Hawaiian Holdings Inc (HA) 2010 Q2 法說會逐字稿

Greetings and welcome to the Hawaiian Holdings second quarter 2010 conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Shannon Okinaka. Thank you, Ms. Okinaka, you may begin.

Thank you, Doug. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' second quarter 2010 financial results. On the call with me today are Mark Dunkerley, President and Chief Executive Officer, and Peter Ingram, Chief Financial Officer.

By now, everyone should have access to the press release which went out at about four 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, I'd like to remind everyone that the following prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.

For a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements, we refer you to Hawaiian Holdings' recent filings with the SEC, including the most recent annual report filed on form 10-K, recent quarterly reports filed on form 10-Q, as well as reports filed on form 8-K.

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

Thank you, Shannon, and thank you to everyone for joining us on today's call. As reflected in today's press release, we ended the second quarter with our ninth consecutive quarterly profit. Our bottom line results were in line with what we had expected entering the quarter, albeit based on a slightly better cost performance and a slightly weaker revenue result.

The second quarter was an eventful period, as we successfully introduced our first and second A330s into revenue service in June. This is the first step in a transformation of our long-haul fleet that will further our product advantage relative to our competitors' and reduce our operating costs. The early indications from the operation of the new aircraft are that in both of these areas, the A330 is exceeding our expectations.

Since we talked to you last quarter, we announced our intention to begin serving South Korea with four days a week service to Incheon Seoul starting early next year, and we also received final approval from the USDOT for service to Tokyo's Haneda Airport -- the culmination of a highly competitive route case in which many handicappers doubted Hawaiian's ability to win an award.

The new service will start in the fourth quarter of this year. I'll speak in a little more depth about these developments a little later on, but in the meantime they both represent exciting and valuable opportunities that we're looking forward to.

I'm going to turn the call over to Peter now to take you through the numbers, after which I'm going to provide a bit more commentary on our performance in the market during the second quarter and our outlook going forward.

Thanks, Mark. In the second quarter, we earned a net income of $9 million or $0.17 per share compared to $27.5 million or $0.53 per share during the same period last year. As was the case in the first quarter, our results this year are fully taxed on a book basis with a 43% effective tax rate, whereas in 2009 we booked a lower effective tax rate of 26%.

GAAP results were also negatively affected in the current period by a reduction in the fair value of our fuel hedge position as crude oil prices decreased from about $84 per barrel at the beginning of the quarter to $76 per barrel on June 30th. This resulted in a non-operating fuel hedge loss of $4.8 million in the second quarter compared to a gain of $6.5 million in the second quarter of 2009, a quarter in which the price of crude oil rose from $47 to about $70.

Said another way, about half of the change in our pretax earnings year-over-year is attributable to gains on our fuel hedge book in a rising fuel price environment in 2009 being replaced by losses in the fuel hedge book on a falling fuel price environment in 2Q 2010.

Looking at the quarter on an economic fuel cost basis, that is including only the fuel hedge impact related to contracts that settled during the period, we earned an adjusted net income of $12.6 million or $0.24 per share, in the just-completed quarter compared to $20.8 million or $0.40 per share, in the prior year period. On a pretax basis, the year-over-year comparison on an economic fuel cost basis was $19.5 million in earnings in the quarter this year compared to $30.6 million last year.

Operating revenue during the quarter was $316 million, up $24 million or 8.2% year-over-year on a 1.1% increase in ASMs. Passenger revenue per ASM came in 7% higher in the second quarter of 2009, with load factor for the quarter improving 1.4 percentage points to 85.6% while yields improved 5.3%.

Our non-passenger revenue grew at about the same pace as passenger revenue during the period. The biggest positive contributor was increased returns from baggage fees during the quarter, which are responsible for much of the increase in our cargo line. As in the first quarter, other revenue was lower year-over-year, primarily attributable to two components of this line.

The first is the marketing component of our frequent flyer miles sales to third parties that are lower in 2010. We explained in our first quarter call that we changed the proportion of these sales that we recognize in the current period relative to what we defer as sale and recognize over the period when travel occurs. Our actual sales of frequent flyer miles increased in the quarter compared to last year, primarily due to increases in the price per mile received.

The other smaller drag on other revenue is cancellation fees. As we've reduced cancellation fees as a result of shifting over the past year to the industry standard process of charging lower change fees while collecting a fair difference on itinerary changes.

Moving on to the expense lines, our biggest variance is fuel, where the first half featured some pretty tough year-over-year fuel price comps. On the operating line we saw an increase of $24 million in fuel expenses. Our fuel consumption was about 34.3 million gallons, which is flat with last year, while our price per gallon at $2.29 was about 44% higher than last year's $1.59.

As we look forward to the second half of the year, the forward curve suggests a somewhat narrower year-over-year price difference from the $1.93 and $2.08 per gallon that we paid in 3Q '09 and 4Q '09, respectively.

