Hawaiian Holdings Inc (HA) 2007 Q1 法說會逐字稿

Welcome to the Hawaiian Holdings First Quarter 2007 Earnings Conference call. During the presentation all participants are in a listen only mode. Following the formal comment, we will conduct a question and answer session. (Operator's instructions). As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Ms. Allyson Pooley with ICR. Please, go ahead ma'am.

Thank you, Tom. Welcome, everyone, and thank you, for joining us today to discuss Hawaiian Holdings' first quarter earnings results. On the call today from the Company are Mark Dunkerley, President and Chief Executive Officer; and Peter Ingram, Executive Vice President and Chief Financial Officer. By now, everyone should have access to the press release which went out at after the close of market today. If you don't have the release, it is available on the Investor Relations portion of Hawaiian's website at www.hawaiianairlines.com.

Before we begin today, we'd like to remind you 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 and, 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 statement, we refer you to Hawaiian Holdings recent filings with the SEC, including it's most recent Annual Report filed on Form 10-K, the most recent quarterly reports filed on Form 10-Q, as well as recent reports filed on Form 8-K.

And, with that, I would like to turn the call over to Mark.

Thank you, very much, Allison. Good afternoon and thank you for joining us today. I am going to start by giving some of the highlights of the quarter and our current outlook. Peter is then going to discuss our financial results in greater detail. Then we're going to open up the call to your questions.

During the first quarter of 2007 we continue to face many of the same challenges that weighed on our results in the latter half of 2006. Most notably, intense competition on our Transpac and Interisland groups, and soft demand for Hawaii travel. Helping to offset these challenges was our continued progress on cost containment.

I'll start on the revenue side of the equation which reflects the typical competitive environment. Yield and revenue for available-seat miles declined 11.1 % and 11 % respectively, year over year, while our load factor was basically flat at 87.5 %.

As most of you are already aware, our revenue results have compared unfavorably to other U.S. airlines over the past couple of quarters. The most important reasons for this are; First, that industry capacity on our Interisland routes increased over 20 % last summer with the entry into the market of Mesa Airlines through its operating division of Go.

Go Airlines has lowered Interisland fares to the point where $19 no longer constitutes a fare sale. And while capacity growth on Tranpac routes has slowed, the cumulative impact of well over 30 % growth since 2002 is depressing fares.

This capacity environment contrasts with the broader domestic U.S. market which is in a benign and even declining capacity over the past year or so.

More recently, we've seen signs of a softer U.S. economy as well. Particularly in the western part of the country where most of our Tranpac passengers originate. The latest example of this-a weakness but, by no means the only one-is a 50 % off room rate promotion from one of the large hotel chains.

And unlike many of our network competitors we obviously don't benefit from relatively stronger market elsewhere notably in Europe, Asia, and Latin America.

So, while we're not in the business of making excuses for financial performance that clearly falls short of our own expectations, we do think that our recent results should be viewed in the broader perspective of an extremely challenging marketplace.

For the first quarter our Tranpac routes generated about 68 % of our total passenger revenue. A %age which has increased year over year both, as a result of our wide-bodied fleet expansion, and also due to the decline in revenue from the Interisland part of our business. That's, of course, due to the particularly competitive pricing.

Weaker demand for Hawaii vacations has led to Transpacific RASM decline of 6.6 % year-over-year. Load factor was down modestly while yield declined by 4.6 %.

Our Transpacific capacity increased 18.7 % relative to last year as three additional 767 300 aircraft were added to the schedule. We've added new flights to Hawaii from Seattle, Sacramento, and San Diego. As most of you are probably aware, we acquired four used 767 300 aircraft in the first quarter of last year.

The first three of these aircraft entered service in September of 2006 and in January and March of this year; all following modification an overhaul, and we expect to have the final aircraft available for service this month.

This aircraft is going to provide us with a spare aircraft for our wide body operations. In other words, this last aircraft is not going to result in any additional ASMs being flown.

Delivery of the last modified 767 300 EM, that's the straight 300 aircraft that we have modified to EM, completes the fleet restructuring that was started in 2006. We're pleased with the decisions we've made, both in regard to the acquisition of the 767 300 aircraft and in terms of the decision to buy three of the AWAS 767 300 ER aircraft, that we purchased off-lease, and the shortening of the lease terms on the remaining four of the AWAS aircraft.

We've lowered the average cost of our long haul fleet, we've given ourselves near-term fleet certainty, and we've provided flexibility in the medium term which may prove valuable. We do not have any further fleet additions planned for 2,007.

