Hawaiian Holdings Inc (HA) 2008 Q2 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 call is being recorded today, Wednesday, June 30, 2008. I would now like to turn the conference over to Lena Adams of ICR. Please go ahead.

Thank you. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings second 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 about 4 o'clock Eastern Time today. If you have not received the release, it's available on the Investor Relations page of Hawaiian's web site.

Before we begin, we would 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 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 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.

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

Thank you, Lena. Good afternoon and thank you for joining us today.

Even amidst the tumult in the industry as a whole, I don't think any airline has faced as much change in its operating environment than has Hawaiian. We've had to confront a number of challenges and opportunities, all coming one on top of the other. Excluding the proceeds from our lawsuit with Mesa, the net result of the collapse of two competitors and our raising fares to offset - raising fares offset by the rising price of fuel is essentially a breakeven financial result. This demonstrates just how severe the fuel price crisis is facing the industry.

At our last conference call, I highlighted the hard work of our employees in handling the sudden shutdown of both Aloha and ATA. Three months later, my thanks to our employees for their efforts. It is no less important since long after the spotlight has shifted from us, the extra work of handling the increased load of passengers remains. They have done a tremendous job and we've been rewarded by remaining atop the most important areas of DOT's monthly operational statistics throughout. I have said before that our employees are the best in the business. And during this period, I think many others saw this to be the case.

Much of the change that has taken place in the market occurred during the early part of the quarter and already was discussed in our first quarter earnings release and conference call. So I'll try not to dwell too much on it today.

Having said that, I think it does make sense to take a moment to tick through the notable events of the quarter with apologies to those of you for whom this is relatively old news.

During the first week of April, Aloha Airlines and ATA ceased operations. Aloha's collapse affected but the inter-island and trans-Pacific markets. The impact was most profound in the inter-island markets we serve where during the first three months of this year, Aloha provided about 40% of the seat capacity.

Both ATA and Aloha competed in the trans-Pacific marketplace with a combined 18% of capacity between the US West Coast and Hawaii. I'll discuss the current situation in both of these markets, including our subsequent expansion in inter-island capacity, a little bit later in the call.

In mid April, we commenced service to Manila in the Philippines. Our service has been warmly received, both in Manila and by the local Filipino community here in Hawaii. Traffic on this route is building in line with our expectations for a new service to a market where Hawaiian Airlines is not yet a household name.

Given the length of haul, of course, this flight, more than any other in our network, has been dramatically affected by the relentless increase in the price of fuel. Given this challenge, we have a number of initiatives in place to accelerate the process of developing this into a mature market.

We also launched service to Oakland in the first week of May, seizing the opportunity to enter a market we have long considered enticing and which was vacated by the failures of Aloha and ATA. Given our longstanding presence and brand recognition in the Bay Area of California with our daily service to both San Jose and San Francisco, the startup has been smooth. I should note that our operations team did a terrific job in starting up this route on such short notice and at a time of great upheaval in our business. This further underscores our commitments to capitalize on every suitable market opportunity.

Also notable in the quarter is the successful resolution of our legal dispute with Mesa. As we discussed during our first quarter conference call, we reached a settlement with Mesa on our outstanding legal dispute, which resulted in Hawaiian receiving cash proceeds of $52.5 million. If you've seen our press release, you will note that this is reflected as a litigation settlement credit in our second quarter operating expenses. Most importantly, the receipt of this cash in early May bolstered our liquidity at an opportune time, especially given the further rise in jet fuel prices throughout the second quarter.

Before concluding on the notable events of the quarter, I should comment directly on the impact fuel prices are having on Hawaiian.

During a quarter where we increased our capacity by 3.4% in ASM terms, our fuel expenses rose at a staggering 81% or $55 million. Our fuel hedges provided some level of offset and as we recorded an $8.9 million in gains on derivatives in the quarter on a book basis and netted $8.3 million in cash settlement on those contracts that settled in the quarter.

With that as an overview, let me dive a little deeper into the financial results for the quarter.

