Hawaiian Holdings Inc (HA) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Hawaiian Holdings third-quarter 2008 earnings conference call. During today's presentation, all parties will be in a listen-only mode. (Operator Instructions). This conference is being recorded today, Wednesday, October 29, 2008. I would now like to turn the conference over to Andrew Greenebaum of ICR.

Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings third-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 at about 4.00 Eastern time today. If you have not received the release, it's available on the investor relations page of Hawaiian's website.

Before we begin, we would like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The following prepared remarks contain forward-looking statements. Management may make additional forward-looking statements in response to your questions. Statements do not guarantee performance and, therefore, undue reliance should be 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 reports filed on Form 8-K. With that, I'd like to turn the call over to Mark.

Thanks, Andrew. Good afternoon and thank you for joining us today. 2008 is proving to be an extraordinary year for Hawaiian. It's marked now by three seismic events. First, the collapse of our two primary competitors in the span of a single week in early April. Second, the unprecedented escalation in crude oil and jet fuel prices in the first half of the year, and most recently, third, the unraveling of credit and equity markets. Each of these events has affected our business in a meaningful way. As I go through my prepared remarks today, I'm going to spend some time discussing what the combined impacts mean to us and how we're preparing ourselves to address the challenges they present and the opportunities that may arise as a result.

Before discussing the outlook, however, I'm going to spend some time reviewing the financial results for the third quarter. Our strong topline performance was largely offset by the negative impact of soaring fuel expense, netting to a modest increase in year-over-year operating profit. Operating income came in at $27.3 million for the quarter, a 7% increase over the prior year. Looking further down the income statement, our pretax income declined year-over-year to $14.6 million, as compared to $21.8 million last year, as nonoperating expenses were negatively affected by mark to market impacts related to fuel hedges purchased in a declining market.

In addition, we recorded a tax provision of $8.6 million that brought the quarterly net income to $6 million.

Third-quarter revenue increased $67 million, or 25%, compared to the third quarter of 2007, with both interisland and trans-Pacific operations posting substantial improvements.

As many of you know by now, we embarked on a significant increase in our interisland operations in April following Aloha's cessation of service. Given the leadtime to acquire additional aircraft, in the interim, we've increased interisland capacity by extending the flying day of our 717 aircraft, by operating our spare 717 aircraft in regular service, and by supplementing 717 operations with a handful of 767 round-trips between Honolulu and Maui each day. This has allowed us to meet market demand while we complete the process of acquiring additional narrow-body aircraft and preparing them for service.

As the third quarter drew to a close, we added the first of these four planned 717s to the fleet. This aircraft entered the regular schedule in October. The second of these aircraft has also now been delivered, and it's going to start in the schedule in November, with the remaining two aircraft joining the fleet over the course of the next couple of months. With two of these aircraft available to us as of this week, we're now able to eliminate the 767 interisland operations from our schedule. This allows us to run a more efficient, simplified daily operation that will serve the market in a more optimal manner for our customers.

By the end of the year, we will have added 110 interisland round-trip flights per week from Honolulu to the neighbor islands, and that's compared to our September schedule. Most importantly, the new flights will improve our competitiveness as we provide additional lift at high demand times of the day, particularly during the morning and the afternoon.

As a result of our increased schedule, interisland traffic grew almost 24% during the third quarter on a similar capacity increase, resulting in basically flat year-over-year load factors. Since we did not see a recurrence of the below-cost pricing initiated by our competitors during 2007, our yield was substantially higher year-over-year. Combining all of these factors, our interisland revenue per ASM improved more than 40% relative to the depressed levels we experienced a year earlier.

In total, interisland operations contributed just under one-third of our overall passenger revenue during the third quarter.

Our trans-Pacific capacity was about 6% lower in the third quarter than it was in 2007, following the commencement of our Manila service in April, which reduced the availability of aircraft for our West Coast operations. Our traffic in trans-Pacific operations declined 13% resulting in a load factor reduction of 6.6 percentage points. At the same time, we posted yield improvement of 23%, which resulted in an overall improvement in revenue per available seat mile for our trans-Pacific operation, of about 14%.

