Hawaiian Holdings Inc (HA) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Hawaiian Holdings, Inc. second quarter 2009 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference call is being recorded today, Monday, July 27th, 2009. I would like to turn the conference over to Matt Bernier, Senior Director of Finance. Please go ahead, sir.

Thank you, Mary. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings second quarter 2009 financial results. On the call with me today 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 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'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 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 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 the recent filing with the SEC, including most recent annual report filed in Form 10K, recent quarterly reports filed in Form 10Q as well as reports filed in Form 8K.

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

Thank you, Matt, and thank you everyone for joining us today on the call.

The second quarter financial results we released today reflect another period of good financial performance for our Company in what remains a challenging macro economic. While the core influences on our performance are the same facing those competitors, that's much lower fuel prices than last year, offset by much lower demand, resulting from our present economic woes, the big distinction is that in our case we've been able to strength our balance sheet and add cash. With the credit markets in turmoil and recognizing that we have a number of substantial outlays in the next few years, this comparative strength is of tremendous importance. The price of fuel and the state of the economy dominate conversation about airlines these days.

So in on our call, I would like to veer from this formula by first highlighting the contributions of our employees to Hawaiian's success. The employees, both in the front line and in support roles, deliver a level of service to our customers that is the envy of the industry. Everything we do in Management, to position Hawaiian well, is for naught without the support of our employees. The dedication of our employees to our business is an inspiration to those of us in Management and gives us great confidence that together we can meet the challenges that lie ahead.

Let me briefly run through the numbers for the quarter. Our net income for the second quarter was $27.5 million, or $0.53 per share. That compares to a profit of $54.3 million or $1.09 per diluted share a year earlier. Last year's results, of course, were dominated by a $52.5 million litigation settlement.

Throughout the remainder of today's call, as we compare our financial performance, including unit cost performance, to the second quarter of 2008, we will generally compare on a basis that excludes last year's litigation settlement. Income before taxes was $37.3 million this year, compared to $1.8 million last year. And our operating income was $31.7 million in the current year period compared to an operating loss of $4 million last year. Total revenue declined 8.5%, to $292 million, despite a 1.8% increase in capacity. Reflecting persistent pressure on passenger yield throughout the operation. Passenger revenue per seat mile declined by 14.7%, while total revenue per seat mile declined a lesser 10.2% during the period. The revelative strength in the latter number reflects a continuation of year-over-year increases in ancillary revenue. Operating expenses decreased by $62.9 million, as we realized the benefits of lower fuel prices. Excluding fuel and the litigation settlement, our CASM increased by 1.1%, the result of our continued discipline on the cost side of the equation.

As I said at the start of the call, we are reasonably pleased with these results, especially against the back drop of such a difficult macro-economic environment. We do recognize, however, that it was the huge year-over-year decline in fuel prices that reduced our unit costs, which in turn generated a relatively good financial result at a time when our results, and those of many other airlines, would otherwise have been unimaginably dire.

Between mid-March and the end of the second quarter, we saw the price of jet fuel spike to more than -- by more than 50%, to remind us all that we are posting -- what we're posting is a tremendous benefit year-over-year could become considerably less beneficial in the periods ahead. Of course, the price of fuel could stay where it is or it could even retreat from here. The experiences of the last year teaches us only that it is unpredictable. There is little to cheer on our revenue lines.

Like all airlines, we're seeing very substantial reductions in ticket prices. Indeed, though ticket prices stabilized during the second quarter, this actually represents a further decline when the impact of seasonality is taken into account. Peter will share the details of our third quarter outlook later on the call, but I would add my caution to that of every other executive, commenting publicly at the moment, that we live in uncertain times and the future cannot be predicted with our accustomed level of confidence.

With that said, let me cover in a bit more detail our results and the conditions we see in the marketplace. Our fuel bill for the second quarter declined $68.7 million, or 55.7%. Despite a small increase in the level of our flight activity. Excluding the impact of fuel hedging, our fuel expense per gallon declined 56.1% to a $1.59 a gallon. On an economic fuel cost basis, which takes into account the settlement of fuel hedges during the quarter, our cost per gallon declined by 52.7%, from $3.38 per gallon, to $1.60 per gallon.

