Hawaiian Holdings Inc (HA) 2007 Q3 法說會逐字稿

Good day everyone and welcome to the Hawaiian Holdings Third Quarter 2007 Earnings Conference Call. The call is being recorded. During the presentation, all participants are in listen-only mode. Following the formal comments, we will conduct a question and answer session. At this time for opening remarks and introductions, I would like to turn the call over to Miss Allyson Pooley of ICR. Please go ahead ma'am.

Thank you. Welcome everyone and thank you for joining us today to discuss Hawaiian Holdings third quarter 2007 financial results. On the call from the company are Mark Dunkerley, President and Chief Executive Officer, and Peter Ingram, Chief Financial Officer. By now everyone should have access to the press release which went out about four o'clock Eastern time. If you have not received the release, it's available on the investor relations page of Hawaiian's website.

Before we begin, we'd 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 and therefore, undo 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 SEC, including the most recent annual report filed on form 10-K, it's recent quarterly reports filed on form 10-Q, as well as recent reports filed on form 8-K. And with that I'd like to turn the call over to Mark.

Thank you Allyson. Good afternoon everybody and thank you for joining us today. I'm going to begin with a review of the highlights of the quarter. Peter is then going to discuss our financial results in more detail, as well as our current outlook. And then as always, we will open up the call to your questions.

We were pleased to see better results in the third quarter than one year ago. We enjoyed strong seasonal demands for Hawaii vacations from the U.S. mainland, which coupled with some astute judgment by our revenue management team, resulted in revenue beating our own expectations for the period.

At the same time, we continue to control our costs, and so our unit costs, excluding fuel, declined by almost 6%. These stronger-than-anticipated results have come at a good time for our business and we are pleased that they add substantially more cushion relative to the financial covenants we discussed during our last two conference calls.

At the same time, we know that our mainland-based competitors have seen more substantially improved results during this period. They have not had to contend with the dynamics of our Interisland market and their exposure to the U.S. mainland to Hawaii market is proportionately far more limited than is ours.

Our task is to reach the results of our competitors within the context of the competitive environment that we face. To do so, requires us to continue our resolute focus on cost control. We have a number of important initiatives in various stages of implementation aimed at achieving just this and we're going to touch upon many of them in the course of this conference call.

We've now entered a period of easier year-over-year comparisons since the weakness in our business first started hitting us at the end of last year's third quarter. However, we would caution that rising fuel prices, continued irrationality in the Interisland markets, low seasonal demand for transpacific travel, and excess TransPac capacity, all contribute to an outlook which, while better than it was just a few months ago, nonetheless remains challenging.

Some of the very effective tactical decisions, made by our revenue management team this past summer are only suitable in periods of high demand. We won't be able to employ them as effectively this winter when demand is seasonally lower. We also remain cautious about the outlook for the economy in the Western United States, where a majority of our traffic initiates. Although, we are pleased to report that we have seen little evidence to date that the much-publicized credit woes are having an impact on demand for Hawaii vacations.

Having struck a note of caution, I'm happy to say that our position remains strong, both in the Interisland and in the TransPac markets. Customers prefer Hawaiian over the product offerings of our competitors and we enjoy a disproportionate share of traffic as a result. We have been able to manage non-fuel related costs and we are optimistic that the initiatives implemented throughout the last 18 months are now reaching a point where we will be able to enjoy their fruits.

Our capacity in the third quarter increased 17%, primarily reflecting the entry into service over the past year of four Boeing 767 aircraft, one of which essentially serves as the spare for our fleet of 18 widebodies. Despite Hawaiian being the industry's fastest growing airline in 2007, our load factor was higher in the third quarter this year than it was one year ago.

And importantly, we posted a year-over-year improvement in passenger revenue per ASM for the first time this year. This occurred despite the fact that our long-haul, lower RASM flying represented the vast majority of our growth this quarter.

So to recap the numbers, we had a low-factor improvement of 1.6 percentage points in our schedule business, which more than offset a 1% reduction in yield, producing passenger RASM growth of 0.9%. Our two primary markets, TransPac and Interisland, both contributed to the higher year-over-year RASM.

We've also been careful not to let growth compromise our commitment to exceptional service. The credit for our standard setting customer service and operational performance goes, as always, to our dedicated employees who constantly strive for service leadership. This commitment was recognized again this quarter when we were named the nation's top airline serving Hawaii by Travel + Leisure magazine.

Let me spend a minute discussing the TransPac and Interisland businesses in a little more detail, starting with the TransPac. For the third quarter, our TransPac routes generated about 70% of our total passenger revenue, a percentage which has increased again year-over-year as a result of our wide-body fleet expansion. We entered the peak summer season with a degree of anxiety in light of the availability of some particularly low fares in the marketplace.