Obviously, there's some ins and outs here that merit some further discussion. Industry capacity between the West Coast and Hawaii declined roughly 17% in the third quarter, primarily attributable to the demise of both Aloha and ATA earlier this year. At the same time, historically high fuel prices have necessitated that Hawaiian and other carriers increase prices, particularly on long-haul operations like our West Coast to Hawaii routes, where fuel is a disproportionately large component of the cost structure.

Coupled with this, over the last handful of years, Hawaii has experienced a multiyear period of increasing hotel costs as relatively fixed supply mixed with steadily growing demand have created an attractive market condition for the hoteliers from 2004 through 2007.

Both high fuel costs and high hotel prices have made a Hawaii vacation more expensive in the summer of 2008. As a result, demand from consumers has slipped up the demand curve, and predictably, visitor arrivals to the state have fallen. I will elaborate further about the fourth-quarter outlook in a moment.

But moving onto expenses, fuel prices remained the big story during the quarter. Ignoring for a moment the fuel hedging impacts that are reflected in nonoperating expenses, our fuel costs increased $54 million, or over 70% year-over-year. Although prices declined from their most eye-watering levels over the course of the quarter, our realization of this benefit is somewhat lagged because most of our fuel supply contracts provide for pricing to be based on prior-week or prior-month pricing.

This means that we see an average of about a three-week delay in the realization of spot market price changes. As such, our third-quarter results reflect the worst of the June and July peak in spot market prices.

I'll let Peter take you through our current fuel hedge position in detail, but I will just take a moment to touch upon our approach to hedging at a high level. Generally, we don't take a view on the future direction of prices as we don't profess to have a better projection than the markets' forward curve. That said, we believed it is prudent to average in a hedge position over time as an insurance policy against price spikes.

The market has declined over the third quarter. We've booked some mark to market losses on out of the money hedge positions, albeit at a much more manageable level than those of some of our competitors. In total, the nonoperating expense impact of our fuel hedging was $9.2 million during the third quarter.

Although fuel prices are down from the historic peaks we experienced a couple of months ago, the market remains very volatile as witnessed today. Not only on a day-to-day basis, but also from hour to hour. While this creates a level of uncertainty around long-term planning, we believe that our hedge position will help us smooth some of the volatility and will provide us the time to respond in changing conditions.

As we look beyond the third quarter, prophesying the future is becoming an increasing challenge in our business. The influences on our business at the moment are fairly easy to discern, but the extent and duration of their impact remains unknown. Dealing first with the trans-Pacific business, the macroeconomic turmoil is clearly a negative development as we expect the housing collapse on the West Coast and the drying up of consumer credit to affect the willingness of people in our West Coast markets to take a vacation to Hawaii.

At the same time, there are a couple of positive developments which we believe will offset this to some degree or other. The price of oil has waned of late, and this is particularly helpful to our longer-haul operations that consume a lot more fuel. It is also the case that falling hotel occupancy in the state is putting pricing pressure on Hawaii's hoteliers. As we know from our own industry, such pressures can be resisted for a while, but not for long. So we expect to see the non-airline portion of the cost of a Hawaii vacation reverse its five-year trend of escalation and start to come down.

We've already seen an increase in discounting and promotional activities by the hoteliers and we expect this to occur more broadly in the coming period. This will improve the value of the -- proposition of a Hawaii vacation, providing an offset to the adverse income effect of the current economic conditions.

The pattern of trans-Pacific bookings has changed in the past several weeks with close-in bookings holding up better than bookings later in the winter. Even this is a generalization as there are marked differences in booking activity from week to week and day to day. So beyond the guidance for the fourth quarter that Peter is going to mention in a few minutes, we're not prepared to suggest how we think 2009 is going to unfold.