During the second quarter, economic fuel cost per gallon, which includes the portion of our hedge in gains or losses related to contract settling during the period, was $2.33 compared to $1.60 in the same period last year. Excluding fuel, our costs per ASM increased 2.5% in the quarter, which is better than both the range we expected on our 1Q earnings call and the improved range that we projected in the 8-K that we issued in early June.

A couple of items contributed to the improvement relative to our most recent guidance, the biggest of which was a retroactive adjustment to the security fees that we pay the federal government as part of funding the TSA. This adjustment of $1.6 million covers expenses dating back to 2005. The credit realized in this period is reflected in the aircraft and passenger servicing line on our income statement.

Our salaries and benefits expenses were up year-over-year but virtually flat with what we saw in the first quarter. As we've discussed in our first quarter call, this year's expenses reflect the new labor deals that we entered into over the past year, including the fact that all of our employees are now participating in the Company's profit-sharing programs, whereas last year those groups that had not signed new deals were not included in the plans.

We've also been in a period of fleet transition with the associated increases in training, particularly for pilots, that this entails, which has challenged our productivity. Going forward, the level of training expenses will moderate, and as such, we expect to more fully realize productivity improvements we achieved at the negotiating table in the periods ahead.

Maintenance expenses were up 5% year-over-year but down from Q1 levels. We had more airframe heavy maintenance expenses related to our 717 fleet than last year as we took one aircraft through its 10-year check, but 767 airframe activity was a bit lower year-over-year in this period.

Depreciation and amortization expenses were up about 10% in the quarter, reflecting expenses related to some of our capital acquisitions over the past year. The most significant individual items driving this increase were our winglet modifications and the spare engine that we acquired for our incoming A330 fleet.

On the positive side of the ledger, we had lower year-over-year aircraft rent in the quarter, as last year's second quarter was inflated by the realization of rent expense related to certain maintenance reserve deposits that we no longer expected to use to offset future maintenance expense.

Compared to the first quarter, rent expense was higher to reflect the addition of the two A330s that joined our fleet on operating leases. Commissions and other selling expenses increased 5.3% in the quarter. This is a more modest increase than last quarter. As was the case in the first quarter, we had higher commissions and booking fees expenses in the quarter, but unlike the first quarter we realized a positive adjustment to our frequent flyer liabilities, which moderated the impact of the other increases on this line. As a reminder, the value of this liability is a function of the variable cost of carrying a passenger, which in turn fluctuates with the price of fuel. So we're prone to some volatility on this particular line as the forward fuel price moves up and down.

Turning to the balance sheet, we ended the quarter with $314 million in unrestricted cash and short-term investments and another $37 million in restricted cash. Our CapEx in the quarter was $18.2 million, in addition to which we made progress or pre-delivery payments of $5.3 million related to future aircraft and engine deliveries.

Aside from the PDPs, the most significant CapEx driver in the quarter was the spare engine that we purchased for the A330 fleet. In the remainder of 2010 we expect CapEx of $15 million to $20 million, plus another $26.4 million for PDPs.

We also contributed approximately $14.4 million into our pension and benefit plans during the second quarter, bringing year-to-date contributions to $25.3 million. Our required contributions for the remainder of calendar 2010 are $11.3 million, most of which we intend to make in the third quarter, and we currently anticipate required contributions of about $14 million in 2011, a substantial reduction from this year's level. The 2011 numbers are preliminary at this point, pending our normal year-end valuation process.

One final note with respect to the balance sheet. We're also continuing to discuss financing alternatives with a number of financial institutions as we approach the maturity of our term loans in the coming months. These discussions are progressing positively, and we look forward to drawing things to a conclusion over the next few months.

With that, I will turn the call back over to Mark for some further commentary on the business.

Thank you, Peter. Nine straight quarters of profitability during a volatile time in our industry positions Hawaiian well for the future. In the second quarter, we continued to make substantial progress towards building and strengthening our business. Hawaiian was awarded one of just four US route rights to operate into Tokyo's Haneda Airport, representing the best possible way to enter this extremely large and well-developed market for visitors to Hawaii.

To give you some context, there are today over 1 million visitors arriving annually in Hawaii from Japan on 12 daily flights operated by five airlines. Japan is Hawaii's largest source of international visitors by a wide margin. Most of the flights arriving in Hawaii from Japan are from Tokyo, and all of the Tokyo flights originate at Tokyo's Narita Airport, which is located a considerable distance from the city's center.

Given the maturity of the market and the amount of competing service, flying to Japan has always represented an especially daunting prospect for Hawaiian, which until recently we had always decided to forego. This changed with the opening of the much more convenient Haneda Airport in Tokyo to long-haul international service.