Revenue for the quarter came in at $319.2 million, a 31% increase over the same period last year. Revenue per seat mile increased 26% on a 30% yield increase and a 2% decrease in load factor. Our operating expenses reflected the $52.5 million litigation credit related to the settlement of our Mesa lawsuit. Including this credit, operating expenses increased by 11%. If you exclude the special credit, our operating expenses increased by 32% with fuel being, of course, the most significant driver. Excluding the special credit, our cost per seat mile increased by 28%. And if you also exclude fuel from the CASM comparison, our year-over-year increase was 9%.

Peter will discuss the expense numbers in more detail later in the call, but I'd like to make a couple of high level observations.

First of all, during the second , we significantly expanded our inter-island operations while long-haul capacity was comparatively flat year over year. Some short-haul has both higher revenue and higher expenses on a (inaudible) basis. This adjustment in the mix of our flights will have the effect of inflating both RASM and CASM on a year-over-year basis.

Said another way, part of our RASM increase is attributable to the higher proportion of short-haul flying, as is part of the CASM increase.

Somewhere in the region of half of the increase in CASM excluding fuel and the Mesa settlement is attributable to this mixed effects.

Second, our flying expenses increased in proportion to our revenue increase, which was higher than our ASM increase.

As a mathematical matter, this increases our unit costs, though, of course, we are delighted to pay more in commission expenses if it is the result of increased revenues.

Third, our expenses were affected by a couple of atypical items in the quarter as we rapidly ramped up our operations following the demise of our two competitors. Faced with the sudden shutdown of Aloha and ATA, we spent heavily in areas like overtime to make sure that we took care of their passengers and to take full advantage of the opportunity to fill the void.

Again, Peter's going to highlight those as he discusses the expenses in a bit more detail.

Were we to remove the effects of all three influences, we believe our unit costs would have risen modestly, reflecting inflation in a number of cost lines, such as airport fees and charges.

Turning back to the revenue numbers, let me briefly discuss operating dynamics for each of our markets. Let me start with the trans-Pacific market.

Before shutting down operations, Aloha and ATA accounted for 18% of the seat capacity between the West Coast and Hawaii. And in the first quarter, industry capacity was up about 6% year over year.

With this capacity gone in the second quarter, overall West Coast capacity declined by 17% and based on current schedules we appear - we expect a similar reduction to the industry in the back half of 2008.

As we talk to you today, we have not seen any significant capacity changes in the market since the events of early April, although there have been a couple of tactical changes by our competitors, including the announcement of Seattle services to Maui and Kona by Alaska and reductions in Chicago to Honolulu service from American.

Trans-Pacific revenue contributed slightly more than 60% of our overall passenger revenue in the second quarter. Given the fuel price pressure being felt by everyone in the market, fare levels rose throughout the second quarter and this was reflected in solid improvement in our trans-Pacific yields.

Load factor, meanwhile, was essentially flat during the quarter with year-over-year increases in April and May offset by a lower June load factor.

The combination of these higher fares and lower load factors produced a trans-Pacific RASM increase of just about 20% year over year.

Hawaiian's trans-Pacific capacity in the quarter was 3% lower than last year. And this percentage decline is projected to be similar in the second half of this year. We have not decided to further reduce capacity in the current environment for a couple of reasons. First, the elimination of ATA and Aloha capacity has addressed the overcapacity situation, at least in part.

Secondly, it's difficult for us to tactically draw down capacity without eliminating important markets given that 80% of our trans-Pacific capacity is in markets with only a single daily frequency. This contrasts with our network competitors who can reduce capacity by drawing down frequencies in particular markets without changing the shape of their overall networks.

You may recall that during our first quarter conference call, we announced the signing of a letter of intent for an additional leased 767 aircraft. We decided in June that we would not be taking this additional aircraft in light of the delays associated with its entry into service. At the same time, we remain firmly committed to our long-term fleet plan and the transition of our 767 fleet to an A330 and A350 aircraft fleet over the next decade.

During the second quarter, we took affirmative steps in this direction with the signing of letters of intent for three leased A330s, which we expect to enter our fleet in 2011. Two of these aircraft will replace 767s, for which leases are expiring.

