Hawaiian Holdings Inc (HA) 2008 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Hawaiian Airlines first quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Wednesday, April 30, 2008. I would now like to turn the conference over to Mr. Andrew Greenebaum of ICR. Please go ahead sir.

Thank you. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings first quarter 2008 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 today about 4:00 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 statements under the Private Securities Litigation Reform Act of 1995. The following prepared remarks contain forward-looking statements. 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 SEC, including the most recent annual report filed on Form 10-K, recent quarterly reports filed on Form 10-Q, as well as the reports filed on Form 8-K. With that I'd like to turn the call over to Mark Dunkerley. Mark.

Thank you Andrew and welcome everybody to our call. Record fuel prices and excess capacity were for Hawaiian, just like every other U.S. carrier, the major malign influences on our quarterly results. In our case however, the issue of excess capacity was taken care of in the span of a single week by the disappearance of both Aloha and ATA. This is clearly the major news in our world and since we don't want to bury the lead, I intend to spend time discussing it today before discussing -- before focusing on the results of our first quarter.

Even before discussing that however, I would like to take a second to review the press release we issued early this morning announcing that we have reached an agreement with Mesa to settle our lawsuit. As I am sure most of you are already aware, we were awarded $80 million in damages against Mesa related to their misuse of confidential information provided by Hawaiian in the course of our bankruptcy. With today's announcement, we've agreed to settle the case and Mesa has agreed to drop its appeal. Hawaiian will receive $52.5 million in cash, and subject to various court approvals, the money should be in our accounts within the next couple of weeks. The agreement brings this saga to an end and we are delighted with the terms of the settlement.

Now let me take some time to explain the recent competitive developments beginning with the inter-Island market. Before Aloha shut down, the inter-Island market was characterized by excess capacity and the below cost pricing strategy of Go, a unit of Mesa Airlines. Fares were below compensatory levels even before the increase in fuel prices over the last 12 months and far, far below what is necessary to cover costs in the wake of rising fuel prices. Predictably this led to all of the airlines losing money and at least in the case of Aloha, to an extraordinary hemorrhaging of cash. Aloha, which had 40% of the inter-Island seats, ceased operations on April 1. Hawaiian and its competitors replaced some of the lost capacities but overall almost 25% of the total inter-Island seats disappeared from one day to the next. It is worth noting that the date of Aloha's shut- down coincided with the quarter's end so none of this momentous news influenced our first quarter results. ATA in fact shut down just a few days after that.

Our trans-Pacific market also had excess seat capacity in the period leading up to Aloha's and ATA's disappearance. They're not as severe as was the case in the inter-Island market. Five years of seat growth against a backdrop of flat hotel room availability had the effect of preventing airlines from raising fares to cover the rising cost of fuel. Since every flight across the Pacific is a long-haul, the effect of rising fuel prices is proportionately greater, so I wouldn't characterize one market as having started off in a better condition than the other.

The combined share of seats of Aloha and ATA was over 15% of the total U.S. mainland to Hawaii market and 19% of the West Coast to Hawaii market which is the market segment in which Hawaiian competes. In the immediate aftermath of the shutdown of both carriers, we implemented a contingency plan. Our objective was to demonstrate our ability to shoulder the load of stranded passengers thereby minimizing any negative impact on the public's perception of Hawaii as a destination and underlining for all to see that Hawaiian is in a position to fill the void left by both carriers.

I am extremely pleased and proud of the job done by our employees executing our contingency plan. We were also touched by the outpouring of support from volunteers from virtually every department of our company who helped us meet travelers' needs and answered their questions in a timely and professional manner. We left not one single inter-Island traveler stranded on any single day and we cleared all of the trans-Pacific customers of Aloha and many of those of ATA within a day or two of their original travel schedule. The feedback in the community and in the press has been good and I believe that our operational reputation was enhanced during the weeks that have followed the shut down.

Under our contingency plan, we increased our inter-Island capacity by about 6,000 seats per day to roughly 20,000 seats. This was done by extending the flying day of our 717 aircraft earlier in the morning and later in the evening, and by using our spare 767 aircraft on a handful of daily roundtrips between Honolulu and Maui. In the weeks which have followed, we have been able to better calibrate the expansion of our schedule to the demand in the marketplace and as a result we have scaled back the extent of the seat expansion to an increase of 4,500 seats per day. Achieving this still requires us to fly earlier and later in the day than ideal and to use our spare 767 and 717 for inter-Island flying. So we're actively seeking additional inter-Island aircraft to get our spare aircraft back to being spares and to be able to fly more seats during the periods that our customers prefer to fly.