Looking at our other operating expenses, CASM, excluding fuel, was held relatively in check during period. Increasing in other rentals and landing fees that we have encountered over the last several periods and increases in our aircraft rent expenses were offset in part by reductions in some of our revenue related costs like credit card processing fees. Peter will cover these in greater detail in just a moment.

Cost control remains a central tenant of our approach. With so many of the elements that impact our business beyond Management's control, we better be focused on those we can influence. I would like to take a couple of moments to review the market dynamics in each of the major pieces of the business, starting with our inter-island routes. Despite the return of unsustainably low pricing to the inter-island routes over the past several months, traffic levels were less robust than in 2008. This reflects the weaker local economy in Hawaii and a sustained, albeit flattening, reduction in the number of tourists arriving in the state. During the second quarter, the level of discounting in the marketplace didn't reach the sub-$30 level we saw in the first quarter, but prices in the low $40s remain broadly available. And, you'll be amused and slightly horrified to learn that as Hawaiian prepares to celebrate it's eightieth anniversary, our original timetable and price list has been discovered. It shows that in 1929, eighty years ago, we charged $32 for an inter-island ticket. A fair that has been seen in the marketplace as recently as a couple of months ago.

Although our low factor has been below prior levels we continue to maintain a low factor premium relative to our both of our competitors. All in all, since our inter-island routes have a low price elasticity of demand, the low prices have not stimulated an offsetting increase if travel. And this has resulted in our inter-island passenger revenue per ASM, declining in the mid 20% range. We've also seen over the past several months as we discussed in April, an uptick in the level of discounting between the West Coast and Hawaii. We made a decision this spring, not to match the deepest of the discounts, instead, judging that with the new pattern of very late bookings, we would be able to avoid the worst of the yield dilution by holding inventory for sale close in to the date of departure. This worked admirably, though, it is hard to describe a slightly more 10% reduction in ASM in glowing concerns.

Year-over-year arrivals in Hawaiian from the western United States have generally stopped as we pass the anniversary of the seat fall off in industry traffic in April, 2008. Fare levels remain considerably lower than those seen in the summer of 2008, but the benefits of lower fuel prices are more profound on long-haul flying than on short-haul flying. This combined with a lower capacity level between the US West Coast and Hawaii, has led to a measure of balance between supply and demand. So the RASM decline was almost entirely attributable to declines in yield with load factor only slightly lower year-over-year. It's important to note that our year-over-year changes in load fact are markedly month by month over the quarter. This reflects variability last year rather than any change to our business this year.

Last year we posted extremely high load factors in April and May. In the immediate aftermath of the closures of Aloha and ATA, whereas the June load factor last year was lower, as we sought to maximize fare levels in the face of surging fuel prices. As such, our load factor was down year-over-year in the first two months of the quarter, but up in June. Peter is going to address our outlook in a few moments, but I would like to presage his comments with my own.

We have done extremely well in this environment through the first six months of this year. The back half of the year, predictions do not come easily or with much confidence. We still have little forward visibility as to the state of demand and fuel prices still exhibit extraordinary volatility. Using the Ford curve as a guide for a price of fuel and extrapolating the price behavior we have seen by our competitors of late, we would anticipate our third quarter margins narrowing somewhat. If this comes to pass, we will still be strengthening our balance sheet through our operations at a time when most of our competitors are selling family silver to achieve the same aim. We are make no predictions at this stage for the fourth quarter.

And with that, I'll turn the call over to Peter to provide a bit more detail on the numbers for the second quarter and more detail on our outlook for the third.

Peter.

Thanks, Mark.

Let me begin by reviewing the nonpassenger revenue line since Mark covered the passenger items in a fair bit of detail already. I'll start with the cargo line, which includes freight, mail, and our baggage handling revenue. The total revenue from these categories increased by more than $6 million compared to the second quarter last year, with revenue from the baggage handling fee changes that we implemented in the latter part of 2008 more than offsetting a decline in freight revenue.