Turning to the short-haul side of the business, inter-island operations represented a bit less than one-third of our passenger revenue during the second quarter. Here our capacity increased 28% year over year on an ASM basis with our average seats per day increasing to about 19.600 compared to about 15,200 seats a year ago.

As most of you already know, prior to Aloha's failure, there was excess capacity in the inter-island market, but the amount of excess was less than the reduction associated by Aloha's collapse. In order to fill the void, we immediately expanded our 717 flying, adding additional flights at the beginning of the day and added a smaller number of 767 frequencies between Honolulu and Maui by deploying our trans-Pacific aircraft there.

We are eager to transition from these interim measures to our longer-term plan of operating four more 717s. The four 717s will enter into service at a rate of one per month from September. This means that for the time being, we will continue to operate our somewhat suboptimal schedule involving the use of a 767 in the inter-island operations and are scheduling the flights both earlier and later in the day than had been the case previously.

Despite the substantial increase in our inter-island capacity, inter-island RASM increased by over 40% year over year in the second quarter. This increase requires a bit of perspective. As a reminder, inter-island fares in 2007 were depressed by the destructive fare war initiated by Mesa when it entered the market.

In last year's second quarter, for example, we witnessed sale fares as low as $10 one way and our average fares in that quarter reached the trough of what we saw over the course of an almost two-year fare war battle.

This year, we saw the lowest local fares in the first quarter rise to $49 before Aloha's exit from the market. Since then, Hawaiian has initiated two fare increases. Today our lowest inter-island fare is $64, which remains among the most affordable in the nation while at the same time providing meaningful yield improvement over our 2007 results.

It is also true that the inter-island remains a very competitive market. Like Hawaiian, Mesa has increased its capacity substantially since the beginning of the quarter. It's clear, however, that at least for the moment, the destructive competition over the last couple of years has abated in the inter-island market.

We recently entered into a codeshare agreement with United Airlines under which we will carry United's code on our inter-island flights. With this agreement in place, we now carry inter-island connecting traffic for all of the network carriers serving Hawaii.

For our part, we believe that our company is in a better position than most in the industry, both as a result of two of our competitors having failed and because we've been so focused on reducing controllable costs over the course of the last couple of years.

But, of course, no amount of diligence and cost control is going to overcome the effect of fuel prices almost doubling. So relief must come from raising revenues. In addition to a number of fare initiatives, which we've implemented over the past several weeks, today we are announcing a number of changes to our fees and charges.

We will be upping the charges for our most labor-intensive transactions. We will be matching our competitors' charges for the [first bank jet] inter-island travel. And we are adjusting our frequent flyer award redemptions to better match the increased costs of transporting our passengers.

The details of what we are doing will be in a press release that will be issued shortly, but in total, we expect these charges to add over $20 million annually to our revenue base.

Projecting the future in this business is not for the fainthearted. And today's mix of higher and volatile fuel prices and an uncertain economic climate adds to the variability.

Nonetheless, I think a couple of things can be mentioned. First, it appears that the number of seats being flown today in the inter-island market corresponds to the demand for inter-island travel. And so long as this remains the case, I suspect that the inter-island market can remain relatively stable.

Second, the outlook for our trans-Pacific business is less certain as a combination of our seeing higher fares and the economic malaise affecting the economy seems to be leading to lower passenger demand than had been the case as recently as a month of so ago.

It may be a few months before this market achieves some form of stable outlook. And in the meantime, we remain intent on making the best tactical decisions around fares and capacity as we possibly can.

In closing, I'd like to reiterate how proud I am of the people of Hawaiian Airlines and our accomplishments to date. The past few months have been a period of unprecedented change in the airline industry and for Hawaiian in particular. Our team has risen to every challenge while continuing to provide outstanding customer service.

We look forward to strengthening our position in the marketplace, continuing to deliver value for our customers, and building value for our shareholders.

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

Thank you, Mark. Before I go into more detail on the financial performance, I'd like to highlight two noteworthy events that took place during the second quarter.

