Hawaiian Holdings Inc (HA) 2009 Q4 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings Fourth Quarter and Fiscal Year Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Matt Bernier, Senior Director of Finance of Hawaiian Holdings. Thank you, Mr. Bernier. You may begin.

Thanks, Manny. Welcome, everyone, and thank you for joining us today to discussion Hawaiian Holdings' fourth quarter and full-year 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 4:00 Eastern Time today. If you have not received the release, it is available on the Investor Relations page of Hawaiian's Web site.

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 statement and management may make additional forward-looking statement 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 statement, we refer you to Hawaiian Holdings' recent filing with the SEC, including the most recent annual report filed in Form 10-K, recent quarterly reports filed in form 10-Q, as well as reports filed in form 8-K.

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

Thank you, Matt. As you have already seen in today's press release, we've posted good results in the seasonably weak fourth quarter, rounding out a year which saw Hawaiian earn a pre-tax margin of 8.2%, a higher margin by considerable distance than those posted by any of our competitors. This is the second year in a row that Hawaiian has recorded pre-tax profits, and the fifth time in the last seven years.

Our experience has been altogether different than that off our competitors as the industry has struggled to cope, first, with record fuel prices and then with the effects of a global recession. During the fourth quarter, we earned net income of $35 million or $0.66 per diluted share, compared to a net loss of $11.9 million or $0.23 per share in the fourth quarter of 2008. On a pre-tax basis, earnings were $13.3 million in the quarter compared to a pre-tax earnings of $4.2 million a year ago.

As was the case in the third quarter, we posted an unusual tax provision in the fourth quarter, recording a credit of $21.7 million, despite generating pre-tax earnings during the period. Peter is going to discuss this in more detail a bit later in today's call, but the brief explanation is that, as a result of our profitability in recent periods, we deemed it appropriate at this time to partially reduce what had been a 100% valuation allowance on the Company's deferred tax assets.

For the full year, the Company earned pre-tax income just shy of $100 million at $97.2 million and net income of $116.7 million, and that's all on revenue of $1.2 billion. It should be apparent to everyone that follows our company that our ability to consistently outperform the financial and operational results of our competitors rests in very large part on the tireless dedication of my coworkers throughout our company. In a tough and exacting business, it is the contributions of each and every employee that counts. And from the frontline to the board room, I have the privilege of working with immensely dedicated people. Imbued with tremendous enthusiasm and a sense of caring for our customers, together they deliver a level of customer service that we are proud to call our hallmark.

2009 was a remarkable year. Like everywhere else, Hawaii suffered the effects of the global economic downturn with visitor arrivals to the islands falling by 16% from their peak level in 2007. Our revenue was lower in 2009, as a result, but we were encouraged by a gradual strengthening in demand as the year progressed with December being the strongest month since the recovery began. We've still got a ways to before matching the heady level of visitor arrivals Hawaii experienced in 2007, so we don't feel that demand for the Hawaii vacation has, in any sense, chopped out.

Sticking closer to home, our interisland group this year exhibited the effects of slower demand and the attentions of a new entrant keen to secure a foothold. This picture changed at year-end when the second and third largest interisland carriers, Go and Mokulele, respectively, announced the pooling of their resources under the brand name Go Mokulele.

The story on expenses in 2009 was the big cost-savings resulting from lower fuel prices, though this great advantage that we enjoyed for much of the year ebbed away at year's end, leaving us looking at fuel prices that were actually higher than 12 months prior.

Before I delve into some specifics about our financial performance in the fourth quarter, I'd like to take a moment to update you on the status of our labor negotiations. During December, we reached a tentative agreement with the IAM covering about 1,200 of our employees. Most of these employees work at our airports in agent and ramp roles. The four-year agreement was ratified on January 18th and we are pleased to have this group under a new contract.

We remain in negotiations with the IAM with respect to finalizing a contract extension for our 600 mechanic and related employees. The most recent round of negotiations occurred in January, and it's our clear desire to conclude an agreement for this group in early 2010. Also during December, we agreed on a 68-month contract extension with ALPA, the union representing our pilots. Like the IAM contract, this agreement was ratified in mid January. Earlier in 2009, we had agreed to new contracts covering our flight attendant and dispatch employees.

So we've made a tremendous amount of progress on the labor relations front in 2009 towards securing a more certain and stable labor outlook as we enter 2010. All of the new contracts provide for compensation increases and they also provide management with more flexibility as we seek to improve the Company's profitability and competitiveness going forward. Each of the new contracts provides for profit sharing and the IAM flight attendant and dispatcher contracts include participation in the same incentive compensation plan that covers management and non-contract employees at Hawaiian.