The interisland market exhibits quite different characteristics. We believe that travel between the islands of the state is both less price-sensitive and less income-sensitive than our trans-Pacific business. Our relative optimism about this part of our business has had to be tempered recently by the announcement of a new entrant. Mokulele Airlines, which today operates a fleet of nine-seat Cessna Grand Caravans in the state's secondary markets, has announced plans to begin service in some of the state's larger markets with regional jets operated by a mainland-based regional carrier. While the details over how this is going to play out remain to be seen, in this case, the new entrant is pledging not to start a fare war, and there is also no indication that either the new entrant or [go] have the financial resources to wage the kind of attritional battle that took two years to deliver the collapse of Aloha.

For our part, we have tremendous confidence that Hawaiian, with our almost 80-year history of serving these islands and unmatched ability to connect visitors to the islands, the best and largest fleet, a superior cost structure to all of the competitors, and a tremendous group of employees providing the industry's top operating performance, will maintain and build upon its strong market position.

Actually, the other level on which the credit crisis could affect us is in terms of access to capital markets. Fortunately on this front, our progress in buttressing our balance sheet throughout 2008 means that we're not in need of immediate access to the capital markets. We ended the quarter with $225 million in unrestricted cash and short-term investments and our primary credit facilities are in place through late 2010 and into 2011. During the third quarter, our cash position was further bolstered by the exercise of 3.55 million warrants that were issued in association with the refinancing of our term loans in 2006. I will defer to Peter to review the details of this transaction in a few moments.

Despite the uncertain market conditions in the near term, we're remain focused on our long-term plans. During the last quarter, we announced plans to install winglets on a subset of our 767 fleet, specifically those aircraft which we expect to have in the fleet long enough for us to realize sufficient cost savings to justify the installation expense. We expect to begin the installation in the latter part of 2009, with the process continuing through the spring of 2010.

We've also recently signed leases for two A330s, which will enter our fleet early in 2011. As we've discussed when we originally committed to the replacement of our 767s with A330s and A350s, we have been actively seeking opportunities to begin this process earlier than our own scheduled deliveries in 2012. With these leases, we will be able to begin introducing the A330s just over two years from now, more than a year earlier than our own delivery positions.

Concurrently with these leases, we have extended the leases of two of our 767s until early 2011 so that we can maintain these aircraft in our fleet until they can be replaced with the new Airbus units. We've also extended the lease of two other 767s, that otherwise would have expired in 2009 and 2010, for an additional six years.

With all of the changes in our business, the one constant has been the unparalleled contribution of the best group of employees in the airline business. As we stretched our fleet utilization well beyond the expectations we had when entering the year, we've known that we were putting substantial strain on the day-to-day operation. Our team has risen to this challenge and has come through it impressively by continuing to provide the industry's best operational performance day in and day out. And while their continued excellence has become expected, this expectation doesn't for a moment diminish my pride and appreciation for their accomplishment. To all of them, I extend my sincerest thanks.

With that, I will turn it over to Peter to dive into the numbers in a bit more detail.

I'll begin my remarks by providing a bit more detail on our operating and nonoperating expenses, and then spend a couple of minutes discussing our cash position and balance sheet before sharing our outlook for the fourth quarter.

Our cost per ASM for the third quarter was $0.128, which represents a 25% increase year over year. Of course, the biggest culprit in this increase was fuel costs. Although spot prices for crude oil and jet fuel declined over the course of the quarter, our realization of price lags in the spot market lags by about three weeks on average, as Mark mentioned. The truly staggering prices in the early part of the quarter meant that this period bore the brunt of the worst fuel prices we've seen.

In total, our fuel bill increased over $54 million, consuming much of the solid revenue improvement Mark discussed earlier. Our cost per gallon increased almost 68% to $3.83 on a GAAP basis, and our economic fuel costs, which take into account the impact of fuel-hedging activity related to those contracts that we settled during the quarter, were about the same at $3.84 per gallon as the benefit of some of our older hedge positions, which were in the money, were offset by more recently placed hedges that settled at a net loss.

