Hawaiian Holdings Inc (HA) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Hawaiian Holdings, Inc. third quarter 2009 earnings conference call. (OPERATOR INSTRUCTIONS.) This conference is being recorded today, Tuesday, the 20th of October, 2009. I would now like to turn the conference over to Matt Bernier, Senior Director of Finance. Please go ahead.

Thank you. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' third quarter 2009 financial results. On the call with me today 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 o'clock Eastern Time today. If you have not received the release, it is 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 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 10K, recent quarterly reports filed on Form 10Q, as well as reports filed on Form 8K.

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

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

As you've likely already seen in the press release that we issued at the top of the hour, Hawaiian posted a quarterly profit in the third quarter. Net income was $30.7 million, or $0.58 per diluted share, and that compares to a net income of $6 million, or $0.12 per diluted share, in the same period of last year.

As usual, the bottom line numbers don't tell the whole story, so I'll spend some time on the call today addressing some of the more unusual variances in the numbers. Peter's then going to take you through the expense lines and our balance sheet in greater detail a little later on in the call.

The first and most glaring thing to draw everyone's attention to is a $20 million favorable adjustment to income taxes. Absent this adjustment, our third quarter net income would have been $10.7 million and our diluted EPS would have been $0.20. I'll defer the pleasure of making sense of this to Peter in his section of the call.

Turning to the operating numbers, our revenue declined by $34 million to $305.6 million year-over-year, which was inline with the positive end of the guidance we provided at the end of the second quarter and the updated guidance we issued in September.

Passenger revenue per ASM declined 16.2% year-over-year on a load factor improvement of 4.6 percentage points and a yield decline of 20.7%. Total RASM declined a lesser 12.4% year-over-year as our other revenue lines continued to post improvement based on higher revenue, both from the sell of frequent flier miles and from other ancillary items.

As we anticipated in our third quarter outlook, cost per ASM, excluding fuel, increased by 14.5% compared to the third quarter of last year. Compared to the second quarter of 2009, CASM, ex-fuel, increased less than 1%. As we outlined during our last earnings call, an increase in CASM, excluding fuel, was anticipated although it merits further discussion.

The most noticeable of the drivers of our CASM result in the quarter was an increase in our maintenance expense. Within this area there were some items that are timing related and others which were caused by usual events. Peter's going to help pass this line of our expenses in his section but, regardless of the reasons, the level of expense during the third quarter was high.

Wages and benefits expense increased, primarily as a result of higher pension and other benefits costs. We also benefited last year from a one-time adjustment in our frequent flier liabilities that had the effect of lowering expenses in the third quarter of last year.

Offsetting these cost challenges was the fact that fuel prices remained far lower in the third quarter of '09 than they were in '08. Although fuel prices have been on the rise since very early this year, it's almost shocking to remember that they were essentially twice as high in the third quarter of '08 than they were in the period that we've just completed. For us, the net result is that our GAAP fuel expenses declined $62.8 million year-over-year in the third quarter, and $64 million on an economic fuel cost basis.

With that as an overview, let me delve a bit deeper into the current competitive outlook, starting with the interisland business.

As most of you probably already know, the competitive environment changed in the past week with the announcement of the merger of go! and Mokulele. The merger didn't affect our results for the third quarter, so let me just mention that, during the period, we saw low fares and a better competitive environment as our two primary interisland competitors jockeyed for position.

During the quarter, our interisland passenger revenue per seat mile declined about 30%, with a yield decline of over 26% and a load factor decline of about 4 percentage points. Notably, we recorded a year-over-year load factor improvement during September, marking a change relative to what we've seen throughout '09.

Undoubtedly, however, most of you are probably more interested in our thoughts about the future now that go!, wholly owned by Mesa, and Mokulele, owned by Republic, have formed a JV. I'll start by saying that much about the JV remains shrouded in the confusion of the press release so we may have things a little wrong. But from what we can glean, Republic has removed the Embraer 170s from the islands, thereby reducing the number of competitor daily frequencies by 40, while Mesa, the surviving operator, has increased its flying by a total of 12 daily frequencies.