Those of you who follow our competitors results will know that revenue declines in the cargo side of the business are a common affliction in the current economic circumstance and this affliction caught up with us in Q2 although I believe that our results have continued to hold up better than most of our competitors in this area. We'd anticipate that both the weaker cargo results and the benefits of the baggage fees will continue into Q3, though it is worth noting that the year-over-year increases related to the baggage lines will become less pronounced as we annualize the fee changes in the latter part of the year.

Looking at other revenue, as was the case in the first quarter, the leading driver of our improvements was higher revenue from the sale of frequent flyer miles to our Affinity program partners, including those from our credit card partnership.

Moving on to operating expenses, wages and benefits increased somewhat, with higher expenses related to our larger operation and our pension expenses partially offset by a smoother operation compared to the chaotic period last year when we scrambled to grow the inter-island business after Aloha's collapse and encountered a lot of over-time cost and training expenses as we were digesting growth in a compressed period. Aircraft rent expenses increased $4.8 million in the current period.

The expenses here increased above a normal run rate as we recognized a $4.1 million increase in supplemental rent during the period, based on an assessment that some of the maintenance deposits that we paid to the lessors of our aircraft will not be used in the future to offset future maintenance expense. And as such, we needed to true up the associated balance sheet account to our current best estimate of recoverability. This change in estimate will not appear materially -- affect the run rate of aircraft rent expense in future quarters. Other rentals and landing fees also increased during the quarter by $4.8 million, generally consistent with the experience we've had with this line over the past several quarters. The primary driver of these increases is higher rates and charges for airport operations here in Hawaii with increases in volume having a lesser impact on the increase.

Maintenance expenses declined year-over-year as the absence of engine overhaul events that occurred in the second quarter of 2008 was more than enough to offset increases in the Pal By the Hour line associated with more flight activity particularly with our larger inter-island 717 fleet. Selling expenses declined year-over-year. The biggest contributor to this improvement was a reduction in credit card fees relative to the spike we saw in last year's quarter following the surge in ticket sales during April with the dramatic changes in our competitive landscape in 2008.

Moving down to the non-operating lines, Mark already mentioned that we posted a gain related to our fuel hedge positions. As most of you know by now, we mark our fuel hedges to fair market value through non-operating expense each reporting period. Given this accounting methodology and our discipline approach to hedging, we will tend to post gains in quarters when the price of fuel rises, and losses in quarters when the price falls. As a result, with increases in the price of crude oil and other fuel products in the second quarter, our hedge book increased in value and we recognized a gain of $6.5 million.

During the quarter, we realized losses of about $200,000 on positions that settled but recorded gains of $3.2 million on the same contract relative to where they're value was marked at the end of Q1 and another $3.5 million in gains in the fair value of contracts that will settle in future periods. As of June 30th, the overall value of our open hedge positions was positive to the tune of about $7.4 million, but I would caution that this value changes day-to-day with changes in the forward market. Our approach to hedging remains disciplined as we seek to average into a position over time that provides upside protection on about 55% of current month consumption and a declining position in the months beyond that going out about 1 year. We believe that this discipline has proved appropriate as we weather the market fluctuations in the past eighteen months and do not have any plans to materially alter our approach. I would refer you to the table at the back of the press release for more information about the recent state us of our fuel hedge positions.

Elsewhere in the non-operating lines we recorded a $1.7 million partial reversal of our fourth quarter 2008 impairment charge related to the adjustment of the valuation of our auction rate securities. Separately, subsequent to the end of the quarter, we liquidated $3.2 million of the auction rates at face value pursuant to an annual sinking fund redemption. As a result, as of today, we now have $32.3 million in face value of the notes, which we carry on our balance sheet in long-term investments at a discount related to the continued illiquidity of the securities.

Before leaving the income statement, let me just touch for a moment on our tax rate, which came in at about 26% in the current period. Frustratingly to some of you, this has been a difficult-to-project number as the valuation allowance on our deferred tax assets tends to leave to a lot of period to period volatility in our tax provision. There are a number of factors that may cause the full year rate to vary, but our best guess based on the current situation is that the rate will end 2009 slightly lower than what we recognized in the first half. Our capital expenditures for the quarter totaled $9.4 million, bringing us to $11 million year-to-date. The largest single acquisition this quarter was a spare engine that we had previously leased for our 767 fleet. We will be acquiring a second spare engine off-lease in the third quarter and will also see the beginning of our winglet program for the 767's in the back half of the year. As a result we project that the Capex for the year will total about $30 million to $35 million.