Now let me turn your attention to our financial performance in the fourth quarter. Operating revenue during the quarter was $297 million, and that's down $3.5 million year-over-year, which is a much shallower decline than we recorded over the past two quarters. Passenger revenue per ASM came in 2.7% lower than the fourth quarter of 2008, which is an improvement relative to the expectations we had entering the quarter.

During December, we posted positive year-over-year performance in PRASM with both our interisland and transpacific routes contributing to the improvement. Revenue for the quarter was boosted by a four-point increase in load factor, which was not quite enough to offset a 7.2% deterioration in yield. Total operating revenue per ASM declined less than 1%, as we continued to benefit from improvement in our non-passenger revenue lines.

On the cost side of the equation, the trends are not on a similarly favorable arc. Fuel prices, as I mentioned earlier, have been on the rise throughout 2009, and during the fourth quarter the year-over-year improvement in our fuel expense line was the lowest recorded this year. I've already mentioned that at year's end the price of fuel was actually higher than it had been a year ago.

Cost per seat mile, excluding fuel, increased 15.1% in the fourth quarter, a result that's obviously in need of more detailed explanation. The most significant contributing items to this increase were wages and benefits expense, maintenance expense and commissions and other selling expenses. Let me take a moment to provide a bit more color on these issues, and Peter is going to cover our expenses in more detail a little later on.

On the wages line, almost half our year-over-year expense increase was a result of higher variable compensation recorded during this quarter than the corresponding quarter last year. We made money in 2009, and it is right that a portion of this should be shared with employees. This is an expense item that few of our competitors faced last year.

The wages and benefits line also reflects about $3 million more in year-over-year pension expense as a result of the poor performance of our pension plan assets during the market decline in 2008. We have seen the effects of this expense throughout the past year. These two items explained almost all of our year-over-year difference.

On the maintenance line, our expenses were up $9.5 million in the fourth quarter, although down somewhat from the third quarter. The contributing factors were higher 767 airframe and engine overhaul costs.

Finally, our commissions and other selling expenses increased by $6.6 million year-over-year. About 70% of this increase is attributable to accounting expense related to our frequent flier liabilities.

Looking ahead into 2010, there are a number of cost challenges to be met. Costs in a number of important areas will rise, and they include maintenance. The confluence of a midlife check on our 717 fleet, the introduction of the A330 and a number of heavy maintenance requirements on our 767, which fall by happenstance in 2010, is going to make this an expensive year in this line.

Wages and benefits, the combination of growth, wage scale step changes coming up for the employees that we've hired over the last 18 months and the pay increases agreed with most of our labor groups is going to put upward pressure in this area of our expenses. Offsetting the inflationary nature of this, to some degree, will be the productivity gains that we achieved at the negotiating table. Most of these gains will accrue from midyear onward.

Airport costs, most of the airports we serve have been less diligent than the airlines in terms of controlling costs in the face of this economic downturn. Now we are seeing substantial rate increases at many of the airports that we serve, most particularly at Honolulu where the majority of our activity takes place.

Our management task for 2010 is to offset as much of this inflationary pressure as possible. We have a number of initiatives in hand across the entire organization and we expect that the rate of unit cost increase is to start high for the year and then progressively moderate as the year goes on.

Turning to revenue, I'll take a few moments to share with you the circumstances we face as we roll into the New Year. Starting with the interisland routes, we have seen a stabilization and improvement in the revenue environment over the course of the fourth quarter. I've already mentioned the forming of Go Mokulele. The combined carrier now operates fewer seats than the two carriers did when they were independent. All told, interisland capacity on the routes flown by both Hawaiian and Go Mokulele during the first quarter of 2010 will be down about 25% compared to the third quarter of 2009, which is the last full quarter before the JV was formed.

For the fourth quarter, our interisland passenger revenue per ASM was down about 5%. But this masks the fact that throughout the three-month period we saw rising load factors and strengthening yields such that in the month of December revenue was actually positive when compared to the prior year. The Go Mokulele JV is not included in the bankruptcy filing by Mesa, and there has been no discernable change to Go Mokulele's competitive stance since the filing last month.

On our transpacific routes between the western United States and Hawaii, we've posted a passenger revenue per ASM decline of just under 2% in the fourth quarter. While a negative result is never cause for celebration, this outcome reflects a much narrower year-over-year decline than we saw during each of the past two quarters. Visitor arrivals to Hawaii from the West Coast remained comparable to 2008 levels, albeit well below the peaks achieved in late 2007.

Industry seat capacity remained generally constrained during the period, down 3.7% year-to-year with seat increases by Alaska, US Airways and American, offset by reductions in seats offered by Delta, Northwest, United and Continental.