One June 2, Hawaiian Holdings commenced trading on the NASDAQ Global Market under the symbol HA. Additionally, just a month ago, we were added to the Russell 3,000 Index. Both of these achievements validate the efforts we have made to strengthen our market position in challenging circumstances over the past several years. They should improve the visibility of our stock, enhance liquidity in our shares, and provide us with greater exposure to institutional investors.

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

Our operating expenses for the second quarter increased 10.6% on a 3.4% capacity increase, which resulted in a cost-per-seat-mile increase of 6.9%. these numbers include a $52.5 million litigation settlement as a result of the Mesa settlement. And excluding this, our CASM increased 27.7% to $0.1352.

Excluding both the litigation settlement and aircraft fuel, our CASM increased 9.4% to $0.0836, quite clearly this CASM result divergence from some of the trends that we have seen in recent quarters, an outcome for which some further explanation is appropriate.

As Mark discussed earlier, the first important difference in this period is the rapid expansion of our inter-island activity during the second quarter in the wake of Aloha's failure, which caused a fairly significant shift in the length-of-haul mix. As those of you who follow the industry closely know, shorter haul flights are characterized by both higher RASM and higher CASM, so the shift in our mix will inflate both numbers when compared to prior periods.

The second impact is that the pace of our expansion has led to some transition costs as we've added airport space, increased our staffing levels, and spooled up training activities. These costs will settle out over time, but we expect the transition cost to continue to have an impact over the remainder of 2008 as we continue to train crews for additional 717 aircraft deliveries and bring these aircraft into service.

Additionally, our revenue-related expenses have increased in light of higher bookings and average fares. And we continue to experience increased maintenance activity and the effect of rate increases in items like airport rent and landing fees.

Our fuel expenses grew 81% in the second quarter to $123.4 million, which represents more than 38% of our operating expenses when you exclude the litigation settlement. This jump in fuel expense reflects an almost 9% increase in block hours and a lower increase in fuel consumption of 5.2% given that our block hour increase was disproportionately oriented to the 717.

On average, our cost-per-gallon of jet fuel increased 72% year over year to $3.63 per gallon for the quarter. And although it's not reflected in our fuel line, we did realize $8.3 million in fuel hedge gains for derivative contracts that settled during the quarter.

This includes gains on both heating oil swaps that we had on the books prior to Q2, as well as some crude oil caps that we purchased during the quarter. For GAAP purposes, we recognized gains and losses related to these contracts on a mark-to-mark basis in non-operating income. In the second quarter, we recognized a gain of $8.9 million. 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 of $3.5 million related to outstanding contracts that we'll settle in future periods.

Going forward, we anticipate continuing a program of hedging some of our future fuel consumption with a combination of swaps, caps, and synthetic collars. Since the end of the second quarter, we have added some additional contracts for the remainder of 2008 and currently have some level of price protection on 31% of our third quarter fuel requirements and 7% of our fourth quarter requirements.

As you will have seen in our press release, at the beginning of July, we had only 10% of our consumption for the third quarter hedged. So much of our current position has been added in the last couple of weeks as we have seen prices begin to decline from their recent peaks. While that means that the recent positions are not all in the money, our earlier positions remain well in the money. And the fact is, we would happily trade some losses on our hedge insurance for more manageable prices in the physical fuel that we consume in our daily operations.

Wages and benefits expense increased 8.4% year over year in the second quarter to $65 million. This increase was primarily due to increased wages for our pilots, flight attendants, and other operational personnel resulting from our increased operations starting in April. We've hired approximately 380 employees since the end of the first quarter to accommodate the increases in our schedule, as well as increases in third party ground handling work that we perform.

Additionally, during the quarter we paid out a special bonus totaling $2.5 million to all of our employees in appreciation of their substantial contributions during the past 18 months.

Offsetting those increases is a $2.5 million special charge in the second quarter of 2007 related to the voluntary separation packages offered to the employees affected by last year's outsourcing efforts and other costs related to our management reorganization in the early part of 2007.