The seat count is down a little more since Republic airplanes were at 70 seats and the Mesa airplanes are 50-seaters. As we talk to you today, the prevailing fare structure that existed before the announcement remains in place and the lowest available fare in the market is $49.

For our part, we've recently completed an assessment of our capacity in light of ongoing demand weakness and other factors as well, and we'll be paring our interisland capacity by 5% to 8% beginning in November. All in all, interisland capacity is set to be down 12% to 15% by year's end, which is much more inline with the underlying demand than it is today.

So, what does this mean for the forward outlook? In the near term, with fewer seats chasing the same level of demand, we expect load factors and revenue performance in general to be better than it would have otherwise been. This will not translate into year-over-year improvements immediately as Republic only entered the market about 11 months ago and the full thrust of their entry was not felt until the first half of the first quarter of 2009.

On our transpacific routes to the US West Coast, the situation remains generally stable when compared to earlier this year. Compared to the same period last year, however, fares were down, load factors were up by 5.8 percentage points and yield declined by 17%.

During the third quarter last year the price of fuel was reaching its apex. And all airlines, Hawaiian most definitely included, were trying to raise fares to cover costs that were galloping out of control. In so doing, demand was squeezed, fewer customers traveled and load factors fell away rapidly.

This year's transpacific load factor of 88% is more representative of what our business expects to see over the course of the summer, leaving us encouraged by the level of demand in this severe economic downturn. Where the recession is being felt is in average fares, which remained lower than we would like them to be.

As we look forward, the competitor capacity outlook on the routes we serve is a bit of a mixed bag. Overall, the number of seats offered by all carriers on the West Coast routes that we serve is expected to decrease by 3.7% in the current quarter and essentially flat, down 0.1%, in the first quarter of 2010.

Some of our competitors have removed capacity tactically, sometimes on a seasonal basis and usually through reductions in frequency rather than exiting from particular routes. Offsetting this, a couple of carriers have announced capacity increases. We don't currently anticipate that these changes are substantial enough to override the general stability in the market, but of course I'd caution that the environment remains extremely dynamic.

From the perspective of the economic situation, we're now passing the anniversary of last year's market meltdown. It appeared when we saw a fairly significant slowdown in bookings. As a consequence, we think that our load factors should remain positive year-on-year in the next quarter, but yield comparisons will remain somewhat difficult as prices didn't fully erode until the early months of 2009.

Let me now take a moment to provide you an update on our ongoing labor negotiations. As you probably know, we entered the year with all of our labor contracts amendable. Earlier this year we reached agreement on the new flight attendant contract that was overwhelmingly ratified. We're currently in mediation with ALPA, as well as the IAM, which represents our mechanics and airport employees. We're also in negotiation with the union representing our dispatch employees.

Among these, our negotiations with ALPA have received the most media attention. The negotiating teams met last week for negotiations under the supervision of the National Mediation Board. Hawaiian's been willing to address the compensation and retirement desires of ALPA but, at this point, we've not been able to get the union to address some of the byzantine work rules in our contract which leave us at a competitive disadvantage to our competitors in this area. We remain eager to get all of our unionized employees under a new contract and we look forward to resolving all of these discussions as soon as possible.

As we look beyond the end of 2009 and into 2010, the arrival of our first Airbus A330-200 is just around the corner. To remind you, we're going to accept the deliver of two A330s in the second quarter of next year and plan to enter them into service beginning in June. The project plan for introducing our new fleet continues apace and we're excited about the opportunities that these new aircraft will present.

Our A330s will be the best product in the markets we serve from the perspective of both comfort and function, bolstering our already award-winning service. Our fleet will grow by one net wide body next year as we'll have an offsetting lease return of a 767-300 during the third quarter next year.

In anticipation of the new aircraft, we've announced that we'll be adding daily, nonstop service from San Diego and Oakland to Maui next summer, as well as another daily flight between Los Angeles and Honolulu. We also announced that we plan to debut our new Airbus aircraft on our Los Angeles to Honolulu route.

Unfortunately, our inability to reach a timely agreement with ALPA has forced us to pass on a fleeting opportunity to acquire an addition A330 that we had slated for early 2011 and we will be adjusting our capacity outlook accordingly. This aircraft would have been in addition to the A330 operating lease scheduled for 2011, as shown in previous investor presentations.