On transpacific routes, we are seeing, like most airlines that reported, a positive revenue momentum. We are mindful, however, that a little ways down the road we will be experiencing rising capacity on these routes. For the year as a whole, industry transpacific capacity levels are set to rise by 9% versus 2009, which, while still 9% below the levels of 2007, nonetheless represent a significant change in the landscape. These increases are not evenly spread throughout the year, with industry capacity growth of 1%, 10%, 13% and 12% in the first, second, third and fourth quarters respectively. As you can see, much of the growth will come during the peak months of the year when there is much more demand to satisfy.

Let me now take a moment to update you on our fleet. The introduction of our first A330-200 aircraft promises to be one of Hawaiian's highlights for 2010. We are scheduled to take delivery of our first A330 in April with a second airplane arriving in May and a third in November. In late 2009, we agreed to accelerate the third delivery of the first quarter of '11, so this is not an incremental aircraft if you are thinking that we only had two deliveries planned for 2010.

For those looking further into our future, we have no deliveries now planned for 2011, as the dragging on of our ALPA negotiations this fall obliged us to forgo an opportunity to secure an additional A330, which was to be delivered in 2011. It is unclear whether or not we will be able to make up this delivery at this late stage.

As a company, we are very excited about the arrival of the A330. This aircraft will not only establish a new product standard on the transpacific routes, but it will improve our operating efficiency and bring additional destinations within our capabilities.

I'll wrap up with a few thoughts before turning the call over to Peter. 2009 was a great year for our company and puts us in a strong position going into 2010. We are seeing the same revenue momentum that other airlines have reported of late. And in addition, the interisland market is not suffering from the go-for-broke initiatives of a new entrant attempting to gain a foothold, as was the case one year ago.

At the same time, we've seen fuel prices rise from their level at the bottom of the recession last year. In the areas of maintenance and wages, we have some cost challenges that will be addressed by management with efficiencies and productivity improvements. Lastly, our transpacific market looks set to experience capacity growth this coming summer, creating a challenge whose dimensions are going to be measured by the level of recovery in demand.

All-in-all, for the second straight year, Hawaiian can claim to be in a stronger position than it was a year prior and that it expects to be yet again stronger the next time we review a full year's results. In this, we are alone among our competitors.

With that, I'll turn the call over to Peter.

Thank you, Mark.

Let me start with the fuel line, where our expenses for the fourth quarter dropped about $8 million year-over-year. Our fuel consumption was about flat but fuel expenses declined 10.5% as our price per gallon, excluding the impact of hedging, was $2.08 compared to $2.33 a year prior. 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 hedge portfolio, was $2.05 for the quarter compared to $2.72 last year.

And there's a table in 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've been $35.5 million and diluted EPS would have $0.01 higher for the quarter.

On a GAAP basis, our fuel hedges resulted in $479,000 of non-operating income in the fourth quarter. Of this, $915,000 represented realized gains, which were offset by the reversal of $579,000 in previously recognized gains for the hedges that settled in the period and an unrealized gain of $143,000 on hedges that will settle in future periods.

We continue to average in on our hedge position on a disciplined basis with 33% of our fuel consumption hedged for 2010 as of January 29th of this year. By quarter, our hedge percentages are 56% for 1Q '10, 42% for 2Q '10, 26% for 3Q '10 and 10% for the fourth quarter. Details of our hedge positions are available in the press release that we issued at the top of the hour.

Our winglets installation program is continuing. We completed the installation of winglets on five 767s before the end of January, and we'll have three more completed in the early part of this year.

Mark talked already about some of our nonfuel expense variances on his part of the call, but I'll take a couple of minutes to provide a bit more detail starting with the wages and benefits line. Our variable compensation expenses were about $5 million higher year-over-year in the fourth quarter, a number which is exaggerated by the absence of variable comp accruals in 4Q '08. Additionally, we had higher profit sharing expense this year based not only on our financial performance but also by the inclusion of additional employees in the profit sharing plan as our flight attendant and dispatcher contracts were settled in 2009.

Benefits expenses were about $5.1 million higher year-over-year, with about $3 million of this attributable to higher pension expenses, as we saw throughout the year and the remainder primarily due to increases in our health insurance and 401(k) expenses.

During 2010, we'll see further pressure on the labor expense line. We currently expect to see a substantial increase in our payroll taxes as a result of some increases looming here in the state of Hawaii. At the moment, we are somewhat uncertain about the ultimate magnitude of this increase, as it is subject to deliberations that are ongoing at the state legislature. We'll also see higher labor costs as the employees we've hired over the past couple of years, with our growth, progress up their seniority scales and as we fund contractual increases.

A partial offset will be seen in our pension expense as better pension asset performance achieved in 2009 starts to reduce the increase in this line relative to what we recognized last year. Also, as the year progresses, the productivity hit attributable to preparing to the arrival of the A330 will abate and we will begin to realize the productivity improvements included in our recent labor negotiations.