Our Interisland results reflect the over capacity in the market and the heavy discounting by a competitor attempting to establish a foothold.

Investors should recognize that fare levels Interisland have moved from low, when Mesa entered, to considerably lower, in response to Go's inability to gain much traction in the marketplace.

The $19 promotion on top of a promotion on top of the promotion is now, pretty much, the everyday fare.

On a positive note, our market share on the Interisland routes continues to reflect the superiority of our service. Our share gap, that is our share of passengers carried relative to our share of seats in the market, has remained steadily positive since Go's entry. And we believe that we've achieved a load factor premium relative to all of the other competitors in the market.

We are compelled to be competitive with pricing in the market and but given a choice, customers clearly prefer to fly of on Hawaiian than on any of our competitors. We attribute this to our modern era body fleet, the best frequent flyer program in the market, our reliable on time performance, and most importantly, to the award winning service provided by our front line employees.

Unfortunately, we can't forecast a change in the competitive environment anytime soon. We don't believe that any of the players in the market can operate profitably at current levels and public comments from them do not suggest otherwise.

Importantly, we also don't believe that our competitors have cost structures that would allow them to achieve profitability in a pricing environment where we would not.

Despite this difficult environment the Interisland business remains an important part of our network that complements the our Transpacific routes.

Turning now to expenses, we are pleased to post improved numbers in the first quarter for cost per available seat mile, they were down 6.4 %, and cost per seat mile excluding fuel, which was down 5.5 %.

A number of the initiatives and we started over the past year are beginning to yield benefits. The importance of which has been amplified by the challenging revenue environment. We continue to make progress on outsourcing.

A little over a week ago our third party reservations provider began taking reservations calls in the Philippines and we plan to begin transferring some of our accounting activity to India this summer.

79 of our employees have chosen to accept voluntary separations packages that were offered in conjunction with this activity, while other employees will transfer within the company to our Honolulu station.

We're also moving toward the outsourcing of much of our IT infrastructure. Given the separation charges which we expect to result in a second quarter charge of about $1.6 million, and the transition expenses associated with these efforts we won't reap the benefits of outsourcing until later in 2007 and into 20008. But it is an important part of our overall cost reduction effort. More immediately, we are benefiting from the review during 2006 with many of our third party supply contracts. We have already significantly reduced the cost of third party ground handling on the West Coast as well as the cost of hull and liability insurance.

During the first quarter of 2007, we finalized a review of our catering activities which will provide additional savings as we move through the year without compromising the quality or eliminating food service as many of our competitors in the industry have already done. And notwithstanding the cost pressure on our maintenance lines that Peter is going to discuss in more detail in a moment, we are close to finalizing some changes in our third party maintenance relationship that are going to yield considerable savings. Additionally, we continue to work toward improving productivity within our existing labor agreement.

Finally, we continue to make progress with regard to fuel consumption. Fuel burned per block hour declined about 2% year over year in the first quarter yielding savings in excess of $1 million. Looking at these varied efforts cumulatively, our fully implemented annual run rate of savings from these should exceed $15 million.

Regardless of the other pressures on the business, we continue to focus on the core principles of safety and reliability and we're pleased to report that we continue to lead the industry in on time performance, fewest cancellations and fewest complaints and also we've ranked near the top for a fewest lost bags.

Additionally, we remain the top performing airline for 2006, according to the findings released by the 17th Annual Airline Quality Rating. This comprehensive study conducted by the University of Nebraska and Wichita State University evaluated the nation's 18 largest carriers using a weighted average of 15 elements in four major areas of importance to consumers when judging airline quality and service.

Hawaiian, which was included in this rating for the very first time, earned the top score overall. The credit for this goes out to our front line employees who take tremendous degree of pride in making Hawaiian the best airline in the country.

In summary, I'd like to conclude by saying that we remain firmly committed to our strategy as the destination carrier, serving Hawaii and this despite the economic headwinds and overcapacity in our major markets. We are investing for the long term in areas like technology and outsourcing which we believe will position us as the stronger airline in the years ahead.

With that, I'll turn the call over to Peter for a more detailed view of our financial results. Peter?

Thanks, Mark. Since Mark covered the revenue environment in a fair bit of detail, I'll spend more time in my remarks on the expense side of the business and on the balance sheet. Let's start with the balance sheet.