In concluding my comments today, I'd be remiss if I didn't mention that next month will mark Hawaiian Airlines 80th anniversary. Hawaiian has come a long way from early sightseeing tours above Honolulu and amphibious operations between the islands.

The credit for whatever success we achieve is due to our outstanding employees and their remarkable contributions day in and day out. I'm grateful for their support and their professionalism, even at times when there is much to distract attention from the critical matter at hand; and that's providing efficient, cost effective air transportation safely and with unsurpassed customer service. On this, and on every day, they make us in Management and on the Board exceptionally proud.

With that, let me turn the call over to Peter to share some of the -- more of the details of our financial performance.

Thank you, Mark.

Let me start with the fuel line, where our expenses dropped almost $63 million year-over-year. Our fuel consumption grew 3.4% as we flew slightly more this year with the additional 717s that we added to the fleet last year, but fuel expenses declined 48% as our price per gallon, excluding the impact of hedging, was $1.93 compared to $3.83 last year.

Our economic fuel cost per gallon, which reflects the impact of realized gains and losses on fuel derivatives, but excludes mark-to-market impacts on our hedged portfolio, was $1.91 for the quarter compared to $3.84 last year. And we've added a table to our press release that shows our pro forma results, reflecting economic fuel expense. On this basis, that is excluding unrealized gains and losses on fuel hedges, our net income would have been $34.7 million and diluted EPS would have been $0.08 higher during the quarter.

On a GAAP basis, our fuel hedges resulted in $3.3 million of non-operating expense in the third quarter. Of this, $682,000 represents realized gains, which were offset by the reversal of $2.2 million in previously recognized gains for the hedges that settled in the period and an unrealized loss of $1.8 million on hedges that will settle in future periods.

We continue to average in to our hedge position on a disciplined basis, with 54% of fourth quarter '09 consumption hedged and 39%, 23% and 8%, respectively, hedged for each of the first three quarters of 2010. More details of our hedge positions are available in the press release.

We're also continuing to achieve good performance in our fuel conservation efforts, and these initiatives will receive a boost going forward as we start to see the arrival of our first winglets on the 767 fleet. Our first winglet installation was completed last week and we plan to complete another seven aircraft over the course of the next several months.

The other area with significant year-over-year variance was maintenance, as Mark mentioned, where we recorded $37 million of expense in the quarter compared to $24 million last year. Over $7 million of this increase was related to higher engine overhaul expenses on our 767 fleet, including two overhaul events for engines that are not included in Power-by-the-Hour contracts and some additional costs related to life-limited parts replacements on another engine.

We also saw a $2 million increase in 717 Power-by-the-Hour expenses as a result of increased flight activity and rate increases in these contracts, as well as some additional airframe heavy maintenance expense in the 767 fleet.

As we look forward to the fourth quarter and 2010, we'll continue to see pressure on the maintenance line as we come into a bit of an up cycle in activity on the 767 and 717 fleets. For example, we have another three 767 engines coming up to life-limited part replacement events over the next 12 to 18 months, and we will soon be cycling all of our 717 aircraft through their 10-year heavy maintenance checks, which is the most significant airframe overhaul event in the maintenance program for that fleet.

Fortunately, some of these events are reserved for under our lease agreements so the cash impact is moderated, but the costs are incurred -- as incurred, will be reflected in the income statement. Nonetheless, our maintenance costs in the upcoming quarter are expected to retreat from where they were in Q3, albeit we will still see an increase compared to the fourth quarter of last year.

Let me touch briefly on a couple of other expense lines. Labor and costs -- labor costs increased as a result of higher pension expenses. And we also benefited last year from a credit adjustment to our workers compensation costs.

We also had a $5 million increase in our commissions and other selling expense line. And as a reminder, last year on that line we recorded a $5 million credit related to changes in our frequent flier award redemption levels.

Before I leave the income statement, I'll spend a moment on our unusual tax provision. As you've already seen, and as Mark mentioned, we recorded a $13.7 million tax benefit in the quarter, despite our positive pre-tax earnings. The reasons for this peculiar result are a couple of adjustments affecting the tax provision, the most significant of which relates to a reconciliation of our recently filed 2008 tax return to the book provision that we recorded last year.