As a result of those outsourcing efforts and the involuntary terminations, our wages in the area of accounting, reservations, and information technology improved by approximately $1.9 million during the three months ended June 30, 2008.

Looking forward, our third quarter results will obviously continue to reflect the elevated level of our operations. And for labor groups such as pilots where the training bubble is extended for both new employees and those transitioning to different equipment, we will experience the inefficiencies related to this activity. As our staffing stabilizes, however, we expect to become more efficient as, for example, we replace premium paid overtime hours with straight time hours.

For the second quarter, maintenance, materials, and repairs expense increased by $6.7 million versus a year ago to $30 million. With the increase in our operating activity power-by-the-hour engine maintenance charges increased during the quarter. And year over year we have experienced contractual rate increases in these arrangements.

We also saw a year-over-year increase in maintenance activity on engines not in power-by-the-hour programs, as well as a couple of landing gear overhaul events and a higher level of outsourced airframe maintenance.

Our commissions and selling expense line was up year over year by about $5.2 million. The increase was primarily due to increases in credit card fees, booking fees, and commission expenses due to our increase in sales. In addition, our frequent flyer expense increased as a result of an adjustment to the incremental cost component of our frequent flyer liability resulting from rising fuel prices.

Other rent and landing fees also increased in the quarter by about $2.1 million year over year due to a combination of increased activity and rate increases, particularly here in the State of Hawaii, where airport rents and landing fees have increased substantially compared to last year.

Unfortunately we're going to see these line items continue to increase, not only because of our increased operations, but also as a result of further rate increases that come into effect in the back half of this year.

Below the operating line, we reported non-operating income of $5.9 million versus a non-operating expense of $4.6 million in the second quarter of 2007. The gains on our fuel hedging activities that I discussed earlier accounted for the majority of the year-over-year improvement. We also had lower interest expense in the second quarter of 2008 as a result of both reductions in debt and the lower interest rate environment, which was partially offset by lower interest income, again related to lower interest rates year over year.

Turning to the balance sheet, the headline event for the quarter was obviously the enhancement to our liquidity afforded by the settlement of our litigation with Mesa. We ended the quarter with unrestricted cash and short-term investments of $190.9 million, an improvement of $90.6 million relative to where we were at the end of March.

Our restricted cash stood at $56.1 million, which is up $14.2 million from the end of March. This number reflects our credit card holdbacks, which have not increased on a percentage basis, but which are higher, reflecting the higher air traffic liability associated with a larger operation and higher ticket prices year over year.

During the quarter, we paid down $13.9 million in principal on our debt, including scheduled payments of $2.5 million on our term loan A and $2.2 million on our aircraft financing. Additionally during the quarter - during the first quarter, we had drawn $8 million on our revolving line of credit, which was repaid in the second quarter.

I'd also like to take a moment to update the status of our auction rate securities holdings. In the first quarter, we reclassified our auction rate securities investments from short term to long term as a result of continuing failures in the auction market.

At the end of the first quarter, we held auction rate securities with a face value of just under $43 million. These are municipal securities issued by a Hawaii-based healthcare institution. Although the auction market for these securities continues to experience failures, we were successful in liquidating $6.2 million of these notes at face value subsequent to the end of the second quarter.

As a result, this amount has been reclassified as a short-term investment in our second quarter financial statements. And we continue to hold about $37 million in these securities currently at face value.

Before we take your questions, I'll spend a couple of minutes on the outlook for the third quarter. Quite clearly, much has changed in our business over the past three or four months and the inter-island market conditions are relatively stable compared to what we have experienced over the past two years even as we continue to operate a less-than-optimal schedule as we await the entry into service of the four additional 717s that we're adding to our fleet.

In the trans-Pacific market, things are a bit less settled. We have increased our prices in order to recover the phenomenal increases in the price of fuel, but in recent weeks, we have seen this reflected in lower load factors in the trans-Pacific operation. In the weeks and months ahead, we'll continue to further refine the trade-off between yield and load factor.