We ended the quarter with $170.5 million in cash, restricted cash and short term investments, up about $2.3 million from where we were at the end of last year. Our restricted cash declined by about $13.9 million due to the release of some of our credit card hold back right at the beginning of the year, so unrestricted cash and short term investment increased by about $16.2 million to $130.7 million.

Depending on our financial performance over the remainder of the year our hold back may again move upwards, but we are nonetheless pleased to have increased our overall cash balance during a difficult and seasonally challenging quarter. Also, the bulk of our fleet acquisition and modification capital expenditure is now in the rearview mirror and that will take some of the pressure off cash needs going forward.

Turning to expenses, our operating expenses increased by 6.8% in the quarter on a 14% capacity increase and that results in a cost per seat mile decline of 6.4%. Excluding fuel as Mark said, CASM declined 5.5% to $0.796. Our fuel line grew by 4.1% in the first quarter to $59.3 million, which is a bit more than a quarter of our overall operating expenses. This reflects an increase in block hours flown of about 14%, including double digit increases for both the 717 and 767 fleets. Our average cost per gallon of jet fuel declined 7.2% to $1.94 in the quarter and that includes taxes, delivery and hedging impacts.

As a result of the fuel consumption initiatives Mark mentioned, we reduced our consumption per block hour by about 2%, which generated savings north of $1 million. We continue to be pleased with the progress we've made on consumption and we'll be pushing to improve even further in this regard in 2007. Although as I mentioned on our last call the 767 300EMs that we're adding to the fleet will operate with a fuel consumption penalty relative to the ER that makes up the majority of our wide body aircraft fleet.

As of the end of March, we had hedged about 23% of our consumption for the second quarter at an average settlement price of $1.92. Additionally, we've hedged 4% and 1% respectively of our consumption for the third and fourth quarters at average prices of $1.97 and $2 respectively.

Wages and benefits were down slightly year over year at $58 million for the first quarter. Included in this are our worker's compensation expenses for the quarter reflect a positive adjustment of about $1.2 million related to positive claims experience in prior years. That offset some additional wage expenses related to our increase in flying. Even taking this into account, however, we've been able to add flying without a proportional increase in labor expenses as we continue to improve productivity within our current labor contracts.

As indicated on the last call, we expect a substantial increase in our maintenance expense this year and our results in the first quarter bear this out. Maintenance materials and repairs expense increased by $8.3 million versus a year ago to $21.5 million.

The biggest driver of this in the first quarter was engine maintenance on the 767 fleet. We entered 2007 with three engines from our 767ER fleet which were not in "Power by the Hour" programs. When these engines entered our fleet as part of leased aircraft a few years ago, they weren't scheduled to be enrolled in the "Power by the Hour" program until their next maintenance overhaul. And so when they go through that that first overhaul since we've had them, we take a maintenance hit on an expense as an incurred basis under our accounting policies.

One of the three went into overhaul in the first quarter compared to zero in the first quarter last year. We expect the other two to be overhauled later in 2007.

Additionally, we saw higher expenses in the quarter for engines in our "Power by the Hour" program as a result of more flying and escalation in the contractual rates. Aircraft rent expenses declined by about $3.2 million versus last year to $21.4 million. This reflects the acquisition of three 767ERs that were previously leased at the end of last year, offset a bit by some supplemental rent that we recorded in relation to nonrefundable maintenance deposits that we don't currently project to be required to fund future maintenance expenses.

Of course, the other side of our aircraft acquisition is reflected in depreciation and amortization expense where we show a $3.5 million increase to $10.2 million for the quarter. This reflects depreciation of the formerly leased aircraft as well as the three 767300 EMs that we've now enter into service.

Below the operating line we reported non operating expenses of $3.7 million versus non operating expenses of $7.5 million in the first quarter of last year. Interest expense increased $2.6 million due to both the expansion of our term loans about a year ago and the debt we took on in December of 2006 to purchase the three formerly leased 767s. Offsetting this, however, is this year's quarter doesn't have the over $3 million in charges related to our term loan restructuring that hit last year and we had less non operating expenses related to our fuel hedge activities in the current year.

Before I turn the call over to the operator, I'd like to spend a couple of minutes on the outlook for the second quarter. We anticipate the revenue environment to remain challenging for both our Transpacific and Interisland markets. Capacity is expected to increase 18% to 18.5% with long haul 767 capacity rising at a greater rate than short haul 717 flying.