Our maintenance expenses were higher by $9.5 million in the fourth quarter, primarily as a result of higher power by the hour costs for both our fleets and higher airframe and engine overhaul expenses. While this represented a sequential improvement over the third quarter, it was not as big an improvement as we had expected, in part due to an unscheduled 767 engine overhaul that occurred during the period.

Looking ahead to 2010 on the maintenance line, we anticipate that the higher expense levels we've seen in the back part of last year are more indicative of the current expense run rates than what we had experienced previously. In particular, during the first quarter, we've begun our first ten-year checks on our 717 fleet, which is the most significant airframe overhaul event in that aircraft's maintenance program. We'll complete four of these in total during 2010 and another eight in 2011. Additionally, later in the year, we'll start to incur expenses related to the arrival of our A330s, and we'll incur some expenses related to scheduled late -- limited parts replacements on our 767 engines.

Aircraft rent expenses declined $4.4 million during the fourth quarter. Last year's expenses on this line had been inflated by $3.4 million of supplemental rent expense related to certain of our leases, which explains the lion's share of this variance.

On the commissions and other selling expense line, most of the year-over-year increase in the fourth quarter related to the absence of a credit we recorded in the fourth quarter of 2008, which was related to a change in our accounting assumptions for the breakage rate of frequent flier miles. We also saw some increases in our advertising expenses in the current year related to the activities that corresponded with our 80th anniversary during the fourth quarter.

Moving down to the non-operating lines of the income statement, the big differences relate to the absence of two significant expense items that we recorded in the fourth quarter of 2008. Last year, we recorded over $21 million in fuel hedging expense as the price of oil was in freefall. As I mentioned earlier, our hedges generated a small gain this year, as prices were considerably more stable during the current year period. And we also recorded a charge last year, in 2008, related to the valuation of our auction rate securities.

Before I leave the income statement, I'll take a minute to review our unusual tax provision. As you've already seen if you have our press release, we recorded a $21.7 million tax benefit in the quarter, despite our positive free-tax earnings. As a result of the improvement in our financial performance over the past couple of years, it was appropriate at this time to review whether we should maintain 100% valuation allowance on our deferred tax assets, and that is something which had been in place since Hawaiian emerged from bankruptcy back in 2005. We completed our review of that during the current quarter and concluded that it was appropriate to release a portion of the valuation allowance, which resulted in a credit of about $25 million on the tax expense line during the fourth quarter.

This change affects our book tax provision only. It doesn't affect our tax returns. One benefit that should result from this, however, is that going forward we should have a more normal tax provision on a quarterly basis. Specifically, we'd expect to see a book tax rate of 40% to 42% during 2010. I would note, however, that we do continue to have some valuation allowance on our deferred tax assets. And as we continue to review the appropriateness of the remaining allowance in future periods, there is the potential for further adjustment.

To adjust for these one-time benefits, the fourth quarter tax provision would have been about $3.3 million, and our year-to-date effective tax rate would have been 21%. The impact to our EPS in the fourth quarter from the one-time benefit was $0.47. And in our press release, we have included a table that reconciles these numbers for those of you who want to look at the impact of these tax accounting gymnastics more discretely.

Turning now to the balance sheet, we ended the quarter with $302 million in unrestricted cash and short-term investments and another $26 million in restricted cash. Over the course of 2009, we improved our balance of unrestricted cash and short-term investments by $96 million, while simultaneously paying down $25 million in our loan balances.

Unlike many of our competitors, this improvement in our financial structure was achieved without accessing the capital markets and diluting our shareholder base. Our CapEx in the quarter was $14.6 million, with the most significant capital additions being our winglet modifications. We expect 2010 CapEx of $50 million to $60 million including the completion of our winglet program, the acquisition of a spare engine for our A330 fleet and several IT investments.

As I mentioned a moment ago, we have been pleased with our ability to generate cash from operations in 2009 and to maintain a strong liquidity position in the face of what continues to be a volatile operating environment. As most of you know, over the next couple of years, we'll see an uptick in debt maturities and the beginning of pre-delivery payments related to our firm order spray of 330s. So our ability to build cash organically over the last two years has been vital to establishing a strong financial foundation for our company.

Looking forward into 2010, our first quarter capacity will be down 4% to 5% compared to the same period in 2009, as a result of less transpacific flying while we complete our winglet program and reflecting the changes in our interisland schedule, which we made during the fourth quarter. For the full year of 2010, we expect capacity to grow 3% to 4% as we introduce the airbuses into the operation starting late in the second quarter.

The benefits of a slowly improving economy and more stability in the interisland competitive situation are anticipated to be reflected in a load factor improvement between 1.5 and 3.5 percentage points year-over-year in the first quarter and a yield improvement of between 1% and 4%. In total, we expect our PRASM to come in about 4% to 7% higher compared to the first quarter of 2009. And as you think about these numbers, I'd offer a reminder that Hawaiian, rather uniquely among our competitors, posted almost a 5% PRASM improvement in the first quarter of 2009 versus the same period in 2008. So the continuation of our revenue improvements is off a less depressed base in the current quarter than most of our -- the other players in our industry.