In the course of preparing our return over the past several months, we identified a handful of deductions that weren't included in our original book tax provision last year. And now that we've filed the return, we've booked the appropriate return to provision adjustment.

If you adjust for these one-time benefits, our third quarter tax provision would have been about $6.3 million and our year-to-date effective tax rate would have been 21%. In our press release we've included a table that reconciles these numbers for you, for those of you who want to look at the impact more discretely.

Turing now to the balance sheet, we ended the quarter with $303 million in unrestricted cash and short-term investments and another $30 million in restricted cash.

Our capital expenditure in the quarter was $10.5 million, with the single largest item being a 767 engine that we purchased from the lessor. Now, we expect a roughly similar level of CapEx in the fourth quarter, with winglets and the expected completion of a handful of IT programs as the most significant items.

During the third quarter we also contributed close to $8 million into our pension plans, more than satisfying all of our required contributions for calendar year 2009.

We've been pleased with our ability to generate cash from operations this year and maintain a strong liquidity position in the face of volatile operating conditions. As most of you know, over the next couple years we'll see an uptick in debt maturities and the beginning of pre-delivery payments on our firm orders for A330s. So, our ability to build our cash balance organically over the last two years has been vital to establishing a strong financial foundation for our company.

With this in mind, and in the spirit of responsible long-term planning, we intend to file a shelf registration statement in the coming days. At this time, we don't have any specific capital markets activities planned, but we want to be prepared to access the market if and when we think it's appropriate.

Looking forward to the fourth quarter, we expect capacity to be flat year-over-year, with a range of plus or minus 1%. Forecasting the revenue outlook is particularly difficult at this stage as we are still in the early process of evaluating the impact of the changes in the competitive landscape on our interisland routes, and so I caveat our projections insofar as we aren't entirely sure how the immediate term impacts are going to shake out. That said, the weak economy remains a drag on the revenue environment, although its effects would appear to be moderating rather than worsening.

Despite the macroenvironment, our bookings remain stable, which is an improvement relative to the weakness we saw with the onset of the credit crisis last fall. This translates into an expected improvement in our load factor during the fourth quarter by 4 to 6 percentage points, offset by a decline in yield of 14% to 17%. This in turn projects to a decline in passenger revenue per ASM of 8% to 12%, which would be several percentage points better year-over-year performance than we just saw in the recently completed third quarter.

On the cost side, our CASM, excluding fuel, is expected to increase by 11% to 14% year-over-year. As was the case in the third quarter, we're comparing to a quarter in 2008 which had a couple of one-off items that reduced CASM, making the comp tougher for the upcoming period. For example, our commissions and other selling expenses last year benefited from the reduction in our frequent flier liabilities related to the steep decline in the price of fuel, and our wages and benefits expenses were below the trend line last year.

Maintenance expenses are expected to be below the level we saw in the just completed quarter but, nonetheless, they're expected to be higher in the fourth quarter of 2008 -- or higher than the fourth quarter of 2008, excuse me.

As has been our custom, we'll leave you to your own devices as far as projecting the price of fuel. Based on the forward curve, however, we should still see some benefit from lower year-over-year pricing, particularly in the early part of the quarter. But this situation will reverse as we move through the quarter. And overall, the benefit of lower fuel prices for the full quarter will be far less than we have seen through the first three quarters of 2009.

With that said, we've reached the conclusion of our prepared remarks. I'd like to thank you all for being with us today and for your continued interest in Hawaiian. And I'll turn the call back over to our operator, Luke, now to open the line for Mark and I to respond to your questions.

Thank you. (OPERATOR INSTRUCTIONS.) And our first question comes from the line of William Greene with Morgan Stanley. Please go ahead.

Hi, guys. This is Ned filling in for Bill.

Hey, Ned.

Hey. How are you guys? I have a couple quick questions. In the past, you've spoken about how lower hotels fares have helped support Hawaiian Air travel trends, with hotel rates taking the burnt of the decline in the cost of travel to Hawaii. So, can you give us an update on what you're seeing or hearing from hotels today in the current environment? And do you guys have any indication about sort of the fare or yield environment as we go towards the holiday season?