Given the preference that we and others believe exists for Haneda Airport versus Narita, the opportunity to vie for one of a very limited number of slot pairs available to US airlines provided a truly unique opportunity to enter the market with an advantage over the established competition. This advantage we believe will more than offset the challenges associated with breaking into a new market, and we have considerable confidence that this route will have a much shorter timeline to maturity than is customary for a new service.

While perhaps not as unique an opportunity as service to Haneda, we are equally excited about our recent announcement to fly to Incheon. Many on the call may not be familiar with Korea and the excellent new airport in Incheon, so I'll take a moment to share our thinking.

We were attracted to commence service on this route for a number of compelling reasons. First, Korea is a country which has rebounded strongly from the global recession and is today growing far faster than the global average and indeed faster than many of its neighbors in Asia. While this alone would make Korea of interest to us, the inclusion of its citizens in the US visa waiver program has removed perhaps the highest hurdle to attracting them to visit the United States and particularly Hawaii.

Third, northeastern Asia faces extraordinarily tight limitations on aviation infrastructure. Getting slots at most airports in the region at commercially attractive times veers between the exceptionally hard and the absolutely impossible. By contrast, the new Incheon Airport is essentially open day and night to arrivals and departures that can be timed with connections and customer preference in mind.

This brings me to the last of the compelling reasons for the announcement of our new service. We have established a code share and marketing relationship with Korean Airlines. Korean is a terrific partner with which we are able to greatly expand our network reach into Asia.

So in the space of a few months we have secured the operational means to access both of these markets and others in Asia with the introduction of the A330 and we have secured the commercial means to do so by winning the Haneda route award and announcing our inauguration of flights to Incheon. At the same time we've seen our existing international services to Sydney, Manila, Papeete and Pago Pago improve substantially year-over-year, leading further to confidence that these are markets in which we can compete effectively.

Taking a step back, tourism to Hawaii is likely to grow more quickly from Asia than elsewhere, and at its core this is why we are focused on expanding our service to this region.

Now none of this is to suggest that we've taken our eyes off the need to manage the parts of our business which here and now account for 90% of our revenue base, and in which we remain the leading carrier. Our inter-island routes in the second quarter continued to demonstrate the solid recovery and revenue performance seen in the first quarter.

Last year at this time the struggle between Mesa's Go! and Republic's Mokulele to determine which airline would become the island's second carrier was being manifest in an unsustainable environment of overcapacity and promotional pricing. This year, with a better balance of supply and demand, we've seen pricing stabilize and an improvement in load factors. The net result for us is a solid rebound in passenger revenue per ASM and a significant improvement in overall economic performance on these routes. More specifically, our inter-island load factors in the quarter were up almost 6 percentage points while passenger revenue per ASM improved more than 30%. Quite simply, we remain the best-positioned carrier across key inter-island routes providing a solid foundation to our position as Hawaii's number one airline.

The revenue performance of our trans-Pacific routes has not nearly been so good. On a year-over-year basis, our RASM has declined by 3% to 4%. This number is clearly very different from the year-on-year numbers being reported by our competitors for their domestic networks.

But it's important that the naked numbers are viewed through the lens of the vastly different circumstances this time last year between the West Coast to Hawaii routes and all other domestic routes. As those of you who have followed us for a while already know, Hawaiian missed the worst of the recessionary effects on the industry last year, as the downturn disproportionately hurt business-oriented and international markets to which we had limited exposure.

In fact, the decline in US West Coast to Hawaii revenue per seat mile for all of last year was a remarkably modest 5%. The consequences of this have been that the U.S. West Coast to Hawaii routes aren't seeing the same rebound in revenue performance that is being reported in other geographies.

Second, we've seen industry capacity between the West Coast and Hawaii increase year-over-year by just over 10% in the second quarter. This contrasts with the experience of our competitors, who are enjoying more benign capacity growth or quite often even declines across the other parts of their networks.

On top of this, hindsight now reveals to us that we held out for higher yields longer than we should have done in the second quarter. This strategy has worked well for us in the last few years and we do think that this is a responsible approach in general. But given what transpired, we'd likely have been better off stimulating demand a little earlier in the booking cycle. We'll have some residual effects of this at the beginning of the third quarter.

The good news lies in the fact that travel to Hawaii is growing and has not yet reached the peak level experienced in 2007. Arrivals from the U.S. West Coast are rising and there remains hotel capacity to be filled. The growth in trans-Pacific capacity is a challenge, but having changed our approach to filling seats, bookings for the back half of the third quarter are looking stronger.

We're also continuing to move the ball forward with respect to developing ancillary sources of revenue. Along these lines we've recently rolled out the ability to purchase exit row seat upgrades at the time of check-in on all of our trans-Pacific routes. In the months ahead we'll be looking to roll out other initiatives that expand our ability to access non-traditional revenue sources while at the same time retaining and enhancing the brand value for which we are known.

Now let me turn the call over to Peter to update our third quarter outlook before we take your questions.