Our balance sheet ended the quarter in good shape, an achievement that is certainly worth highlighting in the current industry environment. Our balance of unrestricted cash, cash equivalents, and short-term investments stood at $282.6 million dollars, an increase of almost $35 million from the end of the first quarter. We do not have any meaningful debt maturities until the first of our term loans matures toward the end of 2010 and in fact the larger piece of our term loan maturity is not until 2011. As such, we do not have any short-term needs that would require us to access capital markets at a time when conditions aren't attractive.

During the quarter we purchased 26,775 shares under our Stock Repurchase Program bringing total purchases to just over 217,000 shares. We announced today that our board has decided to terminate the program in light of the increase in our stock price since its inception in March.

Looking ahead to the third quarter, our capacity should increase about 2.5% year-over-year. Mark discussed the revenue outlook in a fair bit of detail earlier and given the higher fares that were in place last year, both inter-island and transpacific it will come as no surprise that we expect revenue per RASM continue to be under pressure in the third quarter. Relative to the third quarter of 2008, we expect passenger revenue per ASM to decline between 16% and 20%.

There were so many big movements in our business last summer that perhaps a better way to look at our unit revenue guidance is on a sequential quarter to quarter basis. Compared to the quarter that just concluded, this suggests a range of a very slight sequential improvement to a deterioration of a couple of percentage points. On a relative basis, the year-over-year comparison on the inter-island part of the business is a tougher than transpacific, so we expect the declines there to be somewhat more pronounced. System load factor for the quarter should be up by 2 to 4 percentage points year-over-year, while yield is currently expected to decline about 20% to 23%.

Our current outlook for CASM, excluding fuel, is for it to come in flat to slightly better than what we recorded in the second quarter of 2009. What this equates to, however, is an increase of 11% to 13% year-over-year as we had the benefit of a couple of non-recurring good guys in last year's third quarter. Most significantly, last year the carrying value of our frequent flyer liabilities on the balance sheet was reduced in the third quarter based on some changes that we implemented in the reward redemption levels in the program at that time.

We also had a couple of positive items on the benefits and maintenance lines in the prior year that helped lower our CASM. As for fuel expenses, we'll leave you to your own prognostications on changes in the market. Based on the current forward curve, however, we would anticipate another quarter of substantial year-over-year reductions in our fuel line and as a result would anticipate a fairly improvement in all CASM year-over-year in the third quarter in spite of the quirks in some of the expense lines that I just discussed. Looked at sequential, quarter-to-quarter, the forward curve currently suggests fuel prices will be higher in the third quarter than they were on average in the second quarter. If this comes to pass, the combination of our guidance on unit revenue and unit costs excluding fuel would suggest a narrowing of operating margins relative to those we've achieved in the first two quarters of the year.

In closing, I would reiterate what Mark said earlier, there is tremendous uncertainty around predictions in today's world and I stress that this guidance is more speculative than we are accustomed to giving.

With that, let me turn the call back to our operator, Mary, so that we can open up the line to any questions that you might have for us.

Thank you, sir. (Operator Instructions). And our first question comes from the line of William Greene with Morgan Stanley. Please go ahead.

Hi. Good afternoon.

Hi, how is it going?

Good.

Good.

I'm wondering if you could talk a little bit about -- a little bit more color on the RASM. How much of your third quarter is already booked? You talked about this -- there is a lot of uncertainty around this and yet your growing capacity, but you have given some pretty negative RASM outlook. So you can talk about what led to the underlying assumptions, what led to that outlook?

Certainly. We have -- bookings are taking place far closer in on our transpacific business than has customarily been the case. Inter-island has always been a very late booking market. So when we talk about uncertainty, we just don't have a great deal of forward visibility beyond about a month to six weeks.

The second point that I would make is, that, the growth that we are seeing year-over-year is largely the result of the fact that Aloha and ATA collapsed last year. We actually grew in the fourth quarter and a little bit into the first quarter and so it's not as if we're growing now, it's actually more the annualized affect of us moving into the space vacated by Aloha and ATA.