We effectively have two options at this stage. The first is to add additional 717 aircraft. This is attractive for a number of reasons. The 717 is ideally suited to the sort of flying we do between the islands of Hawaii, very short sectors with very high frequencies. From the standpoint of crew training and utilization, maintenance and scheduling, adding common aircraft is optimal. The challenge we face is that although the 717 is a modern and efficient aircraft, it is out of production and the global supply is limited. So the market for available aircraft is illiquid. We've been in contact with a number of parties to control potentially available aircraft but have not been successful yet in finalizing a deal on suitable terms.

Our second option is to add older generation aircraft with the MD-80s being the aircraft type we are focused on. They're less fuel efficient. The penalty is relatively small since the distances we fly are so short. At the same time there are plenty of them surplused and we can lease them for a shorter period of time thereby preserving our ability to assess our long-term fleet needs over the course of the coming months and years rather than days and weeks.

Our analysis of the economic differences between these alternatives is essentially complete and we would hope to be making an aircraft announcement in the near term. Getting aircraft released from a current operator, performing the necessary checks, managing the transition of the aircraft to our fleet and training the crew are all time consuming undertakings. So while we hope for better, we don't expect to have incremental narrow-body aircraft in service until into the third quarter of this year.

Turning to our long-haul fleet, the shutdown of both Aloha and ATA provides an opportunity for us to grow by one or two aircraft while not undermining the beneficial effects of the reduction in capacity on the market. As I mentioned earlier, they accounted for 19% of the seat capacity between the West Coast and Hawaii. Putting that into airplane terms, they flew almost 150 round trips a week with aircraft that were roughly two-thirds the size of our 767s. Of these flights, almost 40% were out of Oakland. We've already leapt on the opportunity to fill the void in Oakland with our new Oakland-Honolulu service which begins tomorrow.

To fund this flying over the long term, we've signed a letter of intent to lease an additional 767-300ER aircraft. The LOI is subject to inspection and corporate approvals so it is not a definitive agreement at the moment. But, assuming that we get the I's dotted and the T's crossed we could have this aircraft in service before the end of the third quarter.

Until these additional aircraft are on our property in the third quarter of this year, we intend to keep operating our fleet in the way I have described earlier. The good news is that we think that this will enable us to meet market demand both inter-Island and trans-Pacific. But of course there is no free lunch and in our case we expect to see some of our operational metrics decline throughout the summer. We will have no spare aircraft to use to recover the operation when a delay occurs. When a flight is on a delay we will not be able to get our customers to their final destination until the cause of the delay is rectified. Nonetheless, we still expect to remain among the industry leaders for operational performance.

Our employees have been working extremely long hours during this period. They have done a terrific job of handling the extra work. Our first priority is to hire additional staff to alleviate the load. To date we've posted roughly 250 new positions and we've actually hired 133 additional employees, many of them formerly with Aloha.

Peter's going to share some guidance in his part of the call but before we get there, I'd like to share with the call's participants the fare increase we announced earlier today. The same fares that caused Aloha's collapse have remained in the marketplace during the last few weeks. The rising price of fuel and the need to cover our own costs necessitates that we follow every other business consuming fuel and raise our prices. So today we've announced a $5 increase on the lowest inter-Island fares from $49 to $54. For our longer haul inter-Island flights we're adding a further $5 and for those wishing to make a reservation by telephone, we're charging $5. We're also joining most major airlines in assessing a $25 fee for checking in a second bag. Though we've not increased trans-Pacific fares in recent weeks, we remain vigilant for opportunities to do so. Our current fares are, in general, higher than those of our competitors.

Having spent some time discussing the changes in the market since the end of the quarter, let me now turn to a top-level review of our first quarter financial results. Later in the call Peter's going to provide additional details on the quarter.

Strong revenue growth and the results of our ongoing cost savings initiatives were offset by a more than 53% jump in aircraft fuel costs year-over-year resulting in larger operating losses than the prior year's period and pre-tax loses that were essentially flat year-over-year. As a result of fuel our costs per available seat mile increased 12% year-over-year to $0.1198. Excluding fuel costs CASM was up by 0.4% to $0.0799. In spite of tough competition and excess capacity our revenue per available seat mile increased 10.6% to $0.01101, making the third consecutive quarter of a year-over-year improvement in RASM and the best year-over-year performance we've posted since emerging from bankruptcy in 2005.