Well, looking to the third quarter we expect our capacity to increase 7% to 9% compared to the same period in 2009. These increases are primarily related to the introduction of two A330s to our schedule in June and some seasonal flying that we have scheduled for the summer between the Western US and Hawaii, offset by a slightly smaller inter-island schedule compared to 3Q '09.

For the full year of 2010, we can continue to expect capacity to grow by the 3% to 4% range that we have previously discussed. We expect third quarter load factor to end up between flat year-over-year and a 2 percentage point increase, with yields higher by 3% to 6%. In total, we expect our passenger revenue per ASM to come in about 4.5% to 7.5% higher compared to the third quarter of 2009.

On the cost side, we've signaled throughout the year that we expect flatter year-over-year performance in the second half of the year, and we aren't expecting anything different at the current time. In that light, we currently expect our third quarter year-over-year change in CASM ex-fuel to be in the range of down 1% to up 2%.

Fuel prices remain higher than last year's level, but given the increases we saw throughout the second half last year we don't expect the year-over-year price increases to be as big in the second half as they were in the first. Given the volatility of the fuel market we aren't giving any specific guidance on prices at this time. I will say, however, that we expect our fuel consumption to be 7% to 8% higher year-over-year in the third quarter as a result of our capacity increases.

With that said, we have 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. I'll turn the call back over to the operator now to open the line for Mark and I to respond to your questions.

Thank you. (Operator instructions).

Our first question comes from the line of Bill Greene with Morgan Stanley. Please proceed with your question.

Hi, guys, this is actually Matt filling in for Bill.

Oh, hey, Matt.

I would like to talk to you guys a bit more about your ancillary revenue opportunities if we can. Mark, you just sort of updated us on a new initiative and the plans to roll out some others in the coming months. This quarter we've asked a number of your peers what sort of inning they think we're in in terms of ancillary revenue opportunities. I'm curious where you guys think you are all today.

Well, it's clearly -- first let me just say that it's a very important area of focus for the Company as a whole. I think we would divide ancillary revenue into the sort of things that we can do that broadly speaking match what others are doing, and then the things that we can do that reflect our unique market profiles.

We have a number of things that we already do. They include most prominently bag fees. We sell upgraded food on our aircraft, and as you've just heard we've got some preferred seats. We've also got AVOD, on-demand video, on our A330s, for which we have charges as well.

All of those areas we're looking to refine and improve. I think not just for Hawaiian but for all airlines finding, for example, the best price points on food and the best way of selling exit row seating is -- we're relatively early on in the development of those sorts of ancillary revenue. So we're working on perfecting what we do in that area.

The stuff that is yet to follow is more heavily geared to the unique attributes of our business and our customer base, and we're spending a lot of time working on our website and trying to find the right way of selling ancillary products. We already do -- we already have hotels, we already have cars, we already have insurance -- but packaging that stuff up in a way that is attractive and compelling for the customer is probably the next leap forward.

Got you.

Matt, one thing I might add to that. Before bag fees became the biggest thing people talked about with regards to ancillary revenue, I think if you looked at airlines over the last 10 years the more important ancillary areas were cargo and frequent flyer.

I think one of the things we're excited about with the A330 fleet coming online is that we have an opportunity to have an even better cargo product than we do today at a time when many of our competitors to the West Coast are flying narrow-body aircraft that doesn't really have the ability to participate in the cargo market as effectively as we do. We think there are opportunities to do even more with our frequent flyer program.

So while we're thinking about some of the new things that haven't been out there as much, we're also thinking about ways to optimize and to better avail ourselves of the things that have been there for the last 10 or 15 years.

Got you. Mark, you just started to highlight growing efforts to focus on selling third party products such as hotel rooms and others. As you guys know, Allegiant has announced its intentions to enter the market sometime in 2011, and they've really been highlighting what they think is the attractiveness of your location, Hawaii.

So I'm wondering if you agree with their view on attractiveness, given the dollar levels on a per-passenger basis that they talk about with hotel markets. I'm curious if you think there's a really big opportunity here for you or if you think there's a distinction between the markets that you play in and the ones that they may be viewing.

Well, I think the answer to both of those questions is yes. I think we feel that Hawaii is an immensely attractive destination. It has an extraordinary resilience. There is perhaps the view that tourism-related destinations are subject to volatility. If you actually look at the history of Hawaii you could not conclude that about this destination. So we think it's attractive, we think there is much less volatility in demand actually than there are for traditional business markets, and we just talked a little while ago about the experience of 2009 versus 2010.

As to Allegiant coming in and whether or not they are going to be looking at different markets, that depends largely on Allegiant. I don't think they are that different markets in terms of the sort of customers they're appealing to. I think the question is where are their customers going to be coming from. They haven't announced their new routes.