And then the third thing I would say, in general, is that we are seeing some discounting out there in the marketplace that is generally being started by our competitors; it's a very competitive business. We've obviously have to remain competitive with that. And Peter, I don't know if you want if you want to add more about the outlook?

I think the only thing I might add to that is that if you are comparing year-over-year, some of the variation you see from period to period has to do with what happened last year. And I think some of the price increases that were going in place really didn't take hold until into the third quarter last year. So in some of the months of the quarter, I think, we've got a tougher comp than we did maybe in part of the second quarter.

Okay. I don't want to put words in your mouth, but the tone I sense is that at best, you're describing the environment as stable, certainly you're not suggesting a lot of improvement sequentially, but maybe you disagree with that?

No. I think that's a pretty accurate take. It's caveated, as always, by the fact that we can barely see our nose in front of our faces given the short booking window. But in general, that's the way we would describe it.

Okay. And then Mark, can I ask you to comment a little bit about the thought process from the board in canceling the share buy back program, because you didn't actually execute that much of it. It's not clear why you would not just keep in in place to be opportunistic, if the stock moves.

Well I think we always want to be opportunistic in ways that make sense. I would point out that at the time we started -- announced the share buyback, the stock was trading at $3.40. And I think we closed today just over $7, essentially a doubling of our stock during that period of time. And I would also point out that one of the things that we were interested in at the time was buying back both equity and debt.

We've had some difficulty getting some, by not means all, but some of the people who are holding our debt to play along. And so I think we thought that this was a good time to suspend the program for the time being.

And how do you think of priorities of cash now that you don't have a share buyback in place then?

Well I think we are -- you know, I think the uncertainty of the immediate future puts a larger premium on holding cash than it would have done in any other period of time and I think we're -- that's in common with everybody else in the industry.

I think we're also mindful of the fact that they're not immediately in the next three to four years. We have both some loan facilities that need to be re-negotiated and some fleet expansion that needs to be financed. And I think our view is that we need to have the strongest possible balance sheet when that time comes so that we get the best access to credit available at the time.

And in the second quarter, where was the air traffic liability?

Peter, do you have that?

Yes. Second quarter, we ended at about $238 million.

And when you look to the third quarter, how should we expect that to change?

To be honest, we do not have a specific forecast of that, that we're inclined to share.

Okay. But you added $28 million from the mileage share in the quarter, so you said 30 plus more from the $28 million, is that right?

Well, actually, the mileage sale that is advance is not treated as an increase in the air traffic liability at this time. We did have -- we had some -- if you look at the deal we have with our credit card partner, we got about $40 million of advance, of which we've worked through $20 million of it in the first half and $20 million will be worked through year. But that is treated separately, the $20 million that remains from the air traffic liability.

I was referring to the increase in cash. That $28 million of that was related to the mileage sale.

That's correct.

Okay. And then just one last question. I know we ask about this each quarter and I have to ask again in light of the RASM guidance. Could you get more aggressive in terms of the ancillary fee options that you have before you. Why not, given the outlook?

We continually -- we look to see what our competitors are doing. It's a very competitive business. I think there have been some recent changes that we're currently thinking about now. There are some limitations we peculiarly have on ancillary revenue, for example our 767s, I believe, come in five different interior configurations that make it more difficult for us to secure pricing for premium seating on the airlines.

We are not shy about going for ancillary revenue. There are -- so I would not say that our efforts in that regard have come to a stand still. I think we're still working on it. And I would imagine that we will be pretty aggressive on the ancillary revenue going forward.

Thank you for the time.

Thanks.

The next question comes from the line of Kim Zotter with Imperial Capital. Please go ahead.

Good afternoon.

Hi, Kim.

How are you? I just wanted to touch on how competition is behaving in your markets especially -- have you seen any capacity increases further from Alaska and the legacy carriers on the West Coast and also touching on the Asia-South Pacific, Delta's new tieup with Virgin Blue. You can discuss that a little bit further?