On the cost side, Mark and I have already alluded to some of the headwinds we are facing, particularly in the early part of the year. We currently expect first quarter CASM ex fuel to increase about 11% to 14% year-over-year with the increases primarily attributable to inflation in our wages and maintenance lines. As we look at the year overall, we expect this first quarter result to be the high watermark in terms of year-over-year CASM ex fuel change, with our full-year increase ending up more in the range of half of that first quarter increase.

Fuel prices, as usual, remain volatile, as we've seen a $10 trading range in the price of a barrel of oil in just the first month of the year. What we know for sure at this point is the prices are well above the level we saw one year ago. As a result, we expect our fuel line to increase substantially year-over-year in the first quarter of 2010, reversing the trend we enjoyed throughout 2009.

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

Thank you. Ladies and gentlemen, it is now time to conduct an interactive question-and-answer session. (Operator instructions)

Our first question is from the line of Bill Green with Morgan Stanley. Please go ahead.

Yes. Hi. Good afternoon.

Hi, Bill.

Can I ask just a couple of questions about your RASM guidance? First, I'm curious what caused the big improvement versus your original guidance for the fourth quarter. Where did the -- sort of what levers were pulled to kind of get there? Where were the surprises?

There really wasn't one specific place. I think we saw a little bit better performance at the end of the year in both transpacific and on the interisland that what we originally been looking at when we gave the guidance.

How was January this year?

I think, generally, Bill, I guess what I would say is you just heard the guidance we gave. I think it is a continuation of what we saw in the fourth quarter. The trends haven't changed materially in any of the major areas. We will see some improvements in traffic, in the month of January and throughout the first quarter as we just talked about. So --.

Just the booking --.

Yes, I --.

Oh, sorry.

I think it's a continuation of the same trends is how I would characterize it.

Okay. Is the booking curve materially different as we come out of a recovery for you or is -- how much of the quarter is already booked at this point?

Well we don't make public exact numbers on that. I would say that it hasn't really changed. It continues to be a pretty late booking market. And this is one of the issues, coming back to your first question about RASM, it's sort of at any point -- and I think I speak not only for Hawaiian but actually around the industry in general at the moment -- things book up pretty close in, but they have been booking, and so the trends have been improving.

Okay. Just last question is the new aircraft, as you think about putting it to work, is it going to generate better returns for you or is it kind of a necessary investment you need to make because of the age of the current long haul fleet. Your thoughts there would be helpful.

I think it's both. I think the timing of the aircraft is determined more around the aging of our existing fleet, and when they come off lease. The selection of the 330 reflects the fact that we think it is, for the missions that we fly, the best aircraft out there.

All right. Thank you for the time.

Thanks, Bill.

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

Oh, thanks very much, operator. Hi, gentlemen.

Hi, Helane.

When you give out the unit revenue numbers, are these stage length adjusted?

No, they're not.

Okay. So if I did that, I should see better numbers, right, than what you're kind of guiding to?

Well I'm not exactly sure how to respond to that. I guess what I would say is, on the numbers that Mark gave for the color around what happened in the quarter around interisland and transpacific, obviously the stage lengths in those -- within those parts of our route network don't change very much.

But if they're different, right?

The numbers that I talked about for the first quarter for -- going forward for the overall flying we do reflect both the changes that are going on in the marketplace as well as any changes in mix that are going on.

Okay, that's excellent. And then just I didn't read the whole press release I'm embarrassed to say, but did you put in, like, a balance sheet that has debt -- so your debt went down, you said, by $25 million, so long-term debt is, what, $178 million then?

Yeah, we have not -- we did not include a balance sheet in the press release. The terms of the debt numbers, there was nothing out of the norm in terms of our debt repayments. We continue to make about $2.5 million a quarter payment on our Term Loan A. We have been making payments on our aircraft debt each month, and so that principal balance has been coming down during the year. Those are the two biggest pieces. They probably account for $20 million out of the $25 million.

Oh, okay. So you're still net debt zero?

Yes. Generally, if you look at our debt, it is below what we have in terms of cash.

Right. Okay. All right. Well thank you very much.

Thanks, Helane.

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

Hi, Mark and Peter.

Hi, Kim.

So Peter, I believe in your guidance you said you expected capacity growth of roughly 3% to 4% in 2010. But I guess what do you see in longer-term growth trajectory, say 2011 and beyond, I guess, especially in light of your current delivery schedule?