We serve 10 cities in the Western US. It remains to be seen whether they intend to come in on any and compete directly head-to-head on any of those cities. If they compete on cities that aren't among our 10 core cities, I would point out that we rely very heavily on origin and destination traffic, because we don't have network feed to our West Coast gateways. So to an extent, if they're in those other cities, there's going to be I think a relatively limited amount of crossover.

Thanks, guys. Peter, just finally, can you just say again what the TSA credit was? How much, and the travel liability adjustment? Thanks, guys.

The TSA credit was $1.6 million, and that was on the aircraft and passenger servicing line, and the ATL is at $276 million at the end of the quarter. That's not the change, that's the total amount of the liability.

Our next question comes from the line of Michael Linenberg from Deutsche Bank. Please proceed with your question.

Oh, sure. Hey, guys, good morning, actually.

Good morning.

A couple of questions here. I want to go back to your revenue guidance. You talked about PRASM up 4.5% to 7.5% and yet you have a pretty meaningful uptick in capacity. You're flying bigger airplanes, 294-seat A330s, and there's going to be a decent amount of capacity that does come into the market. Maybe it's similar to what it was in June, maybe it's even higher by competitors.

Can you just -- there may be a year-over-year piece that I'm missing from a year ago. What gives you some confidence that maybe while on the surface this does appear to be somewhat aggressive, that it's achievable? Is there a piece of the puzzle that I'm missing?

I don't think you're missing anything. We base our guidance based on our look forward. I think we referenced the fact that we held on for yield longer than in hindsight we should have done in the second quarter, and in a sense we have no regrets to that. I think our investors should want us to bias in that general direction.

But going forward, it's about making the most of the opportunities that are out there in the market and just looking at our forward bookings, looking at pricing in the marketplace and where we think we are. The guidance we've given is the conclusion we've come to.

Okay. Then Mark or Peter, I know you indicated that the competitor capacity was up about 10% in June. Do you have those numbers? Again, this is just West Coast Hawaii. Do you have those numbers maybe for the third or fourth quarter? Is it a similar amount?

Yes, the third quarter is a little bit higher at 13% to 14% is what we see from our latest look, so it's a little bit more capacity there, and then I think the number goes up a shade more than that in the fourth quarter as well.

Okay. Then Peter, that's sort of overlapped with you guys. That's not total capacity, it's just where you guys compete head-to-head, right?

Yes, that's the Western US to Hawaii. I think the numbers are a little bit lower if you looked at the full continental US to Hawaii, but we just look at it in effectively the states that we serve.

Okay. My second question is sort of turning to the other side, which is actually a pretty good capacity story. I know Mark, you said 12 daily flights from Japan to Hawaii, and with 5 carriers. You may have said this, but if you could talk about how that capacity has changed, and I know it is changing and it's changing pretty dramatically.

Sort of as a part two to that, you talked about code sharing with Korean into Seoul. What about code sharing into Haneda or do you even want to? Would you rather go it alone, given your unique position in the market and the fact that there is a decent amount of capacity coming out on that side?

Well, you're right to point out that in fact there has been a relatively seismic shift in capacity in the Japan to Hawaii market. JAL's very public restructuring has had the impact of reducing their footprint in Hawaii by about 40%, which led to about a 25% reduction in overall capacity.

That's been partially filled back, partly by us with our new service, partly by Delta. I don't have the figures off the top of my head, but I believe we're down in capacity somewhere in about the 10% to 12% range year-over-year. So that's clearly a very positive development for us.

Again, the point around Haneda, for those perhaps less familiar with it, bears perhaps some underlining. When you try and break into a mature market like this, when you start out, you have reason to believe that your capacity will be the most marginal capacity, it will be the hardest to fill, and which you're going to end up having to discount in order to fill, which always makes it a relatively high hurdle to break into a mature market.

At the same time, what's great about the situation in Japan is that Haneda creates a preference. So we believe that our marginal capacity as the new player on the block actually goes in with a preference, which will hopefully be, and we intend it to be, reflected in the yield premium rather than a yield discount to get into the marketplace, so that's why this is such an important opportunity for us.

With respect to working with either of the two Japanese carriers in the marketplace, there's not much I can say about that right now other than to say that I think in general we're very interested. We've had good relationships with both of the main Japanese carriers over the years. We carry their traffic inter-island. We've always made it a point to keep our relationships current and good with those carriers, and we would look forward to continuing to work with them going forward.

Okay, Mark, I was also thinking about a US carrier as well, but great quarter. Thanks, guys.

Thank you, thank you.

Our next question comes from the line of Glenn Engle with Bank of America. Please proceed with your question.

Aloha.

That's very good, Glenn.

A couple questions. One is you mentioned the supply outlook on the West Coast; you didn't mention it on the inter-island. Can you talk about what inter-island capacity was in the second quarter year-over-year, and not just for you but for the market and what you see in the second half?