Sure. I think on the West Coast to Hawaii, it's -- there is some give and take. We've seen some additional capacity coming in from, as you said, Alaska. I don't know what the reasons were. Certainly it coincided -- the announcement coincided with the outbreak of swine flu, which, I suspect, may have had something to do with it. At the same time, we've seen other competitors downscale their capacity leading into the fall. So it's a mixed bag. There is no established direction, and we are essentially flat looking forward in terms of competitor capacity.

Looking at Asia and the South Pacific, we operate to Sydney, Pongo Pongo and American Samoa and Tahiti and Manila. Dealing with those in -- one after the other, I would say that Manila is a route that continues to develop. It is, broadly speaking, tracking our expectations for a start-up route, which is to say that we're not yet at the point where we would be saying it's a terrific route but neither were we expecting to say that at this stage.

With respect to the Sydney, what we've seen is fairly important shifts to do with the decline in value of the Australian dollar versus the US dollar, which is adverse to our interests, and we've seen also some introductory fares between Australia and the West Coast of the US that is enticing some -- that is enticing Hawaii bound travelers to consider the US West Coast. We are, none-the-less, pleased with Sydney as a route destination for us and we think as part of our network. Pongo Pongo and Tahiti are mature route and they're doing just fine.

Okay. Thank you. And did you guys have any material impact from the H1N1 in Q2. I'm assuming, probably not.

No. Not really. There was a case to be made that it could have affected us badly if people decided to stay at home or well if they decided to come to Hawaii rather than Mexico. I think when the dust is all settled, we think it's essentially had no impact one way or the other.

And finally one quick question for Peter. The advanced mileage sale in other revenue, what was that? How much was in other revenue?

Sorry. The advanced sale, the piece that will be satisfied through delivering miles next year is not recognized through revenue at this point. So by the end of the quarter, there is about $20 million that we affectively treat as debt on the balance sheet, which will work through next year as we deliver miles under our contract.

There were some improvements in other revenue related to the sale of frequent flyer miles and that really has to do with the change in the price we charge for a mile both to -- under our credit card deal and under other frequent flyer deals as we've sought to realign those prices to market conditions.

Okay. Thank you. Great quarter.

Thank you.

Our next question comes from the line of Bob McAdoo with Avondale Partners.

Hi, Bob.

Hi, guys. Just one brief one. In prior quarters, you've given us a little bit of a sense of what is going on with tourism, generally, what the hotel occupancy is and how that's impacting overall cost of vacations and traffic, generally to and from the islands. Can you go through that in a current version of that description?

Yes, sure. I think in terms of demand for the Hawaii vacation, things are essentially stable. We've seen a leveling off of the declines of people visiting Hawaii. Before -- April was kind of a big water shed for Hawaii, which of course occurred before it was evident in the rest of the economy, so what we saw through March was about a 15% decline in domestic arrivals in Hawaii. Because we're now dealing on a comparing a weak period to a weak period, that number is down around minus 3%, something like that. Hotel occupancy is still pretty much down. I think Oahu is the strongest of the islands. Big island and Kauai are pretty weak, and Maui is somewhere in the middle. And we are continuing to see aggressive discounting by the hoteliers looking to attract customers to come to Hawaii. So it feels stable at the moment.

Okay. That's really all I have. The rest of my questions were already answered. Thank you.

Thank you, Bob.

And the next question is from Steven O'Hara from Sidoti & Company.

Hi. Good afternoon.

Hi, Steve.

In terms of going forward, in a per ASM basis is this a good rate to go forward through the end of 2010, let's say?

Well predicting to the end of 2010, I think is a little bit further than we're inclined to do. But I would say that trends that have affected the run rate of other revenue and the cargo lines are generally what we see going forward in the horizon that we're willing to speculate on.

Okay. Yes. I appreciate that. And in terms of the fuel price, can you just tell me what the all end fuel price is right now you guys are seeing?

I think it is -- we're probably in the last few days up in the $1.80, maybe a little bit north of that, with taxes, $1.80, $1.90 with taxes. It has moved around a lot.

Even since the -- well probably right now, at about where we were at the end of the second quarter when things came down a little bit in the early part of this month and have now come back up as you've seen in the market. So that's where we are right now.