Our passenger yield for the first quarter was up 15.1% to $0.1193 while load factor fell by 2.5 percentage points to 85% as we pursued a strategy of seeking a more profitable passenger mix. I'd remind you that this performance preceded the recent changes in the competitive landscape.

Breaking out the individual market segments, trans-Pacific revenue contributed slightly less than 70% of our overall passenger revenue. Our trans-Pacific RASM increased almost 10% year-over-year, marking the third consecutive quarter of increases. Indeed, each of the last three quarters had a larger year-over-year increase than the prior quarter. This improvement was yield driven as we were working even before the changes in the marketplace to offset the cost of fuel through both fare increases and revenue management techniques.

While our load factor was slightly lower than last year, the overall results reflect continued strong demand for travel to Hawaii despite the challenging economic conditions in the country generally. Trans-Pacific capacity increased about 8% compared to last year's first quarter reflecting the impact of the additional aircraft we added into our fleet in 2007.

Our inter-Island operations represented about one quarter of our passenger revenue during the first quarter. Although the first quarter continued to reflect the excess capacity that has existed since Mesa entered the market in 2006, the pricing environment improved year-over-year. As we've discussed previously, Mesa entered the market with promotional $39 fares that not only remained part of the basic fare structure but were followed by more deeply discounted promotions of $29, $19, $9, and on a couple of occasions, even $1. For most of the first quarter this year however, the fare structure in the market has begun with $49 fares. And as a result of the lack of some of the deepest discounts and because of our continued ability to attract a disproportionate share of passengers, we saw inter-Island RASM improve by over 20% from last year's quite depressed levels.

This result reflects both double-digit yield improvements and strong load factor gains. We believe it demonstrates travelers' strong preferences for Hawaiian Airlines over our competitors, an outcome that is attributable to our dedicated employees, unmatched operational performance, superior fleet and strong relationships with our customers.

The bankruptcies of Aloha and ATA are from a financial health point of view positive developments for Hawaiian Airlines. We remain however a competitor among several in each of the major markets we serve and there are no meaningful barriers to entry, as Mesa's entry into the inter-Island market so recently demonstrated. Consequently Hawaiian must remain fully competitive by the standards of the industry. We continue to find ways of controlling costs and we will continue to invest in our brand.

From an operational perspective, the summer period is going to be challenging as we cope with full flights and work to maximize our schedule within the constraints of our current fleet. As I mentioned earlier, our employees performed magnificently in the wake of the Aloha and ATA shutdowns, providing stability to the Hawaii air travel market at a moment when chaos could have reigned. As a result I have every confidence that they will rise to the challenge again over the peak summer travel period.

Though it seems like a long time ago I should mention that earlier in the first quarter we reached key agreements with our pilot and flight attendant union on the introduction of new aircraft. We signed a definitive purchase agreement with Airbus to acquire 12 new long-range wide-body aircraft and secured purchase rights for an additional 12 aircraft. This is the first step in a phased fleet plan designed to replace our wide-body fleet of 18 aircraft, expand our long-range fleet, and enable Hawaiian Airlines to open new routes to more distant markets on a non-stop basis from Hawaii.

And just a couple of weeks ago we launched non-stop flights from Honolulu to Manila. Manila is our first gateway city in Asia. The new service also makes Hawaiian Airlines the only U.S. carrier providing non-stop service between Manila and Honolulu and it will more than double capacity on the route over time.

In conclusion, I'm pleased to be able to say that Hawaiian stands in a stronger position to deal with the problem of astronomically high fuel prices than we were just over a month ago. We are moving as quickly as we can to take advantage of the opportunities in front of us without seeking to destroy the very circumstances that have improved our prospects. It will take another quarter or so until we can get to where we think we need to be but in the meantime our business is running well.

And with that, I'd like to turn the call over to Peter. Peter.

Thank you, Mark. As Mark already highlighted, we posted strong revenue gains in the quarter but fuel price escalation offset this improvement and produced a higher operating loss and a pre-tax loss that given what happened with fuel prices, was in line with or slightly better than the expectations we had entering the quarter.

Since Mark already provided details on revenue performance in our primary market segments, I'll focus on the operating expense detail before discussing our balance sheet and providing our outlook for the second quarter of 2008.