I think what I would say on that, Kim -- I don't have a specific number to give you at this point. I think as you think about the airplanes we have coming this year, we've got a couple planes, two airbuses coming just at the end of the second quarter, coming into the schedule. And so that 3% to 4% reflects half a year of those two airplanes, another month of a third airplane at the end of the year, offset by one 767 leaving the schedule in the September timeframe at the end of the summer. And then next year, we don't have any incremental airplanes scheduled, but you'd see that -- the full-year effect of having those airplanes around.

And Kim, I would just add to that that one of the things that we've tried to do, and I think largely successfully, is put ourselves in the situation that between lease returns and our ability to extent leases if we feel like it we can control our capacity growth according to the economic circumstances that will prevail at the time. We can't do that month to month, and indeed we can't do that with six months notice. It tends to be more like a year's notice.

Right.

But built into our plan for '11, '12, '13, '14 and on out is a degree of flexibility to call capacity increases as we see the market.

Okay, great. Thanks for that color.

Let me ask you this. So the Hawaiian Tourism board, I guess they recently released their latest visitor stats, and they indicated, while 2009 in total was down versus 2008, they're still seeing positive trends going into this year. It sounds like you guys are seeing a similar impact just from looking at your traffic stats. Your passengers carried has been increasing. So with that, do you see it mainly as leisure-driven or have you seen any uptick in the business side of travel, like conventions and such?

It's really primarily leisure, as you've described it there. We're seeing a gradual recovery I think largely in common with the traffic recovery throughout the land. The good news is it's sort of consistent and it's moving in the right direction. With respect to the type of traffic, the convention visitors to Hawaii is going to take longer to recover than straight visitors, chiefly because it books out a lot, lot longer in advance, typically a year or two years in advance. And this time last year, in the wake of the government assistance to some troubled companies and revelations about these -- some of these companies having lavish -- sponsoring lavish conventions, that business just fell off a cliff. So we'll be feeling that I think for another sort of year or so, but it'll come back as well.

Okay. And then just finally, if I may, I just wanted to confirm did you guys match the baggage fee increase pushed through by the mainland carriers, the $25 for the first bag and $35 for the second?

Yes, we did.

Yes, we did. Yes.

Okay, great. Thank you. Great quarter.

Thanks.

Thanks, Kim.

Thank you. Our next question is from Bob McAdoo with Avondale Partners. Please go ahead.

Hi, guys.

Hey, Bob.

How are you?

Good. Good, good, good.

Is it snowing over there?

Yes, funny enough, it's just stopped.

Good. Here it's snowing.

No, it's not snowing here.

It was bitterly cold --.

It was pretty cold last night, but it didn't get below the '70s.

The -- you've talked about the short haul a little bit on the -- off to the mainland. The long haul going to the other direction, the miscellaneous long haul to the south and whatever and the Philippines, has anything changed there versus what we've been seeing the last quarter or two, as you look out, in terms of cost changes that are meaningful or competitive environment or fare structures or anything like that, or is it all pretty much -- as we think about the economics of your business and kind of what I think of as three separate parts, how should I think about that? Is it basically the same? Has anything changed there?

Well starting with the caveat that it is quite a small part of our business, I would say that it's -- actually we've seen considerable strengthening of revenue on our two big principal routes into that area. They've come back more strongly than any of the other routes that we're talking about. Last year, in particular, saw some pretty desperate discounting by some competitors that have abated for the time being, and we've seen really very positive revenue development on those routes.

Thinking about the short-haul business, is it still reasonable to think of that as kind of rough -- when we talk about it as kind of a third-year business, is that still a reasonable number?

Yes, that's a pretty reasonable number. It's going to go up and down quarter-to-quarter, but a third seems about right.

The fact that it shrunk by 25% overall, I guess that was -- you said that was the competitors that have shrunk it by -- now that's you guys together with the competitors you said.

That's us together -- that's the collective reduction in seats and in the market. We've reduced, and they've reduced.

What do you think is going on with yields for that particularly piece of your business since our friends at Go and whatever have kind of --?

Yes, we expect yields to be coming back. I think we've seen some good directional development in that area.

It's a pretty strong improvement on a year-over-year basis. The caveat importantly on that, it was off some pretty depressed base, especially as we get into the first and second quarter numbers for 2009, that things had gotten down pretty low.

And that said, clearly, if the current environment stays the way it is, we would expect really quite strong year-over-year improvements in the revenue environment.

Are there any rumblings of a crazy man wanting to be the third guy in there again, anybody new showing up or sniffing around that you know of?

Nobody that we've heard of.

You talked -- we talked about visitors to the islands, in general, down about 16% versus '07. I guess that was for the full year?

Yes, I believe that's the statistic.

Is -- when the Visitors' Bureau talks about how things look going forward, do they give -- do they have -- do they ever talk about how things are looking going forward? Like, is that 16% -- are we on a real upswing or is it coming --?

I think --.

Did they not come up with -- they make those kind of discussions available to us?