We project a load factor of 87% to 88%, which would represent a small increase versus the second quarter of 2006. Based on current booking trends on our Trans-Pacific route and the persistent low fare environment on the inter island, we expect yields to decline by 10.5% to 12.5% and revenue for ASM to decline by 10% to 12%. Despite our high load factors, bookings over the past several months has been building closer to departure than in the previous year, so needless to say we have a clearer view at this point about the first two months of the quarter than we do about June.

On the expense front, cost per seat mile excluding fuel is expected to decline again in the second quarter. Including the severance costs related to our outsourcing efforts, we currently anticipate our chasm excluding fuel to decline about 4% to 6% for the second quarter. As we said a couple times today, our cost reduction efforts are all the more important given the difficult revenue environment we're experiencing. So much of our attention looking forward is going to be on minimizing costs. With that, I'll turn the call back over to the operator and we'll spend a few minutes fielding any questions you might have.

Thank you. (Operator instructions). We'll take our first question from Robert Barry with Goldman Sachs.

Hi guys. How're you?

We're fine, thanks. How are you, Robert?

Are you seeing perhaps a little bit of strengthening in the second quarter; maybe it's just seasonal. You're adding more ASMs and it looks like it's the toughest comp of the year, yet similar expected (inaudible) and yield performance to 1Q?

I think there are a bunch of statements in your question there. I think what we are suggesting is that we have a pretty good look forward into April and May. June is still an unknown because people are booking really very, very late, later than we would traditionally see. I think the estimate that we're giving is based on a sort of April/May picture rather than, as Peter rightly said in his statement, June provides a degree of uncertainty.

The overall environment I think is largely similar to what we've seen in the first quarter, but the second and third quarters are seasonally stronger. So when we talk about an environment that looks pretty much the same, what we're really talking about is the same weakness year on year rather than week to week.

I think on the last call you said that for the year Trans-Pac capacity looked about flat. Does it still look that way overall based on what you can tell?

Yes, it still looks that way. We are growing. A couple other places are growing; some are shrinking down. We do see actually in the second half of the year some additional relatively minor pulling back. I would not be sitting here telling you that the overall picture of flat capacity has actually changed. Obviously, in our dreams we hope we'll see further cutbacks from other players.

Robert, we look at it a couple of ways. One, the total seats from the continental U.S. to Hawaii, we see that now being down about 3% for the full year. And just focusing in on the West Coast market where we operate all of our capacity, it is up about 1%. So basically, flat in the West Coast market is a little down overall. That's including the growth that we had.

I'm sorry; the down 3% was all of U.S. to Hawaii?

That's right.

The Up 1% was just West Coast to Hawaii?

Correct.

Following up on your restricted cash comment, when will you know if that ratchets back up to a higher restricted level?

There are measures that we look at each quarter, at quarter end, and right now we are where we are. There's no latitude for the holdback to go up at this point. The next look is at the end of the second quarter.

So despite the 8 K you put out and the trends we're seeing, for now you still feel good about restricted cash remaining at this level?

Yes. We obviously have the first quarter numbers in and so as of the end of the first quarter restricted cash is going to stay where it is. The second quarter will be another calculation.

Okay. And then just finally in terms of any debt covenants that you have. Is there any risk or do you feel that you've gotten closer to any risk of tripping any covenants on EBITDA or however you are assessed?

Obviously, that's something we keep a very close eye on. We have in addition to the credit card holdback we have in our term loans covenants that are based on a ratio of EBITDA to debt and again, for the first quarter we are clear on all those as we look at our projections. If the environment remains weak, we get a lot closer than we would like to be on those. That is something obviously we'll be keeping a very close eye on going forward.

What is the debt to EBITDA ratio that you have to stay at? How does it work? Or can you direct me to where I can find it?

There's a couple of different items for our Term A and our Term B loan. I think those documents are probably filed with the SEC. It's going to be a little hard for you to sort out because all those ratios are on a Hawaiian Airlines basis as opposed to a Hawaiian Holdings basis. It's not something that you can easily figure out on the back of a napkin.

There are traditional covenants that you would expect to see.

But you said if things hold as they are you'd get a little closer than you'd like. Can you give us a sense of the breathing room? I feel like the bias is to the downside just given the macro environment in the U.S. How much wiggle room is there?

I think what you're hearing in our voices is we want always to convey a sense of conservatism and concern when we have results that certainly don't please us. What you're not hearing from us is that we have tripped over the line or that we're going to trip over the line. What you hear from us is that this is something we are watching closely to see how things work out in the second quarter. The other point I would draw you back to is my answer to your first question which is June is a pretty important month in the quarter, in the second quarter. We have a pretty good view about April and May; June continues to remain uncertain because bookings are coming in very late.