Yes. I don't have any kind of hard statistics for you, but I can tell you as somebody who sort of obviously circulates pretty extensive in the local business community, that hotel rates continue to be under pressure. They're certainly going to be down compared to last year.

I think in broad terms, hotels react very similarly to airlines, which is once demand falls away they try and hold on to yield for as long as they can, that invariably they failed to hold on to yield faced with the economic circumstance of lower demand.

So, if that holds true in this instance, I think you'll see that average daily room rates will be lower year-over-year for at least another quarter to quarter and a half to maybe even two quarters before you start getting into comps that might swing you the other way.

Okay. Thanks. And just if I can ask one more here. As we start to discuss 2010 capacity trends, I was hoping to get a sense for exactly how you guys are thinking about capacity as we go towards 2010, particularly in the wake of Mokulele's recent change and the A330s that you guys have arriving. Right now, most of us expect you to be profitable in 2010, which would suggest that maybe you expect to grow capacity a fair amount, all things considered. Is that a fair comment? And sort of how should we think about the time horizon for an international expansion?

Okay. I think you've a right to draw a distinction between interisland and transpac. We've been in a very competitive environment over the course of the last few months. Interisland, you've just heard us say that we intend to take interisland capacity down by about 5% to 8%. We're still working through the practicalities of that. I think as we go forward into 2010, that would probably represent a right sizing of our capacities and market conditions. Things could change, but I think that's probably a pretty fair outlook.

I'm looking to Peter to see if he has the actual numbers on what our transpac capacity increase -- our wide body capacity increase is going to be for next year. But while they're searching for the exact number for you, what I would say is that, at the moment, we have not announced an expansion of our international flying. We clearly are looking, as we always do, at potentially flying to new routes. It will not be with airplanes that we have not yet identified. So, we've got a couple of airplanes coming in next year and we will be looking to see if those airplanes should be deployed domestically or internationally. At the moment, we've announced a domestic expansion.

Yes. Ned, I don't have the exact numbers with you, the things we had in front of us really just went through the first half, where our capacity is not too significantly different for us in the transpac.

Got you.

We expect the 330s to come online in June, so it's really more for the summer. And we should see a little bit of an uptick in the summer as we'll have the two 330s coming onboard and we won't have our lease return until after that period and then we'll come down. So, we'll get those numbers out, but it is really summer or fall before we see any meaningful change in our capacity level on the transpac.

Okay. Great. We'll follow up with you for a specific. So thanks, guys, for your time.

You bet. Thanks, Ned.

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

Hi, guys.

Hey, Kim.

So, last month you announced a few new ancillary initiatives, the $10 interisland first bag fee and a $10 meal upgrade. So, what's been the customer response so far? And also, kind of as an add-on, what kind of incremental annual revenue have you factored into your projections with these initiatives?

Okay. They're obviously two very different types of fees. The $10 interisland bag charge, really, we were essentially one of the very last carriers not charging for this. And so, what we've done is made ourselves competitive by putting this in. I think you will find that the contribution of that particular bag charge will be in a very low double-digit millions of dollars for the complete year of 2010.

With respect to the $10 meal, upgraded meal charge that we put on, first of all, those meals have been very popular. And actually, I think we're very pleased with them. At this point, principally from a brand and service perspective, the actual dollar contribution of this is going to be pretty small for the foreseeable future as we build that business model and get people more used to it. I wouldn't put a specific number because I don't think it actually would change our outlook, particularly.

Okay. Alright. Thank you. And an additional question. So, it seems like that your tax rate has varied widely over the past several quarters. Now, with this one-time tax benefit booked, will the tax rate be more normalized going forward or is there something else?

I would be happy, Kim, to be able to promise you that, but I can't at this point. I think part of the -- or the biggest part of the reason why our tax rate has been so variable is the fact that, emerging from bankruptcy as we did in 2005, we had a 100% valuation allowance on our deferred tax assets. That's a typical circumstance for any company that has come out of bankruptcy and would be common in the other airlines who have been through that process.

