the moment. And so we see pretty robust demand there. I would suggest that there is still some growth opportunity in those kinds of markets over the medium-term for Hawaiian Airlines.

Looking further afield, if you look at the interior part of the United States, the mid continent cities that have lots of people living there tend to be hub airports, hub locations for the major network carriers, and quite difficult for us to enter into. That seems to draw our attention to the East Coast. The 767-300 ERs certainly have the range for the East Coast. And there are markets that we look at periodically. I would suggest to you that at the moment the shortcomings with the East Coast markets have got less to do with the amount of traffic, and more to do with the kind of yield that our network competitors are carrying a lot of traffic off the East Coast one-stop over the mid continent gateways.

We have made no bones about a desire to look west from where we are to Asia. We did apply for the opportunity to fly from Honolulu to Shanghai. We were one of 14 applicants. We were unsuccessful in that regard. There are some challenges to China, in particular to do with the [Visa] regime, which is particularly knotty at the moment.

But we are constantly looking for opportunities in some of the established markets like Japan, as well as among the lesser well-established markets. I think what is important when we look Asia is that it is important to move into those markets when you are partnered with the channels of distribution to make sure that you're not carrying air from continent to another. But those are the opportunities I think that we see out there. And there are opportunities out there, and we intend to exploit them in an orderly fashion.

In terms of the potential to increase year-on-year, we will get you the exact number, but obviously it is going to be a number -- in the fourth quarter of the year we're bringing on a couple of airplanes and that gives you a 13.5% increase. So it will be a slightly larger number than that.

The full year effect of the new planes will get you in the 14% range. Is that how to interpret that?

Yes, we will actually go ahead and get the number out to you, but that would be just looking at the math here that would be my guess. It is probably slightly higher than that.

And then my last question is, do you have a percentage of bookings that you do through either the Internet -- or through the Internet on your site and on all Internet sites?

Yes, we obviously know those numbers minutely. I don't believe they are own in the public domain at the moment. I would say to you that we have reason to believe, compared to our competitors -- our established legacy competitors -- that we do a better job than they do at distributing our tickets through the Internet, both directly and through some of the Internet providers.

Ian Wallace from River Run Management.

Coming back to Mesa, can you contrast the customer experience that Mesa provides versus what you presently provide?

I hope that is on the call. Mesa is a regional carrier doing the short sectors generally on the mainland for other airlines. We operate 717s, which is considerably larger airplanes. On board seating and so on is considerably more comfortable. It is a more pleasant experience. That frankly for a short sector isn't going to be the big distinguishing feature -- difference between us.

I think in terms of product we have an award-winning frequent-flier program. We have great relationships within the community. We have a corporate program that works extremely well for us. We have a first-class product, which we believe is accretive to our business. We do handle all kinds of things like outsized baggage and the ability to handle people with disabilities. We're truly a sort of full-service airline in the local community. And we, as I said, we think our product stack up very, very well, and we look forward to the competition.

How much of the interisland traffic is tourist that are connecting to different islands and how much of it do you think it is locals?

We have an estimate of that figure. It is not in the public domain. I would say that over time the amount of local business is declining quite markedly as we get more and more infrastructure developed on the outer islands. What I mean by that is if somebody is building a house on Maui and wanted to go and choose the kitchen cabinets, they used to have to come to Honolulu to go to Home Depot. There is now a Home Depot on Maui. That individual is no longer traveling interisland. And as those box stores and hospitals and things like that grow on the neighbor islands, we will see less and less interisland traffic.

And then finally, I thought there was an issue with Mesa, potentially they had gained access to some information during -- I think it was a law house bankruptcy process. And there might have been some questions as to whether that information was being misused by them that might have potentially led to an injunction. What happened to that processor or --?

First of all, we are pursuing them -- we filed suit against Mesa, alleging that they breached the terms of confidentiality agreement, which they had signed and in return for which -- in return for receiving our most commercially sensitive, nonpublic information, they had agreed only to use that information for the purpose of evaluating a purchase of Hawaiian Airlines. They popped up in, I believe it was September of last year, said they were coming to Hawaii. At one point specifically referenced the fact that they had had a look at our numbers, which in our mind is in clear violation of the confidentiality agreement.

That suit is going through the legal process. There are, as there are always with these things, a range of hearings over the course of the coming months. We are as yet reserving our right to determine whether we are going to seek a preliminary injunction or not. Frankly, that has got a great deal to do with legal tactics and strategy over which I'm not particularly well-qualified to comment. But we are certainly pursuing this case. We believe they flagrantly violated the terms of that agreement, and that they as a consequence will cause some damage to us, and we intend to seek redress.

Do you know if they also had a look at Aloha's numbers during their restructuring or --?

I have heard things out in the street about that, but I don't know that for a fact.

That does conclude our question and answer session today and also our conference call. We thank you for joining us, and have a good day.

Thank you.