Despite this, our revenue management team made the determination not to chase the market down during the peak months and we were rewarded as yields firmed in the third quarter. As a result, we posted a modest 2.4% improvement in TransPac yield, which compares to year-over-year declines in the first and second quarters. Coupled with a modest decline in load factor, our TransPac RASM improved 2.1%, compared to a 1.9% year-over-year decline in the second quarter and a 6.5% decline in the first quarter.

Turning to the Interisland, our results reflect the continued deep level of discounting initiated by Mesa as it continues to try to establish a position in the market. It's now been almost 17 months since Mesa entered the market, so this quarter reflects the first period of like-to-like, year-over-year comparisons.

With this in mind, it is revealing that we posted a 3.5% year-over-year improvement in Interisland RASM, despite fare discounting, a level of fare discounting that was more severe than what we experienced last year, including both more fare sales and deeper discounts. The RASM result was driven by strong improvements in load factor during the third quarter, as we continue the trend we noted in last quarter's call of posting higher inter-island load factors for each month of 2007, relative to the same month in 2006.

We also believe our load factor continues to be higher than any of our competitors as customers continue to choose Hawaiian on the basis of our superior service, fleet, and frequent flyer program. Hawaiian remains, in our view, the best positioned of the competitors in this market and we wouldn't trade places with them.

Turning to expenses, we're beginning to realize the benefits of a variety of cost reduction initiatives. Our cost-for-available-seat mile declined 3.8% versus a year ago and excluding fuel our CASM was down 5.7%. We clearly recognize the need for continuous improvement especially in light of rising fuel expenses and the intense competition we face.

The most visible elements of our cost structure overhaul have been our second quarter organizational restructuring and our outsourcing efforts in the areas of accounting, IT infrastructure and reservations. Each of the major outsourcing initiatives is progressing towards steady state and we expect to accrue the benefits of these efforts more fully in the fourth quarter and particularly starting in 2008.

Now let me just spend a few minutes talking about an exciting network initiative. We have had a long-held desire to expand Hawaiian's presence in Asia and during the third quarter we announced our intent to enter the Philippines market with non-stop flights from Honolulu to Manila. On October 1st, we received approval from the U.S. DOT to do so, and as such we expect to launch service during 2008 as the only U.S. carrier providing non-stop service between Hawaii and the Philippines.

Given Hawaii's unparalleled draw as a tourist destination, it's nearly 300,000 Filipino or part-Filipino residents, and strong historic and cultural ties, we're confident that there will be great support for our new flights.

Before I turn the call over to Pete, I'd be remiss if I didn't provide an update on our lawsuit against Mesa. At the end of September we went to trial with Mesa over our allegations that they breached a confidentiality agreement. The trial concluded about three weeks ago and the judge has taken the matter under advisement. We are now waiting for his decision.

It wouldn't be prudent for us to speculate on either the timing of the ruling or the likelihood of a particular outcome, as these matters are clearly in the hands of the judge at this time. We did issue an 8-K a few weeks ago with some information about the trial for those who haven't already seen it. With that, I will turn the call over to Peter for a bit more detail on our financial results. Peter.

Thanks Mark. Let me start with expenses and then I will touch on the balance sheet and provide some color on our outlook for the third quarter. Our operating expenses increased by 12.7% in the quarter on a 17.2% capacity increase, and as a result our cost-per-seat mile declined 3.8%. Excluding fuel, CASM declined 5.7% to $0.07. Our fuel expenses grew by 18% in the third quarter to $76.8 million, representing over 31% of overall operating expenses.

The increase reflects a 13% increase in block hours flown and given that almost all of the growth was from additional 767 wide-body flying, our consumption per block hour increased. Our average cost per gallon of jet fuel increased 1.2% year-over-year to $2.27 for the quarter, which includes taxes, delivery, and hedging impacts.

At the end of the third quarter we had hedged approximately 25% of our consumption for the fourth quarter through a combination of heating oil forward contracts and jet fuel forward contracts. Our average contract price for the fourth quarter on heating oil is $2.07 and for jet fuel it's $2.17. And additionally, we've hedged 14% of our consumption for the first quarter of 2008 using heating oil forward contract at an average price of $2.02, and jet fuel forward contracts at an average price of $2.21.

Wages and benefits expense increased only 2.6% year-over-year to $53.6 million, which on a capacity increase of 17%, reflects the improved productivity we've been working toward. Notably, this performance would have been better, but for a credit we realized on the benefits line in the third quarter of 2006 relating to our workers' compensation expenses.