I mean, they -- I don't think they have a forecast, an official forecast. I can tell you that sort of amongst the chattering classes of tourism here in the States what I've said has been our experience is pretty much what everybody's talking about, which is a steady gradual movement in the right direction with a fair amount of sort of visitor capacity, the ability to take more visitors, still to be exploited.

Yes. And then finally, can you refresh my memory? Do you have -- don't you have -- do you have some kind of a balloon payment coming up here in the next year or 15 months or something like that in your debt?

Yes, two debt items over the next 15 or 18 months. In the back part of this year, end of the third quarter, beginning of the fourth quarter, we'll have the balloon payment on our Term A loan. It's actually a relative small balloon of about $17.5 million because that one has been amortizing on a quarterly basis since 2006. In the end of the first quarter of 2011, we've got the maturity of our Term B note, which is -- has got a balance outstanding at face value of about $57 million.

And other than that, it's just dealing with CapEx and your normal lease payments and whatever, in terms of the cash --.

CapEx normal lease payments. We've also got some pre-delivery payments that start this year, which are in the $25 million range this year, a much -- a more significant number in 2011 of about $90 million. And of course, we've got minimum payments under the pension that we have to cover this year.

What's the balance or imbalance between payments under the pension relative to accruals under the pension?

This year, we'll have a higher payment than the accruals for 2010.

Under our pilots' contract, and that's the -- essentially, our DB plans are frozen with one small wrinkle, which is pilots who are currently over the age of 55 continue to accrue benefits. Everybody else is on a DC plan and, therefore, it is -- this is a bow wave that's going to diminish over time.

Sure. How much is the difference between what you accrue versus what the payment is? What's -- and I'm thinking about cash requirements, $10 million or $15 million or something?

No, the difference that's here is going to be about $20 million.

Twenty. Okay. All right. Thanks. Good job.

Thanks, Bob.

Thanks, Bob.

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

Hi. Good afternoon.

Hey, Steve.

I was -- could you just talk about some of the competitive challenges you might be facing in the long-haul market with more ASMs to the island? And it looks like you guys are going to be shrinking or not growing ASMs on the long haul in the first part of the year.

Well again, this is going to be a year of sort of four quarters. In the first quarter, industry ASM is actually coming down versus last year. Well actually, no, they're up by 1%. Then we get into more rapid growth, second quarter, third quarter and fourth quarter. There's nothing particularly sort of noteworthy about this additional capacity coming in other than the amount of it. We're seeing a balance of capacity coming in from Southern California and from the Bay Area. It's a variety of airlines. It -- as we look out at the competitive landscape, it doesn't feel like a fundamental change in the competitive environment. It does feel like there will be more seats chasing the demand that's out there.

And does that help the interisland?

At the margin, it does because a slice of our interisland business is carrying connecting passengers from the long haul interisland. So at the margin, it does.

And in terms of your ability to adjust capacity, you get the three deliveries this year, the A330s. I mean, how many of the 767s can you adjust if you find you have -- if you can just refresh me when those go back or what options you have to keep those or get rid of them?

Yes, we've got a couple of lease returns over the next two years that are -- those airplanes will go back over the next two years. We've got four airplanes that we own that are relatively long in the tooth, and we will be assessing the appropriate point to retire those airplanes over the next couple of years. I don't know if it will be 2011, '12, '13. I think that's going to depend on the market conditions at the time and the economics of keeping those airplanes flying. And that's part of the flexibility that Mark talked about. And then there are other lease maturities that are coming up over the next several years.

Okay. And then finally, in terms of the PDP market, I mean, is that -- is the financing market better -- kind of open again?

Well I think financing markets is -- as you would well know, are generally a lot better now than they were 12 months ago. They PDP market, specifically, is not something that is particularly robust at this point in time, and there's a lot of complexity around using that. So I don't think it's very likely that we'll finance the PDPs specifically with the PDP financing that was available a few years ago. But generally, I think capital market conditions are improved.

Okay, great. Thank you very much.

Thank you. Our next question is from the line of Bill Green with Morgan Stanley. Please go ahead.

Yes, just a couple of follow-ups. One of the things that you'd mentioned in the past was helpful in the downturn was hotel rates. Are you seeing them starting to rise, and is that going to have much of an effect, do you think, in 2010?

We haven't really seen any movement off their depressed level. So as yet, we haven't seen any indication that they've started to rise again.

Is it typical out of downturns that they hold back on rates for a while so you can kind of benefit, or how does it usually play out?

I think this has been an extremely atypical downturn. So it's a bit hard to say. They yield-manage their rooms much the same way that we yield-manage our seats. I don't get the impression that there is a sort of groundswell of belief that the time is nigh for hotel rates to go up. But I'm sure the hoteliers will be looking for opportunities to do so if they feel that the conditions have changed.