Sure. Peter's just pulling up the exact numbers here.

Yes, it was a little bit down year-over-year, actually more than a little bit down in the second quarter. I think it may have been down as much as about 20% in terms of the seats in the market in the second quarter. We were down about 10% on our part, or 9%, sorry.

A little less of a reduction in the third quarter and the fourth quarter. I'm showing about a 17% to 18% reduction in the third quarter and then a little smaller reduction in the fourth quarter. And of course the fourth quarter we start to annualize the Go-Mokulele combination last year in the October-November time frame.

So that picture is feeling fairly stable, but the schedules there can sometimes be pretty volatile, as they can on the trans-Pac as well, but it looks like it's still a down capacity environment for the next few months.

Second is if I looked at the second quarter expenses on commissions and maintenance, both of them were down about $6 million from the first quarter. Can you talk about what drove the declines?

The commissions and other selling line, the biggest swing factor was that frequent flyer liability item I talked about, which has an element of the liability on the balance sheet varies with the price of fuel, and we had fuel prices going one direction in the first quarter, increasing the liability, and therefore increasing our expense.

In the second quarter, as fuel prices declined a little bit we had a decrease in the liability and a decrease in the expense. On the maintenance line, it's really just a function of some of the activity that goes on. As you know, Glenn, there's a cycle of maintenance activity for each aircraft and sometimes those cycles peak up and come down a little bit.

We had three heavy checks on the 717s, for example, in the first quarter, compared to one in the second quarter. We don't have any more of the big 10-year checks for the rest of this year, but we'll have even more than that next year. So that's an example of how some of that moves.

I think we had a little less expense on the 767 side as well, on the airframes, and that's a function of the fact that we schedule it so that we get those airplanes out of the barn in the summertime so that they can be flying for the peak of the summer travel season. Off the top of my head, I think that's the biggest pieces of the maintenance reduction.

Thank you. The final question is that when you do an adjusted earnings of $0.24 versus the $0.17, you don't tax-effect the non-operating item?

I think that was tax-effected, but let me just confirm that and get back to you offline, Glenn.

That's all. Thank you very much.

Our next question comes from the line of Helane Becker from Dahlman Rose & Company. Please proceed with your question.

Thank you very much, Operator. Hi, gentlemen.

Hi, Helane.

Just a couple of questions. First, kind of a housekeeping item on the tax rate. Peter, are we thinking 43% then going forward? Do you have any guidance for the full year number?

I'd expect for the back half of the year for it to be in the 40% to 42% range. There were a couple of discreet adjustments in the second quarter that had to do with prior period tax items that caused the rate to move up a little bit in this period, but the 40% to 42% that we've talked about in the past is I think more appropriate looking forward.

Okay, good. Then my second question, just to follow up Glenn's question on maintenance, based on what you're seeing, the second half of the year maintenance is more like the second quarter, and then for 2011 the run rate is more like the first quarter. Would that be right?

Well, I don't think I gave specific guidance on the maintenance line. Generally, what we've tried to do is keep our guidance, as opposed to being specific line items, to be at the overall operating cost level.

But I think there's obviously some pressures we see going forward on some items next year, but there are other changes in there so I wouldn't interpret too much into what we said there on describing what the whole picture outlined.

Okay. With respect to your share repurchase program that was previously announced, is that designed to actually take shares out of the market or is that designed to keep the share count flat with option exercises and things like that?

The reason for it is sort of neither of those two things. The reason for it is that we think that as the board of directors that our shares were trading well, well, well below the implicit value of our equity and we thought it was the best use of the Company's cash at the time.

So that was the real reason for that. We actually have the ability to -- we're not up against any particular boundary line in terms of options and so forth, so I think the impact is going to be in the short term to take some of the shares out of circulation, but I think it's a relatively modest effect in that respect.

Okay. Mark, on the cargo opportunity, with the A330s going into Asia, it would have to give you an enormous amount of opportunity on the belly side. Have you thought about where -- I think it was 6.5% of revenue for the second quarter. Have you thought about cargo being a major contributor to revenue, like in the 7% to 10% range, or how are you thinking about that?

Well, I think you're exactly right. The A330 is for a number of reasons a much more able cargo carrier than the 767 is. If I could take you back a little ways in the history, Hawaiian used to offer DC-1010s, which couldn't take essentially any cargo at all. We therefore did not invest in our cargo product.

With the coming of the 767s, we got back into belly hold cargo but for a number of reasons we were pretty disadvantaged relative to the competition. We have, over the last couple of years, invested quite heavily in cargo. We've got a new cargo system which went live in March of this year, and we're still finishing out some of the last elements of that cargo system, which allows us to have a competitive product in terms of servicing the customer base.

We've now got the 330s coming in. We've got to build enough 330s to be able to make this a broadly available product to a wide range of destinations and a wide range of customers, and as we transition out of 767s and into A330s, we will definitely be focused on building cargo as an ancillary revenue source.