As expected, our maintenance expense has increased again this quarter. Maintenance, materials, and repair expense increased by $4 million versus a year ago to $21.1 million. This increase was primarily due to a year-over-year increase in the level of Boeing 767 heavy maintenance activity, and higher power-by-the-hour charges for engine maintenance due to the inclusion of additional Boeing 767 engines and the power-by-the-hour program, an increase in block hours flown, and higher per hour rates.

Aircraft rent expenses declined by $2.6 million or almost 10% year-over-year to $24.6 million. This reflects the acquisition in December 2006 of three 767's that were previously leased, offset a bit by some supplemental rent that we recorded in relation to non-refundable maintenance deposits that we don't project will be required to fund future maintenance expenses.

The aircraft acquisition also resulted in higher depreciation and amortization expense; it's increased by $4.8 million to $12 million for the quarter. And this increase, to be clear, reflects depreciation of the formerly leased aircraft, as well as the four 767-300 EMs that we purchased in 2006, all of which now have entered into service.

Other operating expenses increased approximately 17.5%. The most significant driver of these expenses is outside services expenses, including those relating to our outsourcing initiatives and these include a combination of ongoing service expenses, as well as transition expenses related to the start-up of these activities.

Below the operating line, we reported non-operating expenses of $3.7 million versus non-operating income of $600,000 in the third quarter of 2006. This increase is primarily due to increased interest expense due to the debt we took on in December of 2006 to purchase the three formerly leased 767's.

Turning to the balance sheet, we ended the quarter with $215.3 million in cash, restricted cash, and short-term investments, a solid increase of about $47 million from where we were at the end of 2006. We are pleased that in the ongoing competitive environment in which we operate that we've been able to maintain a relatively strong balance sheet with an upcast to navigate through the challenges we've faced.

During our last two conference calls I spent some time discussing where we stand relative to term loan covenants. Given the stronger third quarter operating results, we've gained a bit of breathing room relative to the key measures. We remain in full compliance with all of the covenants and based on our current projections we expect to remain so.

Before I turn the call over to the operator, I'll spend a couple of minutes on the outlook for the fourth quarter. Our capacity is expected to increase approximately 7% to 8% year-over-year in the fourth quarter. A slower pace of growth than we have seen throughout the year as we begin to pass the anniversary of some of our root expansion.

As was true in the third quarter, the capacity increase is virtually all related to 767 long-haul flying. As always, our outlook is leveraged to the revenue environment, and our two key markets, as well as to the price of jet fuel.

On the revenue front, we expect the trends we've seen recently to generally continue. However, as Mark discussed the slower seasonal months require us to pursue some different revenue management tactics than we can use in the peak. Factoring in the heavier waiting of long-haul flying, which are lower yielding than the short-haul Interisland business, we expect RASM to be generally flat, plus or minus 1% year-over-year in the fourth quarter.

We currently expect fourth quarter yield declines between 2% and 4%, with a slightly higher load factor of about 87% to 88%. On the expenses front, cost per available seat mile, excluding fuel, is expected to decline again in the fourth quarter, helped to a degree by the absence of some non-recurring items that hit the fourth quarter results last year. Taking this into account, we project our CASM excluding fuel will decline by about 5% to 7% in the fourth quarter compared to the same period of last year.

As usual, the big wild card on the cost side is the price of fuel and unfortunately we've seen a steady diet of increases over the past couple of months taking us into record territory, notwithstanding a little bit of good news on that front in the last 12 hours or so.

As we've said repeatedly, our cost reduction efforts are all the more important given the state of fuel markets and our challenging competitive situation. So much of our attention, as always, will be on minimizing costs going forward. With that I'll turn the call back over to the operator so we can take your questions.

Thank you Mr. Ingram. (OPERATOR INSTRUCTIONS). And gentlemen, our first question goes to Nick Capuano at Imperial Capital. Please go ahead sir.

Hey, good afternoon.

Good afternoon to you too.

Great job with the yield. That's -- great result. Quick question for you. On the -- you elude in the release Mark, Mark and Peter to expense -- continuing the realization of expense savings in your cost control programs. Looking at your wages and benefits, if you could talk -- speak to -- what type of run rate these programs imply.

I mean your wages came in quite low I thought. If you could just give us some kind of color on -- and I know you gave the CASM and gave it in some other ways, but if you could just speak to what we might still have to see with your cost reduction program?

Well, I think our cost reduction program really has it -- a number of different elements to it. One is, that we've gone and made some structural changes in our business. We've had our sourcing exercise, we went and renegotiated a number of our very large third party supplier contracts. That netted some important savings, most of which are now pretty fully implemented.