We continue to make good progress on fuel consumption and expect that the initiatives that we have in the pipeline, including but not limited to our winglet plans for the 767, will continue to accrue benefits to us.

Sticking to fuel for a moment, Mark mentioned that we took a nonoperating charge totaling $9.2 million in the quarter related to mark to market impacts on fuel hedges. As many of you know, we have not designated our hedges for hedge accounting under FAS 133, so for GAAP purposes, we mark the position to market each month, which can lead to some significant swings in our financial results when we have markets moving as violently as they have this year.

For hedges that settled in the quarter, this nonoperating charge during the third quarter includes the difference between what was marked on our books at the end of June, compared to the final settlement value. For hedges that settle in future periods, it includes changes in the value from the June mark or from the date of entering the contract. Specifically, the $9.2 million in nonoperating expenses this quarter reflects about $500,000 of expenses related to losses realized on hedges that settled in the quarter, $4.9 million in charges related to the reversal of previously booked gains on these same contracts, an additional $3.8 million in unrealized losses we have recorded on contracts that will settle in future periods.

Despite these charges, we're obviously very pleased with the direction we've seen in fuel prices since July. Given the severe volatility and uncertainty in the market, you will not hear us express any regret about having averaged in to some of our hedge position at higher levels. Additionally, we've worked to structure our program in a way that provides both protection against prices moving up and participation in the benefits of a declining market.

We also keep a close eye on the collateral impacts related to having a hedge position and are comfortable that we've maintained these within very manageable bounds.

As of the beginning of this week, we have entered into hedge contracts that give us upside protection on about 42% of our fourth quarter of 2008 consumption and 25% of our first-quarter 2009 consumption, and a total of about 10% of our full-year 2009 consumption. The details of this are shown in our press release. We have continued to layer in hedges on a disciplined basis to provide the level of insurance that Mark talked about against higher prices, and it is our intention to continue to do so.

Excluding fuel, our cost per ASM increased 5.1% in the quarter, which reflects the disproportionately high increase in our short-haul flying during the quarter, relative to long-haul flying, following the failure of Aloha in April. By its nature, short-haul flying tends to have higher RASM and higher CASM. And in our network, the differences are quite extreme. Our interisland routes represent a significant portion of the overall operation with 100-mile to 200-mile sectors that are unusually short relative to the broader industry. Meanwhile, our trans-Pacific routes, which average about 2,600 miles, exceed the industry average considerably.

So we really don't have an average flight, and when we see the shift -- a shift in the mix of our flying, we can see a distortion in RASM and CASM levels from period to period. We estimate this impact to be about 4 to 5 percentage points of CASM, excluding fuel, year over year in the third quarter.

Some of you will recall that our X fuel CASM increase is three or four points better than the range we had anticipated during our last earnings call. The most significant variation from our previous expectation relates to a reduction in the value of our frequent-flier liability for two reasons. The first is a routine adjustment of the liability to reflect lower incremental costs for the fuel component of the liability. The second, and larger one, totaling about $5 million, reflects the change in the value of the liability due to adjustments we announced during the quarter to award redemption levels.

Touching briefly on some of the other expense lines, wages and benefits expenses increased during the quarter, reflecting the expansion in our operating activities which were focused on the more labor-intensive short-haul side of the business. Other rentals and landing fees also increased sharply by almost 40%, reflecting the same increase in interisland flying as well as higher airport rates, particularly here in the state of Hawaii.

One of the challenges associated with reduced industry capacity is that airports tend to spread their costs over the remaining activity. And these increases reflect that phenomenon.