And a lot of our fuel is priced either on a lag month basis or lag two week basis and when you see a lot of volatility, you can get some funny sounding results given the price of the fuel in the spot market.

And lastly, in terms of the -- you mentioned the helpful benefits that happened in the third quarter last year. Where were those exactly in terms of where might we see some really unfavorable moves this quarter?

The one that I called out first related to the changes in the frequent flyer valuation is on the commissions and other selling expenses line. And there were a couple of items as well in maintenance and in the wages and benefits.

Okay. Thank you very much.

Okay. Thank you.

Thanks.

Thank you. We have a follow-up from the line of William Greene. Please go ahead.

I just wanted to follow-up on the competitive situation. You guys have had a number of quarters here now where you've had quite a bit of success beating the numbers, et cetera. And as we see often in this industry, success will attract some competition.

So can you talk about how you think about the competitive environment and its evolution in Hawaii and specifically how are you going to position Hawaiian to, in affect, be operating from a position of strength, as that competition inevitably starts to look at more Hawaiian markets?

Well, we have at the moment sort of three pillars to our network. We have inter-island, where we enjoy the largest market share. We think our product is competitive today. We will continue to work on the kind of nuts and bolts of our operation to make sure that the sort of competitive edge that we perceive that we have today remains an edge of at least the same margin going forward.

With respect to transpacific, it has always been a competitive market place. There is no time, at least since I've been here, where we would have ever been able to look at the marketplace and feel that there was anything other than just incredibly competitive. We deal each and every day with all of the major carriers. There are, in essence, no barriers to entry as seen recently by the number of new entrants.

I think our ability to remain competitive rests on a number of different things. Firstly, we have to have competitive costs, and we work very hard to try and achieve that. We've managed to achieve that in most of our cost areas but not all. We continue to be focused on being cost competitive.

We also recognize that being based in Hawaii and being Hawaiian Airlines has some pluses and minuses, but one of the great pluses is that this is a market that we know better than our competitors do. So we are we're very focused on customer service and also focused on the product that we provide and we believe that for people wishing to come to Hawaii, we provide the best product. We're growing our international operation. We're growing it in a measured way over time. We're not rushing into it.

Obviously, international is, in general, down worldwide at the moment. I think we take a longer term view, we're fortunate having a relatively longer view that we can take a longer term view and less of a short term view, and I think we will continue to look in a measured way to expand our international operation to provide some further diversification to our route network.

That's helpful. Maybe I can take the other side of it and that is, you even mentioned this, some of your competitors which have been aggressive in the transpacific market, some of them are under some distress. And how could or could Hawaiian take advantage of any of that distress? Are you in a position to do that or does it really work that way, given the uniqueness of the markets you serve?

It's a terrific question, because it is something that we think long and hard about. We realize that things do not stay static for very long in this industry and even when you use words like stability, which in the course on this call, I used several times. I think one of the great advantages we have at the moment is that we're in a position to keep our eyes focused on the long-term at a time when many of our competitors are focused on the here and now.

And I think that advantage is manifest in all kinds of different ways. This is -- it's not terribly tangible, but I can tell you that in -- within Hawaiian's Management, we're thinking today, two years down the road, five years down the road and where we need to be. We are not having to be so focused on the ends of our noses and what we have to do to get through this year. That can change very quickly, so I certainly do not want to suggest that I'm boasting that that will always be the case.

We are looking to -- at markets which we think may be unattractive to anybody right now, but, with the benefit of taking a long view, may end up being good markets when the economy recovers. We're not in a position yet to make any decisions in that score, but it's something that we continually actively look at.

Okay. And just one last question. This isn't really a question about guidance. But you have been profitable here and as we look to 2010, and we start to make our own assumptions, I realize some of this is lapping but the ASMs are growing. Can we assume given profitability in a long-term outlook of a measured growth of the international space, you should grow 2010 ASMs, is that a fair starting point?

Yes, I think that's right.

Yes, we should have a little bit of growth in 2010. As you know, we start seeing the A330 arrive next year and that will give us some incremental fleet capacity. We do have a 767 going back to the lessors, but there should be a little bit of growth overall.

And I forgot. Are your deliveries next year already financed or are you still looking for financing?