The biggest wildcard we continue to face, of course, is the price of jet fuel. While we are benefiting from the recent easing of prices from record levels -- or at least we were benefiting until today -- it bears mentioning that the current price of fuel remains over 70% higher than it was at this time last year and over 20% higher than it was at the beginning of the second quarter when Aloha and ATA succumbed to its effects.

We project that Hawaiian's capacity for the third quarter will increase about 3.5% relative to last year's third quarter. This increase is primarily predicted on additional utilization of our existing fleet, particularly in the inter-island market, as we don't anticipate the first additional 717 to enter service until the very end of the third quarter or the beginning of the fourth.

On the revenue front, we expect that the increases we have seen in RASM will continue, albeit at a lower rate than what we experienced in 2Q.

With a disproportionate increase in our short-haul operations relative to long-haul flying, we'll continue to experience the mix change tending 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 third quarter.

Yield is expected to account for more than 100% of this improvement as we anticipate a decline in load factor relative to the high levels experienced in 3Q '07.

We therefore are expecting your yield increase to exceed 30% with load factor down by 8% to 9%.

You'll see this load factor trend reflected in our July traffic results when we release them in the next few days. And based on preliminary numbers, we expect July load factor to decline over 8% compared to July '07 to about 79%.

On the cost front, we expect that the increase in inter-island operations and ongoing transition costs will lead to an increase in our CASM. And as such, we're forecasting that CASM excluding fuel will increase between 8% and 9% year over year in the third quarter.

As usual, I'm not going to attempt to project the price of fuel. Internally we build our forecast on the forward curve, although admittedly the volatility of the market is such that we see dramatic swings in this expectation from day to day and week to week. But quite clearly, we expect to continue to see substantial year-over-year increases in fuel expenses.

And with that, I will turn the call back over to the Operator so that we can take your questions.

Thank you, sir. ladies and gentlemen, at this time, we will begin the question and answer session. (Operator Instructions).

Our first question comes from the line of Bob McAdoo with Avondale Partners. Please go ahead.

Hi guys. Two or three questions here. As we think about - one of the things we've talked about is the pool of tickets that were sold prior to the demise of our competitors that were sold at fares lower than today's fares and how those burn off over time. And I assume that obviously the yields and the RASM in April was somewhat different than it was in June as you had more and more of the higher priced tickets towards the end. Can you give us any kind of - we've got this overall number of like RASM up 20% in trans-Pacific. Can you kind of tell us how that was in the latter half of the - in round numbers how it was in the latter half of the quarter versus the early part of the quarter that maybe on balance came out 20% overall? And similarly the 40% number in the short haul?

Yes, in general terms, first of all, let me draw a distinction between the longer haul part of our business and the shorter haul part of our business. The longer haul part of our business books considerably earlier than does the short haul part of our business. But turning to the long haul, it was the case that we had some bookings on the books both before Aloha and ATA went away that were then satisfied for travel later, and also, remember, before the most significant increase in the price of fuel, which was in the month of May.

What we've seen is basically in the first couple of months after the demise of Aloha and ATA, we were able to raise fares. The average fare was diluted to some degree by the bookings we already had on the books, but we were able to fill the airplane pretty full with pretty high load factors.

What we're seeing going forward is that the fares are higher, but that load factors are coming down. What we have - what we attempt to do each and everyday is to strike the right balance between those two. And the kind of RASM indication that Peter gave was really our best guess as to where we think the right sweet spot's going to be between load factor and fares.

Inter-island there's much less of that kind of lag because people don't book nearly as far in advance for inter-island travel. So there will have been a bit of that effect, but not much. I think the biggest issues in inter-island was as Peter said that we're comparing to a period last year where our - the sort of fare war was in its throes. So that really accounts for most of the percentage increase.

So I guess I didn't really - well, in Peter's number is an 18% to 20% number, it's kind of a composite number. And I guess I'm trying to understand what's - I mean, the short haul I assume is still meaningfully better than it was last year.

Yes, we have - are sort of signaling that we think supply and demand is roughly in proper alignment for inter-island, so we think that that's a relatively stable situation. It may be, obviously depends on the competitive decisions made by the other parties in the marketplace. And when we look at trans-Pac, what we're signaling out there is that fares are meaningfully higher than last year, but it is also the case that demand is weakening.