Our operating expenses for the first quarter increased 18.1% on a 5.6% capacity increase which resulted in a cost per seat mile increase of 12%. Excluding fuel, CASM increased 0.4% to $0.0799 due in part to higher maintenance expenses incurred during the first quarter of 2008. Our fuel expenses grew by more than 53% in the first quarter to $91.0 million, fully one-third of our overall operating expenses.

This jump in fuel expense reflects a 4.2% increase in block hours and a proportionate increase in fuel consumption. On average the cost per gallon of jet fuel increased almost 47% year-over-year to $2.85 per gallon for the quarter. During the second half of 2007, we began migrating our fuel hedging away from jet fuel swaps and toward heating oil forward contracts. Currently we have not designated our heating oil contracts for hedge accounting under FAS 133 so our first quarter results include $5.6 million in gains related to heating oil contracts. This number includes the realization of gains related to contracts that settled during the quarter less the amount that we had recognized in prior periods as well as unrealized mark-to-market gains related to outstanding contracts that will settle in future periods.

We purchased heating oil forward contracts for 2008 representing 19% and 10% respectively of our second and third quarter consumption. The average price of our contracts is $2.39 for the second quarter and $2.41 for the third quarter. Wages and benefits expense increased by 1.2% year-over-year in the first quarter to $57.3 million, reflecting some of the cost savings initiatives we implemented over the past year.

As we've discussed on previous calls, our maintenance expense continues to increase. For the first quarter maintenance, materials, and repairs expense increased by $4.3 million versus a year ago to $29.4 million. The increase in maintenance expense is primarily due to the expansion in our operations and an increase in the level of Boeing's 767 heavy maintenance activity. During the first quarter, we had one additional heavy check this year compared to last year and the checks on average were generally more intensive based on the cycle of maintenance activities. We expect maintenance costs to continue to increase throughout 2008 compared to last year. Depreciation and amortization expense increased by $1.8 million to $12 million for the quarter and this reflects the ownership costs of additional 767 aircrafts brought into service during 2007.

Our commissions and selling expense line was up year-over-year by about $2.9 million. Unsurprisingly some of the items in this category vary with revenue so that accounts for part of the increase. We also recognized changes in the balance sheet valuation of our frequent flyer mileage liabilities in this category which contributed to some of the increased expenses during the quarter.

In other expenses, there were a couple of offsetting factors during the quarter which resulted in a net increase of about $1.5 million. Pushing costs up is third-party contract costs related to our outsourced accounting, IT, and reservations activities, functions which were all in-sourced during last year's first quarter. And as you would expect, these costs are offset by savings in our wages and benefits lines. We also had some reductions in professional services and legal expenses during the first quarter that mitigated the year-over-year increase in the other category.

Below the operating line, we reported non-operating income of $2.1 million versus non-operating expense of $3.7 million in the first quarter of 2007. Lower interest expense in the first quarter of 2008 was offset by lower interest income, while gains on our fuel hedging activities accounted for the year-over-year improvements in non-operating income. Despite our pre-tax loss we did not book an income tax benefit during the quarter as our ability to carry back losses was fully utilized in 2007. This circumstance, which contrasts with the tax benefit we recorded in the first quarter of 2007, explains the year-over-year discrepancy in our net loss relative to very similar pre-tax loss levels.

Turning to the balance sheet, during the quarter we reduced the principal on our outstanding debt by $5.9 million and we have similar principal payments scheduled for the remaining quarters of the year. During the first quarter, we increased our outstanding debt by drawing $8 million on our revolving line of credit. Subsequent to the end of the quarter however, we have repaid this balance. At the end of the quarter, we had $109.4 million outstanding on our two term loans, a total which does not reflect the subsequent repayment of the revolver draw, $115.7 million outstanding under our 767 financings and other notes payable of $16.4 million. We ended the quarter with $142.2 million in cash, restricted cash, and short-term investments compared to $183.2 million at the end of 2007. And this reduction is the result of our decision to reclassify our auction rate security investments from short-term to long-term assets in light of the ongoing failures in the auction rate market.

As we discussed on our last conference call, we have auction rates securities with a face value of $42.9 million issued by a Hawaii medical provider. The securities have a AAA rating as a result of an insurance swap and the underlying issuer has an A-plus rating from Standard and Poors. Beginning in February, the weekly auctions for the security began to experience failures in conjunction with the difficulties in the auction rate market that have received considerable media attention nationally. While we have continued confidence in the financial health of the underlying issuer of these securities, uncertainty about the timing of a resumption of successful auctions compelled us to reclassifying the investments as long-term.