Okay. Thank you.

We'll take our next question from Jason Kremer with Caris and Company.

Afternoon, guys.

Hi, Jason.

Hi, Jason:

I gather its morning over there. I was wondering if you'd give any update on the Mesa legislation court dates. Anything going there?

The major litigation court date is September 25th of this year. I think discovery cutoff is happening shortly. We are looking forward to our day in court. Aloha has a court case. I believe their day in court is April 22nd of next year which the lawyers tell us is really break neck pace for getting things litigated; hard is that is sometimes to believe. Speaking for Hawaiian, we're looking forward to our day in court.

We'd like to see something come out of that, I guess. My second question refers to your fuel hedging. Normally you increase your fuel hedging in the forward three months or so. It looks like you kept it the same this quarter versus last. Is that just do to problems or difficulty getting the pricing that you wanted or was it a strategy change?

Good question. It wasn't a strategy change. We remain focused on generally buying forward something in the order of about 40% in the following quarter. We have always reserved for ourselves the ability to look at the pricing curve and decide we don't like it and not go out and get more hedges. At the time, looking backwards at the time that we were going into the market to look for additional hedges is when there was the seizing by the Iranian government of the British sailors and we had fuel go up, I believe, to over $70 a barrel briefly and we decided at that time to sit it out. But it's not a change in strategy.

Okay. I guess lastly, you said it's kind of the same environment. Are you seeing pricing in the Trans Pacific market or are you still kind of seeing pricing pressure there.

Yes, we are. To put a bit more color in it, what we are seeing is enormous leaps between the lowest fare and the next lowest fare and that our competitors are offering. So part of the game of chess that we all play is waiting to see when the lower buckets end up closing. We have to make tactical decisions about whether we are going to match or wait for buckets to close. What we have seen looking backwards now, I'm not talking my first comments were about June and the rest of the summer, but looking backwards, what we have seen is that we are seeing compared to historical patterns people booking very, very, very late in the booking cycle. We had at one stage with about 10 days to go in the month of March, I believe. We were taking five to 10 percentage points of additional booking per flight per day for the remaining 10 days. That's giving you a picture of how close bookings were.

All right. Great. That's all I have. Thanks.

(Operator instructions). We'll go next to Nick Capuano with Imperial Capital.

Hey guys.

Hey, how are you?

Hanging in there. How're you doing? Just a quick question on the inter island environment. Anything incremental relative to promotions been continuing on a consistent basis? Anything incremental there in terms of what you perceive the strategy of your competition and any incremental changes relative to capacity or other competitive changes?

The biggest single change we're seeing is on the pricing side. As my prepared comments suggested, this time last year the promotion there was $39 and that's with the expectation we and everybody else had given was that would be a promotion fair. Through the third and fourth quarter of last year the promotion of $39 stuck around. There are occasional promotions on promotions down to $29; I think one sallied down to $19. What we've seen since year end is that we see very little $39 fares. We're at $29 or $19 pretty much all the time and $19 increasingly.

It's one of those situations where all of these fares are low; $19 is a lot lower than $39, so we are seeing a downward fare pressure. At the same time, we're seeing some relatively minor schedule adjustments. It does not fundamentally change the dynamic of the marketplace. One of the things we're obviously very keen to hold onto is our position in the market. We believe that is the right strategy to pursue. We've been able to do that. As we mentioned in our prepared remarks, our share of passengers is greater than our share of capacity which shows that people are actively choosing Hawaiian over our other competitors. So that's sort of in a nutshell is the dynamic. I think it is anybody's guess. We don't pretend to have any better information than anybody else as to the motives and the timetable that the other players in the market might be working to.

All right. Thank you.

There appear to be no further questions at this time. I'd like to turn the call back over to Mr. Dunkerley for any closing remarks.

Thank you all for taking the time to join us today. Obviously, this is clearly a very challenging time for our business, but we are very, very focused on aggressively cutting costs. Our business day to day is running well operationally. Our employees are continuing to do a terrific job delivering a superior product and to reiterate that we remain focused on our core strategies. We'll be certainly available to answer questions that you may have and many of you have got Peter and my number. Feel free to fire away with questions. We hope, obviously, that in the not too distant future the conditions in our marketplace improve. With that, thank you very much.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.