While we're not giving exact guidance of where that end state could be, I would say that it would be materially higher than our contributions are today.

Okay. Then just one other question -- with respect to the percent change in ancillary revenues, I heard the explanation for why they were down year-on-year. But can you say what percent of the decline is related to the change in the way you recognize when revenue is recognized versus actually being down because it was down? That was the most confusing way I could ask that.

I'll let Peter answer that question, but just in general terms the other sources of ancillary revenue -- [and i.e.,] those sources of ancillary revenue not associated with the change in accounting, they didn't go down at all.

Okay.

It was not a negative.

I think that really just answers the question.

Okay.

Unless you have the percent that's accounting --

I don't have the percent off the top of my head. I'll just point out a couple things. One, for us, Helane, as we said, baggage fees, and this was a difference from the way some of the other folks report it, we have the baggage fees hitting in our cargo line, so you do see an increase there that's primarily bag fee related, therefore ancillary related.

The two items affecting that other revenue line primarily were the change in the accounting calculation on the frequent flyer miles and the cancellation fees. Both of those I'd say are somewhat -- the numbers don't tell the whole story, I guess is how I describe it, because we actually generated more sales of frequent flyer miles. There's just being more of it deferred, and on the cancellation fee was also a change in the way we collect, but it's not a big difference in the total amount of money that's collected for that activity.

Got you, okay. Thank you very much, I appreciate your help. Mark, congratulations on your new contract.

Oh, thank you, Helane, that's very kind.

Our next question comes from the line of Steve O'Hara from Sidoti & Company. Please proceed with your question.

Hi. I was hoping, and maybe you mentioned this, but in terms of the guidance you gave I think it was mid-June, you were looking for 3.5% or higher increase in ex fuel CASM, what was the difference that kind of moved that below that, to 2.5%?

Well, Steve, the big -- really the difference was the receipt of this TSA refund, which -- were you talking about our CASM or our RASM? Sorry, Steve.

Yes, the CASM guidance.

Okay, on the CASM guidance it was the receipt of the TSA refund.

Okay. In terms of the competitive pressures that you are talking about, what are some of the levers you can pull, and is greater international flying one of the ways you can offset that move of capacity onto the island?

First of all, I think you've got to look over a couple-year period, and so much of what's happening in terms of the year-on-year capacity increase is a function of the fact that with Aloha and ATA going away, we had dramatic declines in capacity. So this represents a bounce back as opposed to absolute capacity growth looked at in terms of the long swing of the market.

But that having been said, one of the reasons -- taking a step back and looking at Hawaii as a tourism destination and as a tourism product, it's pretty clear that the lion's share of long-term growth is going to be generated by the Asia-Pacific region, which after all is the world's fastest-growing region, and strategically we have a fairly basic question, which is do we wish to participate in the fastest-growing sources of travel to Hawaii or not.

In order to get into that, we've gone and made a fleet transition to aircraft with greater range and greater carrying capability. We've obviously applied for Haneda and been awarded that, and Incheon we've announced. At the same time, if you look at the West Coast, where we have grown to be the number one carrier in that space and we still remain so.

We think that we know the market better than anybody else. We believe that we will continue to enjoy a leadership position in the marketplace. We believe that we will continue to be able to grow with that market, notwithstanding the fact that others want to come into this market in the meantime.

Okay, and then finally, in terms of the decisions maybe you made in the past in terms of adding capacity to the market at a weaker time and maybe waiting for yield to catch up, do you think you would make the same decision again, or do you think maybe you would have added a little more capacity aggressively and maybe taken the weaker position then and come out of it a little stronger now?

Well, if you look over the last few years, I don't think any carrier has come out as strongly as Hawaiian Airlines. I mean, we have I think started out by saying that we've got nine straight quarters, which -- and those aren't just any old nine straight quarters, they're the nine quarters in which most carriers lost hundreds of millions of dollars and cumulatively billions of dollars.

So I think looking backwards, I think we're extremely pleased with the decisions that we have made, and we have by and large got it just right. I think there are perhaps on the margins some things we'd have done if we could just create an airplane instantly and other things we might have done if we could make airplanes disappear instantly.

But the reality is that you've got about a 12- to 18-month timeline at least in making fleet decisions, and so you can't calibrate your decisions as quickly and as closely as the market moves up and down.

Sure, okay, that makes sense. Then quickly, what was the face value of your debt and then your capital leases together?

The debt is I think about $77 million on the two term loans, and I'll have someone check on the aircraft debt we have and a couple of other pieces. The capital leases are virtually unchanged; they're around $44 million. I think it's actually -- Steve, I can refer you to our press release -- $77 million under the term loans, $94 million under the floating rate notes that we have related to a few 767s that we acquired off-lease in 2006. Other notes payable is about $9 million, and then $44 million under the capital leases.