Okay. One of the things you said that I think you once said also was that your interline agreements for the contracts that you have to haul other airline customers from one small - from one island to the next, that those get re-cut at various times of the year. How many of those have been re-cut to reflect today's fuel prices and how many kind of in round numbers when do those things start to come up.

They generally come up annually and they're spread at times throughout the year with no particular rhyme or reason, just tend to be anniversaries of when we booked that volume and negotiated the terms. I can say that I - amongst the interline relationships with our major US domestic carriers, I don't think any have come up in the last few months. And I think some will come up over the course of the remaining nine months.

Okay. The $30 million maintenance number, is that a number we could use going forward? Or is that - did that have a bubble in it that's going to go back down some?

I would say that that number is not too far from representative of what to expect. I hesitate to try to apply complete precision to that because there are certain maintenance expenses that are time and materials-oriented at the time an event occurs. And we could have an engine come up and require a major overhaul event that can spike that in any given month or we could have a quarter where none of that happens and we walk around here with smiles on our faces.

And then I guess in terms of Manila, is it - you said it's kind of like doing what you needed - what you thought it would do from a revenue point of view. Given the fuel costs, what's going on there? Is there a chance that you could reduce your frequency there?

Well, there's a chance on every route that if we find it doesn't make sense for us, we'll reduce. But I think what we're focused on at the moment is making Manila work. It started up much like Sydney started up for us several years ago. And Sydney has looked pretty good for us. So I think we are intent on making Manila work.

Okay, very good. I'll leave it at that for now.

Okay. Thanks Bob.

Thanks Bob.

Thank you. Our next question comes from the line of Nick Capuano with Imperial Capital. Please go ahead.

Hey guys. A couple of quick ones for you. First, if you could just clarify, Mark, you had talked - I just want to make sure I had your numbers right. In talking about trans-Pacific capacity, we know the 17% that's coming out - that came out with Aloha and ATA, what was your visibility going forward? Or what did you reference going forward about other capacity that you see in trans-Pac and the other capacity movements you see?

What we basically said is that - well, I did say is the 17% came out and that looking forward we're not anticipating much in the way of other changes, at least none that we've seen in the schedule. So you could look at that kind of number going forward if there are no further announcements by any of our competitor airlines.

Okay, thanks. And for Southwest on their call last week referenced their desire to get back in the Hawaiian business with ATA's demise. Is that a piece of business that you are focused on?

We're focused on business wherever it comes from, but obviously I can't get into any details about our partnerships that we have. We have partnerships with all of the major US airlines. In fact, we had a relationship with Southwest that predates both their conference call and indeed their relationship with ATA.

Sure. And lastly, as you look at the loads as you've seen some demand come down in the trans-Pac market, is it consistent across all of your cities or is it concentrated in certain markets? If you can just kind of characterize what you see and what your visibility is there from that standpoint?

I think there are some, as there always are, some minor variations between the different city pairs and different markets. So I think when we say that we're seeing a little bit of softness in demand, we're really seeing something that is across the Western part of the United States.

And just lastly, if the - what you're seeing for fares and just like the general fare environment that you're observing with your competitors in the trans-Pac and to the extent they're following - you're following each other's hikes or picking spots to be more aggressive, can you just talk in general about the competitive environment relative to fares?

Well, I think the biggest aspect of the competitive environment over the last three months and indeed sort of continuing today has been that we are seeing seismic changes in the nature of the markets and our inputs. Obviously the price of fuel is the big on that's got everybody's attention. And so in an industry where you normally see relatively small changes season to season and market to market and year to year, we're seeing just massive, massive changes.

For our part, we have been very focused on raising fares to cover the increased costs of transporting passengers. We in many instances have been matched by our competitors. There have been some instances where they haven't matched. And we're sort of in the throes of the competitive process where we look at markets, try and determine where we think it's going to end up and where fares need to be.