Okay, just a question on cash. I got the impression from your comment, Peter, that in the future you're sort of seeing some obligations that you want to make sure you've got the cash for. Do you feel you have enough cash? I know you have a shelf on file as well. Do you think you'll need to tap that or how are you thinking about the cash obligations?

Yes, we put the shelf in place so that we had the flexibility to adapt to whatever circumstances we found ourselves in. I think, in the short term, we are quite comfortable with our level of cash. It is, as we look out over the next couple of years -- but as you said, Bill, there's some obligations out there. And so we don't have any firm decisions or timelines or specific targets to talk about at this point. And right now, we're keeping our options open.

Peter, can you tell us where the ATL was at the end of the quarter?

Yes, if you give me a second here, it was right about $211 million.

Okay. And then just the last question is I'm curious what your views are as you think about exiting a downturn. Is that the kind of environment or recovery that would encourage competition in the transpacific, or is that the kind of market where folks would look to remove it? I know you mentioned the capacity growth that's there. I'm thinking on the margin does it grow from that level or does it shrink as opportunities elsewhere grow? I'm just not sure how to think about that.

Yes, it's a really good question. I think traditionally you'd expect to see some of the capacity growth coming out of the market as aircraft are better deployed on higher-yielding business-focused routes elsewhere. That would be the kind of typical thing that you would see.

One of the things to point out, again, that's slightly different about the current circumstance and where it's a little unclear how it will play out is that almost all of the capacity that's coming at us in this marketplace today is long-range 737s that are in a domestic configuration. So whereas it used to be wide bodies, it could perhaps be better served flying the North Atlantic or the North Pacific with business travelers on. The seats that are in the market now are increasingly domestic 737s. So the routes that they would -- the opportunity cost routes for them would be more likely domestic routes than traditionally international routes.

Okay. Thank you, again, for the time.

(Operator instructions)

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

Hi.

Hi, Dominique.

Hi, guys. Can you help me out again on your fuel guidance? Are you saying that for the first quarter fuel is going to be much higher than it was in the fourth quarter?

No, we were saying it's going to higher than it was in the first quarter of '09.

Oh, of course. Okay. Got it. And then on the PDP, I'm having a hard time seeing the pattern here. You've got two A330s for 2012, and then three in '13 and one in '14, right?

Yes.

And so why is it 25 this year and 90 next year? How -- which one does it correspond to?

Well basically, the way it works is that we start making those payments at about the two-year point before any aircraft is delivered to us, and then there are -- it's not just one payment. There's a number of payments between the point they start and the point you actually take delivery.

Got it.

So I think the phenomenon you're seeing, Dominique, is that the -- for the airplanes -- the couple of airplanes that are coming in 2012, we start to see the first payments this year. Next year, we've got the first payments for the ones coming in '13, plus we've still got payments for the ones coming in '12, so it's that stacking up of the payments.

Got it. And have you given guidance as to the total cost of those five planes -- six planes?

We haven't, for confidentiality reasons in the agreement, given specifics of what the net delivery cost of those airplanes are. Obviously, there's information in Qs and Ks about our overall commitments, but we don't break it down on a contract-by-contract basis to preserve the confidentiality of that.

Okay. Thanks a lot.

Our next question is from the line of Bob McAdoo with Avondale. Please go ahead.

Yes, one more thing. As you were talking more -- that more and more of the capacity that's coming in is 737 capacity, and obviously there's been an influx or a shift to 757s, with all of that narrow-body capacity coming in, are you seeing any meaningful -- over the last year or two, any meaningful increase in demand for cargo space? Does that really change the economics of your airplanes versus theirs?

Yes, it -- again, great question. It's a little bit of a mixed bag, and it's hard to past the two big drivers. I think the short answer is yes, but it's very hard to separate that from the downturn in the economy, which is generally depressed cargo traffic. But sort of in principle, yes, I think you're right.

Okay, thanks.

And I would just make one last follow-on point to that. Of course, one of the attractions of the A330 is, for a number of reasons, it is a better cargo-carrying aircraft than the 767-300ER. So looking out -- and once we have two aircraft delivered it's not exactly going to change the world, but looking further down the road it's clearly going to be an area of our business that we anticipate growing.

We have no further questions in the queue at this time. I'd like to turn the call back over to management for any closing comments.

Okay. Well thank you very much for joining us today. We've just closed the books on 2009, and obviously we're pretty pleased with the performance of the Company overall in what's been a pretty dismal year for the economy as a whole. We're seeing the improving revenue trends that many are talking about. We are facing the inflationary cost pressures arising from fuel prices. We've talked about some cost pressures in other lines. We've got some additional capacity coning in the transpacific market. And where it leads us as a management team is that it's our task this year to offset these inflationary pressures with some expense lines improvements and productivity in general.

So with that, thanks again for joining us today and take care.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.