What is unique about us is that you're starting to see us having come through that process and then generate profitability afterwards. And some of the other airlines haven't hit that stage as of yet.

With that valuation allowance, we end up with a tax rate that varies pretty directly with the ups and downs of what our cash taxes are in any particular period. And so, you can -- as airlines have low margins, you get these variations with the slight changes and low margins. And you can get things like unrealized fuel hedge expenses that aren't tax deductible and so it gets quite involved very quickly.

The event that will really stabilize it at some point is if we remove the valuation allowance from the deferred tax assets. But at this point, we haven't made a determination that that's appropriate. And hopefully, we can just give you enough guidance going forward of what we expect. Obviously, this quarter was a particularly unusual one, albeit in the right direction.

Right. Right. And if I may, one additional question. In terms of your booking curve, I guess how does it look in the near term? And just broadly speaking, since Hawaiian's significantly more heavily leisure focused, then traditionally I would imagine leisure travelers book a little bit further out. Could we safely assume that you guys might have a little bit more visibility into the demand environment than some of your competitors?

Well, what I would say is that has obviously traditionally been the case. One of the big changes we've seen in the last year is that people have booked very, very, very close in by our standards. And so, we're seeing leisure booking in -- almost as close in to departure as business, which is a situation that we've just -- which is obviously new to us. So, I'm not sure that we've got as much clarity into the future as we're used to enjoying.

That said, one of the most striking features of 2009 has been how people really have booked close in. And we have seen the traffic and they have shown up on the day. So, we probably get a bit more visibility than our competitors do, but it's not nearly by the same margin as we used to enjoy.

Okay. Thanks a lot, guys.

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

Thanks.

Hi, Bob.

So, given what you said about taxes, what should we use for a tax rate for the balance of the year? Did you put something like that in here? Did I miss it?

I think what you should use for the rest of the year, and this is our best estimate at this time, is that low 20s effective tax rate that we've had through the first nine months, absent the one-time adjustment in the third quarter.

Okay. Alright. And the other thing I wanted to ask about was you talk about all the people that you're gearing up to hire or have already started to hire for the A330 project. What should we think about in terms of costs and how those costs are starting to spew up? Are there going to be any of it in the fourth quarter? What should we think about as we move into the first quarter in terms of your -- what's that do to your CASM kind of number?

Well, Peter's -- it's a good question. Peter's given some guidance on the CASM number. I think as we move into the fourth quarter and the first quarter, you're absolutely right because we will be bringing in some people to -- as we transition to a new fleet type.

Hawaiian has actually done a lot of this before so, as a business, we should be, and I believe are, better at introducing new fleet types than many carriers; certainly than many carriers of our size. But that -- so I don't think we're going to be sort of needlessly wasteful in that regard. But I do think we're going to see some increases as we go through a training bubble.

Again, Peter's provided guidance on our CASM, ex fuel, and that includes that issue plus some of the maintenance issues that he's already illuminated. We don't at this stage have any projection for next year but, seeing as it's of interest, we probably ought to go back and start thinking about it.

One of the other things that occurs to me is, if you're going up to -- if you're in effect adding two full airplanes, you talk about 25 new pilots, it seems like you're going to have a lot of churning and training and people off doing training and bidding and whatever. And wouldn't you need more than 25 new pilots if you're going to have two extra planes flying for a while before you drop back down? Or how do you plan on managing that process?

Well, generally, we have just -- as a rule of thumb, we like to think of ourselves as having a crew index of five.

Okay.

So for every aircraft we have five crews or 10 pilots. So, two on the--.

The two is the two airplanes, then.

Should be around 20 pilots. Clearly, with a new fleet coming in, you're exactly right. You cannot be as efficient. You've got to have [check M] and you absorb some inefficiencies. And so, 20 to 25 does pretty much reflect the inefficiency of the first couple of airplanes.

What kind of training costs, or is Airbus subsidizing the early training costs, the first 10 crews or something? Or how does that -- is there going to be any extra costs there of any meaningful amount?

When you look at training costs, they comprise the costs of the actual training plus the cost of paying people while they're at training and the travel to and from.