So it's as I said during our prepared remarkets. Trans-Pac's a little hard to forecast at the moment just because it's unsettled. There's just a lot of changes in a relatively short period of time.

All right, thank you.

Thank you. Our next question comes from the line of Steve O'Hara with Sidoti & Company. Please go ahead.

Yes, hi. I just had a question about the auction rate securities. Are the - are they still AAA-rated? Or has there been any change with the rating on those?

Those securities have a - the Queen's Medical system that issues the security has an A-plus rating. And they had a - the securities themselves had a AAA rating as of the results of an Ambac insurance wrap. When Ambac's credit rating came down from AAA to AA, the rating on the securities came down to AA.

Okay, so that hasn't affected the - obviously you have a lot more cash on the balance sheet now, so that hasn't affected any of the credit card agreements?

Under the agreement we struck with our credit card processor, we count the security in the cash calculation that goes into settling what our holdback will be at a discount to 100% if the rating is below AAA, so right now, we're counting 95% of the face value of these based on that AA rating. And as you suggested, because of our improvements in our cash position, that is quite a comfortable buffer right now relative to those [securities].

Okay, great. Thank you.

Thank you. (Operator Instructions). And our next question is a follow-up from the line of Bob McAdoo with Avondale Partners. Please go ahead.

I don't know why I forgot to ask this. Could you tell us like what today's actual fuel price is given where we are today, not necessarily what it is in the future? What are you paying today that would be kind of the equivalent of the $3.63 number that you used for all of last year - last quarter I mean?

Sorry, Bob, can you say that again?

Sure. The fuel price per gallon that you're using today or that you're getting today, paying today that's kind of comparable to the $3.63 number that you had for all of last quarter, what is today's actual number given that where oil as of yesterday, say right before oil went right back up a little bit today?

It is probably just a little bit higher than right now, probably in the $3.70 to $3.75 range. I mean, obviously that does move around day to day and I expect when I look tomorrow at what we paid today, it'll be a little bit higher than what it was yesterday.

Okay, thank you. That's all I had.

Thank you. Our next question comes from the line of Dominique Mielle with Canyon Capital. Please go ahead.

Hi. Can - hey, how are you guys? Congratulations. Can I have the CapEx number for the quarter, please?

Dominique, I don't have that one off the top of my head, but someone is going to take a look right now and see if we can get it. And if not, I'll get back to you offline.

Okay. And another one is—

I will say it was - we didn't have any major capital expenditure items during the quarter. There were no aircraft items during the quarter, which tend to ride that number up. So I suspect it was something in the south of $5 million range. But we'll get it for you.

Okay. And then the cash number forgetting the restricted cash number, cash went up from the $96 million in the March quarter to $191 million. That's an increase of $95 million. So $52.5 million of that was the Mesa settlement, correct?

That's correct.

And then what's the rest? Because EBITDA was - ex that settlement, it was probably around $8 million. So was there a big - I'm assuming a big working capital source? Is that the difference?

Peter Ingram. Yes, some of that will be an increase in our air traffic liability, which is the advanced ticket sales. And, of course, we're - as we've just come through a quarter where prices have increased and our operations have increased, that's a building number as we're selling forward. That is going to be part of the driver. And, of course, that will accrue to us as we fly those passengers over the third quarter.

Got it, okay.

That's probably the biggest balance sheet item.

Okay, thanks.

The CapEx number just to follow up on that question was right around $3 million for regular CapEx and we did have some progress payments related to some of the spare engines that we'll be taking when we begin to take the Airbus aircraft. And that was about $3.5 million on top of that number.

Got it. Thank you.

Thank you. (Operator Instructions). And management, I'm showing that there are no further questions. Let's turn it back to you for closing comments.

Okay, well, I'd just like to say thank you to everybody who participated in the - on the call and listened to it. Sorry for running quite long today, lots going on in our business, though, and we look forward to talking to you in three months' time.

Thank you. Ladies and gentlemen, that will conclude the Hawaiian Holdings second quarter 2008 earnings conference call. We do thank you again for your participation and at this time you may disconnect.