I think the stuff that is yet to hit the books entirely fully is some of the changes that we've made around outsourcing and more generally that we've been able to grow the number of units of productions, production ASMs, without the same commensurate growth in head count.

So, that's really the source of where we're getting the savings from. I think we have previously given guidance on the kind of annual savings that we expect from the sourcing and the outsourcing and I'm now looking at Peter because I want to make sure we say the same numbers that we've used.

We've said that the sourcing and outsourcing should generate annual savings and steady state in the range of $15 million, $10 million to $15 million.

Right.

And then the rest of it, as I say is just really managing our productivity within the bounds of our existing contracts.

Right. And one more question. If you could just give us a qualitative assessment of the current pricing and fare environment. Obviously you had some firming that helped last quarter. If you could just give a sense of both the capacity outlook in the TransPac market, in speaking of the TransPac market. And then just your thoughts on fares and pricing.

Okay. I think what we saw over the summer was fare levels, which in general were lower than they were the previous year and this is why we were cautious going into the summer because summer 2007 fares seemed to be lower than summer 2006 fares.

We made a range of tactical decisions to hold back inventory to sell close into the date of travel, hopefully at higher fares and that strategy worked, and it worked well and that's why we exceeded our own expectations as to how we thought revenue was going to come in for the summer.

What we are seeing today is a continuation of the fare environment that we saw during the summer. In other words we are seeing fares which are in general in the marketplace at a level lower than they were one year ago.

The question we have for ourselves and we're working through now is how much inventory to sell at what fare and will we be able to pull the same tactical decisions in the fourth quarter that we did in the third quarter. And our note of caution on that is that it is harder to do when we are in a weaker demand part of the year than the summer and I think that's pretty straight forward.

Sure.

With respect to TransPac capacity, for the fourth quarter it is flat to slightly down year-over-year and we're still assessing how it's going to look in 2008. Yearly indications are that it may grow a little bit in 2008, but I would caution that that is very early days yet, and we haven't really arrived at the full conclusion.

All right, thank you very much.

(OPERATOR INSTRUCTIONS). And we do have another question. This is Dominique Mielle at Canyon Capital. Please go ahead.

Hey Dominique.

Hi, congratulations. A few details from Peter if I may. Can I have the CapEx number for the quarter?

I don't have that one on my fingertips, but we have --.

Okay.

-- [people] curiously flipping through pieces of paper.

Dominique Mielle. Okay so let me give you the three numbers I'm looking for; CapEx, the restricted cash number and whether working capital was a source or a use of cash this quarter.

And then the more general question is, on CASM, particularly salary per ASM, that was a shocking decline, wonderful decline and I wasn't sure from the previous answer whether we should be using that number going forward or if there is also on the cost side a seasonal adjustment that we should make, upward I mean.

There were -- let me start with the last question and then work through a couple of the others. On the wages and benefits number, I would note that there were a couple of adjustments on the benefits line that were favorable to us in this period.

So going forward, that number may trend up a little bit and plus there is some seasonality to that number with the seasonality with our flying. Those benefits adjustments are actually smaller than what we saw last year. So hopefully that helps a little bit.

It does. Yes.

Of CapEx for the third quarter, we came in at right about $4.7 million of CapEx for the quarter and restricted cash, you asked about -- restricted cash as of September 30th is at $47.8 million. And there was one other question you had --.

The other question was whether working capital was a source or use of cash in general, the Q isn't out yet but if you have a sense for what it did this quarter that would be helpful.

I have to apologize. I don't --.

Okay, we can speak offline a little later. One last, if I may, the -- what emboldened you to sort of hold back inventory in this third quarter, was it looking at the competitor's capacity going down or anything that -- any specific data, economic data or otherwise that indicated that it was a good idea, albeit maybe a risky one to hold back inventory?

I wish I could point you to a single metric that determines our thinking about this. In reality, it's a range of things, some of which is qualitative, we look at things like what we can see in terms of availability on other carriers. We also look, as you suggest, the amount of capacity in the marketplace.

But perhaps much more profoundly than that, we try things week-to-week in our inventory and we see how it works and we then make a judgment whether to continue the experiment for another week or whether to pull back on that experiment. And so a lot of this is really, kind of very short-term judgment about what the market is doing.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). And gentlemen, we have no other questions in the queue at this time, so I'd like to turn the call back to Mr. Dunkerley for any closing comments.

Okay, very good. Well, thank you everybody for participating on the call. We obviously look forward to talking to you at the -- what will actually be year-end results at the end of the next quarter. And thank you all for calling in and hope you have a good Halloween.

Thank you. That does conclude the call, we do appreciate your participation at this time. You may disconnect. Thank you.

Thank you.