I should also take a minute to elaborate on our third-quarter income tax provision. Since we have a 100% valuation allowance on our deferred tax assets, our GAAP income tax provision tends to generally track our expectation of cash taxes. Through the first half of this year, we had not recorded a provision. Although we had pretax income during the first half, we did not project having a cash tax requirement for calendar year 2008 at that time, since the combination of high fuel prices in our forecast and the availability of tax deductions from prior-year carryforwards and accelerated depreciation was expected to fully offset those earnings.

With 3Q now in the books and a better fuel outlook based on the current forward curve, we needed to book a tax provision to bring the year-to-date numbers in line with the expectations. As a result, our third-quarter effective tax rate of 58% is higher than the 40% to 42% effective tax rate that we would more typically expect due to this change in estimated annual earnings, but the effective tax rate of 17.5% for the nine-month period is lower than the statutory rate, as a result of some of the offsets I've noted.

Moving on to the balance sheet, we ended the quarter with $225 million in unrestricted cash and short-term investments and another $35 million in restricted cash. Our unrestricted cash increased about $34 million compared to the end of the June quarter, as a result of both cash generated from operations and a reduction in the level of cash that is restricted under our credit card processing agreements.

Cash and short-term investment totals that I mentioned do not include the auction rate securities that we've talked about on the last couple of calls. These investments total $35.5 million at face value and have been classified on our balance sheet as long term since the first quarter.

During the quarter, we announced that under the terms of the warrants that we issued in 2006, concurrent with the renegotiation of our term loans, that we would exercise our option to force a conversion of the warrants at a strike price of $5 per share. As a result of this transaction, at the end of the quarter, we issued 3.55 million shares of stock and received proceeds totaling $17.8 million. The warrant holders had the option to pay the exercise price in cash, or to reduce the face value of our Term B debt. And based on those decisions, we received $13 million in cash and reduced the face value of the Term B debt by $4.8 million.

Looking forward to the fourth quarter, I would echo Mark's sentiment from earlier, that predicting the future has become increasingly difficult. On the revenue front, we expect the very strong year-over-year improvements that we've seen in interisland markets will be tempered to a degree by the additional capacity associated with our new market entrant and promotional activity as the players in the market jockey for customers.

At the same time, recessionary economic conditions and uncertainty in the wake of the global credit crisis will have an impact on demand for travel to Hawaii. But at this point, we don't have a crystal-clear sense of either the degree or duration of those effects.

With these factors at work, we anticipate that our improvement in fourth quarter revenue per ASM will lie in the range of 14% to 16%, which trails the levels that we delivered in the last two quarters. We expect the yield performance will remain strong, with gains in excess of 20% overall, but the load factor will be lower by 7.5 to 9.5 percentage points, offsetting some of this improvement. These numbers are predicated on capacity growth of 2.5% to 3% on an ASM basis.

On the expense side of the equation, fuel prices remained high by historic standards but relative to the outrageous levels we saw at the beginning of the second quarter, we stand to benefit from a substantial reduction in fuel costs on a sequential quarterly basis.

Looking at CASM excluding fuel, we have a couple of elements of headwind to deal with relative to 2007. First, we will again see the impact of a disproportionate increase in higher CASM short-haul flying, and this impact will be slightly larger in the fourth quarter since the short-haul flying growth is higher as we get up to steady-state with the additional 717. Second, in last year's fourth quarter, our results benefited from a handful of nonrecurring adjustments that balanced in our favor to the tune of $8 million to $9 million.

As a result of these impacts, we posted a declining CASM excluding fuel than last year's fourth quarter of over 13%, that we noted at the time needed to be put into context. The absence of these credits in the fourth quarter of 2008 will negatively affect our year-over-year CASM comparisons. Putting all of this together, we are currently expecting that our CASM excluding fuel in the fourth quarter will increase by 9% to 11%.

We're always inclined to caveat our projections with a reminder that few things are certain in our business, and I'd suggest to everyone that this has never been truer than it is now. That said, we believe that Hawaiian enjoys competitive advantages over its competitors in both interisland and across the Pacific. We believe that both markets have good prospects over the long term and that any short-term weakness in trans-Pacific bookings will give way to a strong overall market in due course.