Fortunately, we continue to have sufficient liquidity to address our operational needs, a situation that is true even before the cash inflow related to our Mesa settlement. Additionally, following the auction rate failures, we've worked with our primary credit card processor to ensure that these investments would continue to qualify under the terms of that agreement as unrestricted cash which means that the balance sheet reclassification will not affect the financial triggers which determine our maximum level of credit card holdback.

With that as a segue, it's worthwhile for me to take a moment to discuss our credit card holdback. As we've discussed on previous calls, our primary credit card processor retains a portion of advanced ticket sales as protection against chargeback. The level of our holdback with this processor is currently 40% of outstanding advanced ticket liabilities, a level we have been at since early last year. Our contract provides for adjustment to this holdback level based on certain financial triggers related to our level of unrestricted cash, operating income, and fixed-charge coverage. Based on our most recent projections, we anticipate remaining at the 40% holdback level throughout the remainder of 2008 and our relationship with our processor is a positive one which goes back several years.

Before we take your questions, I'll spend a couple of minutes on the outlook for the second quarter. Given the significant changes which have unfolded in our business environment over the past month, it's more difficult than normal for us to anticipate exactly how things are going to shake out in the near term. As those of you who have followed our business for awhile know, our results are highly leveraged to the revenue environment in the trans-Pacific and inter-Island markets as well as to the price of fuel. Fuel prices continued their ascent throughout the first quarter and remain quite volatile. Countering this, as Mark discussed previously, we expect the reduced capacity in our markets following the cessation of service by Aloha and ATA to allow Hawaiian and the remaining competitors to achieve relatively greater success in reflecting these increases in the price we charge for our services.

We project that Hawaiian's capacity for the second quarter will increase 3.5% relative to last year's 2Q. We are not assuming any additional aircraft in this number so this increase is predicated on additional utilization of our existing fleet, particularly in the inter-Island market. On the revenue front we expect that the increases we have seen in RASM over the past few quarters will continue and we expect the rate of increase to improve sequentially in the second quarter for a couple of reasons.

First, we've seen affirming year-over-year in inter-Island pricing, something which occurred even during the first quarter. Second, as fuel costs have increased we have seen a necessary increase in pricing discipline in the trans-Pacific market, a trend which should be amplified by the realignment of capacity with demand occasioned by the Aloha and ATA bankruptcies.

Finally, with proportionate increase in our short-haul operations relative to long-haul flying, we'll experience a mixed change which tends towards both higher RASM and higher CASM. Factoring in all of this, we expect RASM to improve year-over-year by 18 to 20% during the second quarter. Yield is expected to account for all of this improvement as our load-factor was already high in 2Q '07 and generally inter-Island flights operate at somewhat lower average load factors so the disproportionate growth in these services will tend to push this measure down. We therefore are expecting our yield increase to exceed 20% with load factor down by about one percentage point.

On the cost front, we expect that the increase in inter-Island operations will lead to an increase in our CASM by a couple of percentage points and as such we're forecasting that CASM, excluding fuel, will increase between 2.5 and 3.5% year-over-year in the second quarter. As usual, we're not going to attempt to project the price of fuel but with April already in our rearview mirror, we're not hanging our hats on a dramatic improvement in the market in the near term. Internally we build our forecast on the market's forward curve so quite clearly we expect to continue to see substantial year-over-year increases in fuel expenses.

During the past month our booking trends have approved dramatically and as such our cash balance has improved in the weeks since the end of the first quarter. We anticipate continued cash generation as we move into the summer peak season. The events of the past month have underscored the importance of the actions we've taken to improve our cost structure and solidify our financial underpinnings over the past couple of years and we are gratified by the outstanding contribution of everyone on the Hawaiian Airlines team to help us navigate through an extraordinary period for our industry. And with that, I will turn the call back over to the operator so that we can take your questions.

Thank you sir. (OPERATOR INSTRUCTIONS). And our first question is from the line of Kim Dotter with Bear Stearns. Please go ahead.

Good afternoon.

Hi Kim.

Hi Kim.

And Kim, before you ask the question, just a point of clarity for everybody on the call. In Peter's section he mentioned that wages and benefits expense increased and they actually decreased by 1.2% year-over-year in the first quarter. That was just a slip of the tongue. Okay. Yes, Kim, go ahead.