Right.

As is customary, we do -- and I can't get into the details because it's protected under the terms of a complex contract with Airbus, but it would not be unusual for carriers to enjoy some credits on the actual training piece of it.

Okay.

With respect to who pays for their lunch and their time while they're away from base, it's Hawaiian Airlines.

And just to follow up on that, Bob, one of the costs of training is you're not only training pilots for the new fleet, but you're also backfilling them in the existing fleets. One of the things we benefit from with a relatively simple fleet structure compared to a lot of carriers, is we don't have as many layers of those follow-on training events, but we do have--.

But I assume you will have -- while you have two additional airplanes, you will have 717 guys who go to 767 and 767 guys who are moving across, and then some of that will come back down. You'll have some of that kind of process as you grow?

That's right.

Yes. Yes. We--.

All the normal stuff.

Correct. We call it a training cascade because that's kind of what it is and, yes, we'll have it.

Okay. Alright. I guess that's all. Thanks.

Okay. Thank you, Bob.

Thank you. Our next question comes from the line of Helane Becker with Jesup & Lamont. Please go ahead.

Thank you very much, operator. Hi, gentlemen. Thanks for taking my question.

(Inaudible), Helane.

As we think about the pilots and IAM costs for next year, are you accruing wage increases or anything like that for when you ultimately resolve the negotiations? And do you have in your mind a timeframe for when you'd like to get them done, understanding the limitations of the NMB?

Yes. Let me answer those in reverse order. The timeframe we would have liked to have gotten this done would have been about a year ago to 18 months ago to two years ago with respect to our pilots. So, we would like to get into a new contractual arrangement with our unionized employees as soon as possible. That's always been our case.

With respect to -- if I understand your question correctly, are we accruing against the prospect of payments made retroactively for the fact that we're in negotiations, we have no such accrual and would not intend to make any such payments.

Okay. Thank you. All my other questions have actually been asked and answered.

Great. Thanks, Helane.

Thank you. And our next question comes from the line of Steve O'Hara with Sidoti. Please go ahead.

Hi. Thank you. Just a quick question. You had mentioned the average fare, I think, right now is about $49 in the interisland?

No. That is the lowest published fare. That is -- we've had -- and thanks for raising the question because this perhaps bears a bit more explanation. That has been the lowest published fare for several months now as a fare. There have been periodically, in the third quarter for example, further discounts off that as people run specials and we had fares as low as $25 for a while.

And what we're saying is, in the week since the merger was announced between go! and Mokulele, we have seen no changes to the lowest fare. Clearly, what airlines actually enjoy in terms of average fare is a mixture of the tickets they sell at the lowest fare, the tickets that they sell at higher fares, tickets that they have to redeem for frequent fliers, tickets they redeem under arrangements with other airlines. So, that's the limitation of the statistic we gave you.

Okay. And then in terms of -- do you know when Mokulele was offering that schedule through when they kind of folded the operation into Mesa? And when does that schedule become basically -- I know it's all going to be flown on the 50-seaters, but when does that kind of -- when do those sales kind of get folded into that operation and when does that selling period expire, do you know? I guess the question is, when might you see the impact of less capacity?

Well, go! and Mokulele were evidently flying sufficiently empty. But when the JV was announced, go! -- Mokulele just stopped flying within one to two days so that capacity is out. And evidently, they had no difficulty accommodating their customers on go's empty seats.

So, that part of the frame is out. In terms of our own capacity reduction, as we mentioned I think in our call, that'll be out by November. We've got things like schedule bids and so forth. We've got to look at the maintenance timetable for these aircraft and we've got to inform customers of changed schedules. So, the other guys are down as of now. We'll be down in the November timeframe.

When will those capacity reductions actually impact the market? Well, you've got to bear in mind that a lot of the tickets for travel over the next month, for example, have already been purchased under circumstances that prevailed before the merger announcement. And so there is a natural lag between when you see big shifts in capacity and when you actually see an improved revenue environment.

Our best guess would be that we're sitting here towards the end of October. I don't think you're going to see much in the way of changed circumstance for us for the month of November. By the time we roll into December, I think the new circumstances will be taking hold. So, from a quarters' perspective, you're going to have to two quarters of the old world and one -- two months of the old world and one month of the new world.