And with that, I'll turn the call over to the Operator, and Mark and I will be happy to answer your questions.

(Operator Instructions). Bob McAdoo, Avondale Partners.

Can you give me an easy way to think about the fact that -- if I'm reading this right, the RASM growth in the second quarter -- excuse me, in this recent quarter was less than the RASM growth in the prior -- in the second quarter. Is there an easy way to think about why that happened? What was going on? Because I think when we've talked in the past that a lot of the tickets in that April/May/June quarter had already been sold when the competitors disappeared. But yet, is -- and maybe I'm not reading this right, but it certainly looks like your RASM actually didn't grow as much in this most recent quarter.

I think what happened in the third quarter relative to the second quarter is that our load factors -- I don't think it was so much a yield phenomenon as it was a load phenomenon. And, as we mentioned in our prepared comments just a little while ago, the combination of high fuel prices that led to high fares and high hotel costs in Hawaii had a dampening affect in the middle of the summer on overall demand here to Hawaii. As I said, looking forward, I think both the effect of high fuel prices and the effects of high hotel prices are going to be mitigated substantially, which is a good thing because we have to contend with the effects of the economic turmoil we see at the moment. But that's the main reason why there was a difference between the second quarter and the third quarter.

Just to echo that a little, I think if you look at the -- the yield numbers are generally better if you -- year-over-year, if you look year-over-year third quarter compared to year-over-year second quarter, you see a higher yield, and that's reflective of the fact that we've sold more of those tickets in the more recent environment. But as Mark said, that is offset on the load factor side, particularly in trans-Pac. And you will remember in April and May on trans-Pac, in the immediate aftermath of the shutdown, we were pretty much chockablock full on just about every flight as people had already committed to vacations and were re-accommodating at the last minute on whatever seat was available.

I remember that now. And then, the other thing, obviously -- your comments about what's going on, where, maybe a recession, we don't know how deep it is, and credit markets and whatever, sound a lot like what everybody else has been saying as well. I guess the question is, as you have -- here we are, one-third of the way through the quarter. Have you actually -- do you actually get a feeling that the last week or so is meaningfully different than you would've expected, or is it really starting to fall apart? Are new bookings continuing to come in at kind of the rate that you would've seen two weeks, four weeks ago, or in a normal fall time? Or are you actually starting to see this? Or is a just a concern, that we just don't know what's going to happen? How would you characterize what's really going on, kind of since the end of the quarter?

I would characterize it in the following terms. First of all, because we -- we have two relatively distinct businesses. And I'll talk about trans-Pac for a second, then perhaps come back and talk about interisland. Trans-Pac -- we have customers who tend to book ahead so we actually have a fair store of bookings that were already on the books in advance of the most recent -- economic turmoil. And that, I think is to the good for us.

What we saw over the last few weeks is hard to really characterize in terms of a trend, because we have seen some quite dramatic, almost day-to-day changes in booking activity. But if we were to discern a trend for it, I would say the following things. Close-in bookings are holding up better than bookings further out. At this point, we don't know whether that therefore is self-correcting, if that's a change to the way in which people book, then we'll just take bookings later and later and later in the cycle, or whether that is reflective of the fact that, really after the fourth quarter, that there will be weakness in the first quarter.

But we've got quite a lot of bookings already on the books for the fourth quarter, and we're seeing less of an impact in close-in bookings than we're seeing in farther-out bookings. And, then of course, I've just -- to repeat that caveat for the last time, which is we have seen some quite large changes day to day and week to week, and it's not been an entirely straight-line trend since. My hope is -- and to some degree, my belief is that -- that people -- the consumer confidence will start to return once people perceive that sort of rock bottom has been hit in terms of turmoil in the markets in the sense of their own financial resources. But that, at this point, is kind of my private speculation as opposed to a really informed judgment.