Okay. I know you currently don't have a dedicated freighter fleet but do you guys have plans or even any interest in building out a cargo operation now that Aloha's completely shut down its cargo ops?

We think it's probably a pretty good business. The difficulty for us is that our inter-Island fleet, which is 717s, has no cargo variance.

Right.

So we would have to get into an entirely new fleet type in order to satisfy the cargo needs. And at the moment, our assessment is that the investment needed to do that would likely overwhelm the potential benefits of doing so. So I wouldn't say no never, but at the moment it doesn't appear to be a business line that we think we can get at.

Are there any assets, though, in the Aloha [estate] that you would be interested in?

I think there are a bunch of assets in the Aloha [estate] that we may be interested in. They're relatively sort of little assets and granular in nature -- ground handling equipment, things like that. I don't' think there are any large assets that are of particular interest to us.

Okay. All right. What's the minimum unrestricted cash level that you feel you must maintain either from a covenant perspective or just from a pure comfort level? And then, as an add-on, are there any unencumbered assets that you guys could monetize should you need to do so or decide to do so?

On the first part of that, Kim, it's a little bit of a moving target.

Um-hm.

I think that when asked that question in the past we have talked about a level north of $100 million and that was at a time when fuel prices were between $60 a barrel and $80 a barrel. And I think the dramatic and unrelenting escalation we've seen in fuel prices tends to make one a little more cautious and it really shows the value of having the liquidity available. So I think we would like to be on average somewhere in the $150 million range and recognizing, of course, that there is a seasonal ebb and flow to this on the demand for our services. So at some times of year if you're going into the peak season and you're below that, you can be relatively more comfortable than if you're going into the trough and you're at a lower level.

Right.

In terms of unencumbered assets, under the terms of our term loan, nothing is technically unencumbered. We do have some aircraft that are encumbered only by our term loans and which -- we would have the ability to monetize that. Those are the four 767-300EMs that we purchased back in 2006 and brought into service over 2006 and 2007. Right now that is not a direction that we are looking. As Mark mentioned, we're actually more in the mode of modestly expanding our fleet rather than shrinking our fleet.

Right. So in this time of historically high oil prices, plus in light of the Aloha collapse, now presumably having pilots flooding the Hawaiian market, is labor showing willingness to help the company contain costs?

First of all, let me just reiterate I think our employees did an absolutely unbelievably good job in the immediate aftermath. This is obviously a financially focused call but in this community one of our great fears was that in the aftermath of the Aloha shutdown, the visual image everybody would have would be stranded passengers sleeping on the couches at the airport.

Um-hm.

None of that took place and everybody stepped up and it was thanks to our employees that everything went pretty smoothly. I think we're still in the situation frankly where, as I said in the early part of our remarks, there are two issues that until recently have been a threat to all airlines including Hawaiian. One is the high fuel prices and the second is excess capacity. The shutdown of Aloha and ATA take care of one-half of that equation. The high fuel prices continue to be a challenge for us and I think that has to condition the expectations of organized labor in this industry. I can't get much more into it than that but it is clearly the case that nobody is out of the woods yet.

Right. Thank you. And finally, just a quick housekeeping question. Of the $5.6 million in the hedging gains, how much of that was out of period, unrealized?

There is -- it's a little difficult to track it because we had the sort of ins and outs of contracts that [are now in period]. About $4.5 million of that was realized during the quarter. Some of those contracts we had recognized gains during 2007 and had the realization now and then you have the change. But you can say that $4.5 million related to contracts that settled in the quarter.

Okay. Thank you.

Thanks Kim.

Thank you. Our next question is from the line of Jamie Baker with JP Morgan Chase. Please go ahead.

Good morning gentlemen.

Hi Jamie.

Hi Jamie.

I realize you have some existing frequent flyer benefits with a couple of mainland operators but Aloha did as well. I'm wondering if there's a more formal alliance participation that you might be able to pursue particularly since Go is believed to be kicking around the same idea.

Pardon me, but if I understood the question, are we interested in working with Aloha's former partners? The answer to that is yes. Clearly we are. We're a full service airline. We believe we have the capacity to take care of Aloha's customers and clearly part of our focus is making sure that we reach out to all of Aloha's former partners and make sure that they feel that they have a potential good partnership with us. And we're working through that diligently. There's nothing we can sort of announce publicly, a lot of this stuff is actually pretty small, not really material in its individual relationship by individual relationship. But that is a focus of what we're doing.