They're financed. In the one -- we have two delivers in 2010 and one in 2011 that are coming from operating lessors so that financing is in place.

Okay. Great. Thanks for the time.

You bet.

Thank you. (Operator Instructions). And our next question comes from the line of John Reardon from Crowell Weedon & Company. Please go ahead.

Hi Mark, hi, Peter, hi Matt. Wow. My hats off to you guys. I'm not calling about any financial metrics. I would like to ask some future questions because not to sound like a cheerleader, but I've come to feel comfortable on the day-to-day operations of this entity.

Any way, could you talk about your Korean Airlines code share or joint venture? And then the other day I was at Terminal 2 picking up a friend coming in on a local flight, but I was watching your morning departure going out to Honolulu, the 8:30 I think, or 8:00. And I was struck by the demographics, because I must have saw about four Towncars or Suburbans pull up and see the grandparents, the children, and the grandchildren. And it -- if I had to make a movie of it, I would call it "The Last Roundup."

Has there been a demographic trend which looks like it could continue for quite sometime with regards to your departures to the West Coast? And, secondly with the A330, referencing Mark's comments about going into markets, could we be talking about an 8:00 a.m. departure from JFK on an A330, which has the range and payload characteristics you need to get them Hawaiian style into their hotel rooms by 1:00. Any way, that's it. Congratulations.

Well, thank you very, very much more those kind words and let me run down your questions quickly. Our relationship with Korean is a code share. We have it at the moment up for regulatory approval. We would hope to get that regulatory approval shortly. It is a -- it is part and parcel of our strategy to expand our international and further long-range flying in a measured way. We are looking forward to code sharing with Korean. It's a terrific company. And we're already pretty excited about it.

As to the question about demographics, we haven't seen a massive shift in demographics. We do, by the way, have big demographic shifts throughout the year. It is the case that during school break periods, we see a lot more family travel than we do at other times of the year. But, we haven't seen any sort of systemic change to the sorts of people who come to Hawaii.

And then lastly, in terms of East Coast to Honolulu flying, frankly, our 767- 300 ERs today could make New York to Honolulu. One of the things don't appreciate about the size of the Pacific, for example, is that it's actually further from Honolulu to Manila than it is from JFK to Honolulu. We have looked at the East Coast for many, many years now.

The issue for us on the East Coast is not worrying about whether or not we could fill an aircraft with traffic, the issue is we haven't seen the economics turn out to be compelling to have us get into that market. But it is something that is actively on our list of opportunities we look at.

Thank you very much.

You bet.

Thank you. We have a follow-up from the line of Bob McAdoo. Please go ahead.

Hi, Bob.

A couple of other things. What is going to be the seating configurations for the A330 so we start thinking about ASM calculations?

294 seats in the A330 of which -- how many are upfront.

18 will be upfront.

I think it's 24 upfront. 18 he says. 18.

And then the other thing is when do you actually pull one aircraft out for your winglet line and how long does that last and what should we do for adjustments there?

The winglet bound airplanes start in September of this year. They go through the spring of next year. There are a couple of breaks in the winglet schedule so that we can get affectively the use of an airplane for the use of the peak periods like Christmas. The ASM impact of that is part of what Peter gave you for the third quarter and Peter is there anything you want to add to that?

Yes. I would say the impact is going to be more in the fourth quarter of this year. There will be a little impact in the first quarter of next year and then into the second and we should have the wing on line completed by summer, as Mark said.

Okay. Thanks.

Thank you. (Operator Instructions). One moment, please. All right. Well, Management, it looks like there are no further questions. I'll turn the call back over to you for any closing comments you might have.

Well thank you, Mary. And thank all of you for listening and asking such great questions. Obviously, we've had a pretty good quarter. We think we're pretty well positioned to face the challenges that lie ahead, whatever they may be. And with that, we look forward to talking to you in a quarter's time and updating you on our progress then. So thank you all.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. If you would like to listen to a replay today's conference, please dial in to 303-590-3030 or toll free 800-406-7325 and enter the access code of 411-7171, followed by the pound sign. We thank you again for your participation and at this time you may disconnect. Have a nice day.