Turning to interisland, it has very different characteristics. It tends to book close-in always. The nature of our business is, even more than business travel -- on the mainland is a business -- that relies very heavily on people who must travel for a variety of reasons. You've heard me mention before, some of the examples I give, we carry a lot of patients for treatment, for example. That's sort of traffic that we would expect to hold up very well even in a difficult climate. And it is also a market that's just not prone to stimulation, which suggests that it has a lower price elasticity of demand. So I think we look at our trans-Pac business -- that is apt to be a business that is going to be sensitive to economic activity and our interisland business is going to be less sensitive than the average.

One final thing. The strengthening of the dollar and relative to -- the further out on the Pacific destinations that you go to, Australia and -- does the Philippines use the dollar or they have their own currency?

They have their own currency. Australia and the Philippines are two very, very different types of markets. Australia is mainly visiting Hawaii for vacation purposes. The move of the US dollar against the Australian dollar will make, all other things being equal, a visit to the US more expensive than it was a few months ago. We haven't seen anything show up yet in booking figures, but I've got to say, obviously, what's happened in global financial terms is pretty new. So when I say we haven't seen anything yet, we're very much in a wait-and-see mode.

When you look at Manila, it's a very different type of traffic. It is traffic that is predominantly US point-of-sale. It is traffic from people who are less likely to be exposed to the credit market than most Americans are, and -- again, we're seeing -- we're not seeing any sort of dramatic change in bookings for the Philippines.

The Philippines -- the average Philippine customer is a business customer or is a person going to see relatives and ancestors and whatever who are over in -- still in the Philippines?

It's predominantly visiting friends and relatives, as we say, VFR.

And that business is holding up and developing as you had hoped it would?

Yes. Whenever you inaugurate a new service of this nature in a business like ours, it's -- payback is several years away and we've only been at it for six months, so (multiple speakers).

Have you given any thought to reducing, you know, pull one round-trip a week out of that market or anything?

We have not. The peak period of travel for this market is the end of the fourth quarter, beginning of the first quarter. I think -- as we would always do, we want to get through a year of operations, see what lessons we've learned, let's have a look and see what's [altogether for it].

Okay. I guess that's what I've got. Thanks a lot.

Kim [Zauder], Imperial Capital.

On the last call, you mentioned you were implementing several new ancillary revenue initiatives for travel beginning after October 1. Would you discuss the status and take rate?

Sure. We have, you know, the big one is the charge for baggage that went in October 1. We are collecting revenues from that. We are looking at our processes to make sure that they're efficient and effective, that we catch in the net everybody who knew should be paying the fee, that we're not catching in the net those who, by policy, we have determined not to charge, and of course, very, very importantly, trying to keep the airport check-in process efficient and effective so that we're not shooting ourselves in the foot.

That's going fine. I would not describe it yet as being in its final state. It will take a little while for us to get there.

Other ancillary revenue ideas include the selling of some -- tourism-related activities on Oahu. We have a trial going with a vendor at the moment. We are picking up lessons from that trial, and I think we're going to be moving more dramatically in that direction, probably in the coming year.

We have also introduced through our website some follow-on sales opportunities. The most -- the most, sort of, iconic one of which is a lei greeting here in Hawaii, which is selling extremely well, actually. Perhaps a little surprisingly so. I would say that this stage is small beer compared to our main business, but if you want it to be big, you've got to start small and grow.

Thank you. Now you mentioned the new entrant to the interisland market. I was wondering if you could discuss how competition is behaving on the trans-Pac, I guess more specifically over the past few weeks. I heard an announcement that West Jet was entering. If I recall correctly, it plans to partner with Southwest at some point next year. Any additional color on that would be great.

West Jet has entered -- has increased the amount of flying they're doing from Canada to the United States. They're a Canadian airline. They don't have the rights to fly domestically in the United States, and because we don't fly to Canada, we don't think there is going to be much, if any, of a direct impact.