And secondly, you brought up the issue of spare coverage and the near-term challenge there which I thought was interesting given the potential inability to recover from irregular operations. Are there any curfews at the various Hawaiian airports that would affect your ability to get back on track or are you basically free to operate a plane at any hour once you get whatever repair done that needs to be fixed?

The only curfew we face is in San Diego. None of the airports within the state of Hawaii does that become a problem. And I wouldn't want to over dramatize the issue. We would still expect to be the industry leader in a bunch of the metrics of operational performance. I just really do want to -- all I really wanted to suggest is there really is no free lunch. We will probably see some of our metrics slip but we anticipate providing better customer service even under these strained circumstances than our competitors do without them.

Got it. Thank you very much. Appreciate it.

You bet. Thanks.

Thank you. Our next questions from the line of Bob McAdoo with Avondale Partners. Please go ahead.

Hi Bob.

Hi guys. Couple of questions. You made a comment that said in the first few days or so you actually -- it sounded like you said you actually ran some extra long-haul flights. Did I hear that right?

Yes. We did a bunch of things. First of all we had roughly 14,000 seats in the market. We added 6,000 -- we're talking inter-Island -- additional inter-Island seats and we did that by flying our spare 767 inter-Island on a handful of round trips between Honolulu and Maui. That activity actually still continues. Now, subsequent to the first week or so we determined that the inter-Island market is perhaps best served by not 6,000 additional seats by 4,500. And so we have reduced the amount of inter-Island flying but we still operate the 767 on that handful of inter-Island routes.

In addition to that we did operate, I think, three extra 767 round-trips between Honolulu and the mainland to relieve the pressure on stranded passengers in Hawaii getting back to the mainland. That was just three discreet extra flights that we operated and we haven't done that since.

And were you compensated for those or were those gee, we're trying to help you get out of here or we'll take you for $100 even though the Aloha ticket you have isn't worth anything? What was the economics of those?

We offered them all basically without compensation. We were actually compensated for two of the three. Frankly in the first week, our focus was on just moving people from where they were to where they wanted to go. We felt that was important to preserving the reputation of Hawaii as a great destination to visit in all circumstances.

Sure.

We were actually compensated for two of those three flights but that didn't enter into the decision when we made it.

And when we got the guidance that said capacity in this quarter is up 3.5%, that's really this 4,500 -- 99% of it's this 4,500 seats a day kind of project as opposed to anything else.

Yes. That's right. That's the bulk of it.

Okay. Any other kind of special costs that you had in those first few days of overtime? I assume you've still got quite a bit of overtime if you haven't got all your people hired yet. All that kind of stuff is ground into this 2.5 to 3.5% CASM ex-fuel kind of number that you gave us?

Yes.

Yes. That should all be ground in. Obviously with pretty rapid change in the operations, I think on the cost line as well as the revenue there may be a little bit more variability. But we've done our best to account for that in the numbers we've put out.

You made the comment, Mark, that your fares were sometimes higher than the other guys on the fares to the mainland?

Yes.

Which I noted the other day when I was kind of scratching around looking at Orbitz and places like that. And I'm curious, routinely you have had a fare that was at or below the average and I'm just curious. At those prices people are still coming to you because you have this reputation of being there and those flights are still kind of cranking along and the load factor down only one point assumes some of those fares -- that that's the kind of fare label you are in fact collecting?

Yes. I guess I would answer that in two parts. First of all, in our last conference call we suggested to everybody that we were going to be looking at yield management in a slightly different way as we tried to do our best to capture and prove RASM. We also suggested that people pay -- could read slightly less into our monthly traffic statistics as a consequence. And what you see from the first quarter and our position on fares is that we do think that we are benefiting by changing a little bit the way manage our inventory and have prices out in the market place.

The second thing I would say is the fact that our prices are currently higher than those of our competitors reflects a degree -- it's a judgment about what's going to happen this summer. We're comfortable where we are right now. That can all change tomorrow if we see things we don't like but for the time being we think we're going to be able to adequately fill seats at those higher fares.

And that's why you give us a load factor that's roughly where it was?

That's correct.

Okay. Have you gotten any sense that anybody has gotten excited and thought they ought to come help fill in the gap that you're trying to fill, help you fill that gap? Is anybody else adding any capacity other than obviously Mesa helping in the short-haul stuff?