Okay. And real quickly, in terms of the -- I think it was a flat to 1% capacity growth for the fourth quarter, that was including the drop in interisland, correct?

Yes. We said plus or minus 1%. And yes, that was including the changes we have planned for our schedule.

Alright. Great. Thank you.

Thank you. (OPERATOR INSTRUCTIONS.) Our next question comes from the line of John Reardon with Crowell, Weedon. Please go ahead.

Hi, Mark. Hi, Matt. Hi, Peter.

Hi, John.

Mark, last quarter you said that some of your competitors had been pricing the tickets too cheaply and that you and Peter and your team decided to hold some seats off, which actually turned out to be a very -- and sell them later on at higher prices and it worked out great. And then you said this quarter we probably wouldn't be able to do that.

Recently in the press, there have been some articles that maybe we've reached an inflection point in the mentality of the customers to not wait until the very end to buy their tickets; i.e., they're now having to pay up if they wait too long as opposed to book it. So, could you comment on that? Do you think we've reach an inflection? Is there a change out there happening that will be to the airlines in general benefit and to your specifically?

And then secondly, could you talk about your mainland markets? Are they all pretty much uniform or is the Northwest a little stronger than say L.A., San Diego, etc.?

Okay. Well, yes. Let me deal with those questions in order, John. In the first question, a little earlier on this call I spoke about how late we were seeing bookings come. And what happens when bookings come in so late is that airlines look at how many passengers they have already booked. And if somebody essentially panics or fears that bookings won't come in late, they tend to stimulate the market with lower fares.

Over the course of the summer in general, we found ourselves being slightly more bullish than our competitors were and, therefore, somewhat constrained by their willingness to discount fares in order to get seats filled. I think that continued in the third quarter.

The issue, the reason why you can't just sort of hang out there completely, of course, is that if you see fares that were traditionally perhaps -- and I'm using an extreme example to make the point -- but were perhaps in the sort of $800 range and then you see fares that we saw earlier this summer advertised down in the $250 range, you may feel that you can hang out, but you're not going to hang out at $550 more. And so, you may bring your own fares down to, instead of $250 to $350 and look good by comparison, but it doesn't look good by the context of the prior year. I think we thought that that situation that was definitely present in the second quarter was also out there in the third quarter.

Going forward, it's an extremely dynamic marketplace. I don't think that we've seen any particular kind of moment of inflection or truth. It may be that we will recognize in hindsight that we reached an inflection point, but we're not seeing--. I think the good news out there is we're not seeing any changes to the negative in the way the market is booking. We see gradual improvement, but we're not out here saying that we're seeing rapid improvement.

With respect to the mainland markets, there are always differences between different markets. And there are times when some markets do well, some markets do relatively poorly. We don't go into it too specifically because, in a business with a relatively limited number of markets, we're subject to the attention of competitors.

What I would say is it's not unusual for some markets to do well, some poorly, in relative terms. We have that today. It doesn't tend to be the same markets throughout the year. It doesn't tend to be the same markets in the same pattern year to year and we don't expect that to change.

Thank you very much.

You bet.

Thank you. And there are no further questions in the queue at this time.

Okay. Very good, then. I'd just like to close up by thanking all of you for joining us today. Stripping away -- as we look back on the numbers, stripping away the favorable income tax adjustment, our results for the third quarter were satisfactory, I think, under the circumstances.

Like a lot of airlines, we've got a lot of work to do to prepare for 2010. But unlike a lot of airlines, we start our preparation from a position of profitability and balance sheet rectitude.

We look forward to sharing our year-end numbers in a few months' time. And in the meantime, I hope that all continues well with all of you. So with that, thank you and goodbye.

Ladies and gentlemen, this concludes the Hawaiian Holdings, Inc. third quarter 2009 results conference call. This conference will be available for replay after 10 P.M. Eastern Standard Time today through midnight on the 3rd of November, 2009. You may access the replay system at any time by dialing 303-590-3030 or 800-406-7325, and entering the access code of 4169903. Thank you for your participation. You may now disconnect.