I think most airlines with whom we compete directly are basically in the same situation that we're in, which is -- I think we're all warily watching to see how demand manifests itself when people finally turn off the TV and stop watching the stock market and start thinking about the rest of their lives. So we have not seen any discounting yet from -- either from us or from the other carriers, no sort of wholesale discounting.

I think everybody is pretty much sitting on their hands, waiting to see how the market develops. And it is still very, very fresh, and I would just reiterate the comment I made a bit earlier. We see some days that -- where bookings have been quite strong and other days when they're quite weak, with no apparent linkage between those experiences.

Thank you. Finally, if I could, one more. If you could provide a quick update on what's been going on with the pilot labor negotiations.

We are in negotiations with our pilots. The contract has been amendable for a period of time, a year or so. We have sat with pilots and tried to negotiate new contract terms with them. At their request, we jointly applied for mediation, and that is -- that starts a legal process. The process, I think, will get underway now in the third week of December of this year. And we certainly intend to keep at it with our pilots and progress things, and hopefully, reach an agreement that suits our needs and suits theirs as well.

It's obviously an environment that's changing pretty quickly and I think it's reasonably likely that, in general, labor relations in our industry are going to have to take stock of the new circumstances and what it means for our businesses.

Thank you so much.

(Operator Instructions). Steve O'Hara, Sidoti & Company.

I just had a question about the maintenance expense, which was down sequentially. And I'm just wondering if there's any major repairs that were put off, or not done this quarter versus last quarter.

I think that is mainly a function -- we've got a number of things that are pretty formulaic in our maintenance expense, the power by the hour charges on engine maintenance. What can move around from quarter to quarter are really two things of a material nature. One is the timing of heavy maintenance events, and given the nature of what we do, because the third quarter is a peak time for travel, we try and schedule our heavy maintenance events so that we don't have airplanes in the barn during the third quarter and we have them out flying with customers, if we can do that. So I think quarter over quarter, you probably see fewer heavy checks.

I think, in the second quarter, if I recall correctly, we also had a maintenance event on an engine, a sort of scheduled maintenance event that was not covered by a power by the hour deal, and that drove up the expense in that time period. So there's nothing really out of the ordinary, there's just some of these things based on how we book it on an as-incurred basis that they hit you when they hit you, and when they don't, you have nothing.

The other question is about the commission and other selling expenses. If you correct for -- let's say, the 3.7 million in the frequent-flier accounting, and then, assuming you do that in the second quarter as well, I assume there would be a commensurate bump with fuel going up in the second quarter. Is that kind of the -- basically the same kind of run rate, quarter over quarter?

Generally. As I mentioned earlier, there's about a $5 million good guy in this quarter on that line related to the adjustment to our frequent-flier liability. And there's another probably $1 million or so that it is the reduction in that liability because there is a fuel cost component and we true that up at the end of the quarter to where fuel costs are. So that's about -- offsetting that, we had increases in things like credit-card fees, because of higher bookings activity, increase in bookings fees, increasing commissions, all the revenue-related lines that you would expect to go up. So, if you normalize for those two accounting items related to the frequent-flier miles, you will get an increasing run rate that is reflective of a growing revenue environment.

Thank you very much.

(Operator Instructions). At this time, I show no further questions in the queue. Now I'd like to turn the call back over to Mark Dunkerley. Please go ahead.

Thank you all for participating in the call today. I particularly thank those of you who asked some questions. We look forward to updating you on our financial results as we get through the fourth quarter, year-end, and into 2009, which, just like 2008, promises to be a most interesting year. So thank you all for taking the time.

This concludes the Hawaiian Holdings third-quarter 2008 conference call. This conference will be available for replay after 6.30 Eastern Standard Time today through November 11, 2008, at midnight. You may access the replay system at any time by dialing 303-590-3030 or 800-406-7325, and entering the access code 3932 437. Thank you for your participation and you may now disconnect.