Yes. We had Alaska Airlines announce a Seattle/Maui and an Anchorage/Maui shortly thereafter. We haven't had any other announcements. One of the things I mentioned a little bit earlier in the call, I think, mentioned two things that really address your question. One is rates were well below compensatory levels to begin with.

Sure.

And so they're coming up a lot year-over-year but so has fuel been up a lot year-over-year. So they've got quite a long way to go. That's the first point. And the second point is we are mindful that this is a market with relatively few if really no meaningful barriers to entry so we are being policed by competitive marketplace perhaps as clearly as we were before.

Yes. That's for sure. And Oakland is filling because so many of the seats were gone, were taken out of the Oakland market. Oakland is filling up like the rest of them?

Yes. Oakland used to support basically 60 flights a week between these two carriers operating airplanes which on average were about two-thirds the size of our airplanes. At the moment we have seven flights a week replacing and so we're really pretty comfortable with the decision we made to go into Oakland.

And then finally, what is the current fuel price? I know it's moved up and down and we've got to do a blend of your hedges plus what's the unhedged portion. But what are you paying today or what's the market today for you guys for unhedged fuel in the last few days?

It is -- the last day or so we've seen the unhedged price being in the high 330s, low 340 range. Obviously it bobs around from day-to-day, Bob, so I would like to -- when I look at the spreadsheet tomorrow I'm going to see it down based on what happened in the forward market today.

Yes. All right. I think that's what I got. I appreciate it. Good luck to you guys.

Thanks.

Thanks.

Thank you. (OPERATOR INSTRUCTIONS). And our next question's from the line of Nick Capuano with Imperial Capital. Please go ahead.

Hey guys. How are you doing?

Hey Nick.

Hi Nick.

Couple of questions around the bookings. You mention you've seen a dramatic improvement in bookings and I'm wondering to what extent do you perceive it's from just an immediate reaction to the capacity coming out versus -- you also alluded to the fact that you haven't seen a real drop-off in consumer activity in general. So is this people booking early for the holiday or is it in specific markets that you're benefiting from a reduction in capacity of competitors? If you could just give a little more color around the booking trends [in Transpac].

I can certainly try. I'm not sure if I can really answer your question simply because we don't really know. It is the case that even before Aloha and ATA disappeared we saw bookings holding up reasonably well. That's not to say that there wasn't any softness but it was certainly not what you would perhaps consider to happen in a full-blown recession. Clearly after ATA and Aloha shut down, we benefited from people who had travel arrangements that they had to shift. At the moment I think the positive effects of that and whatever negative effects there are of slowdown in tourism are pretty hard to parse for us. I would say that amongst the chattering classes here in Hawaii, I'm not hearing a lot of people suggesting that there we're feeling the full brunt of a full-blown recession.

Um-hm. Relative to United, your largest competitor in the West Coast trans-Pac market, after their difficult quarter and comments about capacity reductions and measures needed to shore up their financials, are you seeing anything in particular out of them or any of the other major players relative to fares?

No. I think what has been in common with most of the major airlines talking about capacity reduction is they're talking about them after the summer and we can understand why. It is just practically quite difficult to stop flying routes and services for which you already have taken bookings. We haven't seen that yet but we still think there is some time for that to be revealed. In other words I don't think we're looking at the fall schedule now and saying there's no prospect of them actually, of any of our competitors taking flights out. We just haven't seen it yet.

Right. And finally relative to the inter-Island market, you mentioned that you're going to be certainly exploring alliances with Aloha's former partners. Are there some ad hoc -- given Aloha's sudden departure from the market are you working and partnering on an ad hoc basis with Aloha's partners or how is that working relative to the bookings and the relationship with the other carriers coming in, Aloha's former partners?

We have always had good relations with numbers of Aloha's partners and we've certainly -- for example, their largest partner is United Airlines. We accommodated United's customers that were booked on Aloha in the immediate aftermath of the shutdown of Aloha. I would've described our relationship with their partners as being good. Candidly, they've been good for -- before Aloha closed down, so I don't think you can necessarily read too much into that.

All right. Well thank you.

Thank you very much.

Thank you. Ladies and gentleman at this time we would like to give participants a final opportunity to ask any additional questions. (OPERATOR INSTRUCTIONS).

And gentlemen there are no additional questions at this time. I'll turn it back to you for any closing remarks.

Again, thank you all for taking the time to listen. We ran very long today. Understand that there's just been such enormous changes in our business over the course of just the last month. Appreciate the support we've received and look forward to the next quarterly conference call to update you again them. Thank you very much.