Okay.

They haven't really changed much during the period.

All right, great, thank you.

Great, thanks.

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

Thank you. Hi, guys.

Hey, Bob.

Just a couple of quick ones. Most of my questions have been answered. The RASM guidance of 4.5% to 7.5%, is that total RASM or passenger RASM?

Passenger.

Passenger? Okay. The other thing -- I'm trying to -- as I think back about where we were a year ago or whatever, I'm trying to think. The decision to break out and show the lower value of your hedges as a special item, it seems like we used to always include the pluses and minuses in your number and didn't exclude it before. Is this a change or am I just not remembering it right?

We did have, going back a few years, Bob, we did have some different hedge accounting. There's different allowable accounting under GAAP, and what we've chosen to do is to not go for the hedge accounting that lets you defer the gains and losses until you actually settle up.

We think it can be as clear -- hopefully it's as clear to just show it as being marked to fair value and then making it clear through disclosures around what the economic fuel cost was in that particular period.

But a year ago when it was a positive, did we call it a special item as a positive? It seems like we didn't when it was a positive, but now we are when it's a negative.

That's not the case, Bob, actually.

Okay.

I think we've been pretty consistent about how we show this since we shifted to having the hedges all be mark to market in the period. Go back to 2008. I think we may have changed the disclosure to make it a little more clear, but --

But when did we change the accounting? It's been 18 months, maybe two years?

Yes, I'm thinking it was 2008.

Okay. All right, I just couldn't remember when that happened. That's all I got, thanks. Good quarter.

Okay, thanks.

Thanks, Bob.

Our next question comes from the line of Kim Zotter from Imperial Capital. Please proceed with your question.

Hi, Mark and Peter.

Hey, Kim.

Hey, Kim.

So the addition of the Tokyo and Korea service obviously expands your international presence while at the same time diversifying your business. Now, do you have a target geographic mix you would like to achieve, and what is the international split currently?

Well, currently, not having started either Incheon or Haneda, our international share of our revenue base is around about 10%, so it's obviously small. That's clearly equally going to change when we get these new services in place.

It's hard to describe what the end state's going to be, because one of the things that I think many would point out is that companies need to be careful about how quickly and how rapidly they expand, and what we're trying to do is to pace our expansion to take full advantage of the growing market without at the same time switching on a whole new region at such a scale that it becomes unsustainable for us.

So I think what you're going to likely see is the addition of a new route with a frequency of roughly every year. Occasionally we'll have some special circumstances that allow us to grow more rapidly than that and I think that is going to drive very rapid expansion against the 10% base, but more modest expansion in terms of our overall capacity.

Okay, thanks, Mark. A question for Peter, if I may. Interest income looks like it's nearly double than what you posted in the first quarter, but the cash balance stayed roughly flat. Is there something else booked in there, or am I missing something?

There are some -- the way we treat the auction rate securities, where we've got the discount that's been recorded on that that accretes, we did have some positive in there that improved it. But no, we haven't found the special sauce that allows you to earn high interest rates on your cash holdings in this period, and if I figure that out I'll let you know.

All right, thanks. Thanks, guys.

You bet.

Our next question is a follow-up question from the line of Bill Greene from Morgan Stanley. Please proceed with your question.

Hey, guys, just two quick things. One, Peter, you've mentioned this frequent flyer liability adjustment that you guys recorded in the commissions line item on the income statement. What was the magnitude of that?

The change of that number, I think, is --

Just trying to size how big it was.

It is going to be less than $1 million, I think.

Oh, okay. Then lastly, we've heard you guys talk optimistically a lot about this east Asia expansion that you're getting with Korea and Tokyo, and you guys -- Mark, I think you mentioned that you expect it to actually spool up a bit quicker than the average new market. But we're just trying to figure out how to think about it from an impact on PRASM and profitability as you enter these places. Can you talk a little bit about your expectations there, how long until it's profitable, what sort of impact, given the sort of change in capacity, and the international flying it might have on PRASM immediately, et cetera?

I can't give you actual PRASM guidance and frankly, I think we need to go away and think about what we can communicate about that and share it with a bit more forethought. What I can tell you is that our expectations are that Haneda will be a contributor right from day one, and we believe that Incheon will be a contributor probably between its first anniversary and its second anniversary.

Okay, great. Actually, just lastly, you guys have talked about the hotel market in Hawaii a lot in the past. How are things shaping up there? On the way down, you guys mentioned that weakening hotel yields or pricing might actually help subsidize travel to Hawaii. As we sort of see a recovery, do you guys think that that actually might weigh against you, or do you see things differently?

Good question, Matt, and what I would say on that is we have not seen a material firming of hotel prices. Visitor traffic to Hawaii is still well down on the peak, which was 2007, so there's still quite a bit more head room before that effect, which you rightly pointed out I made something up on the way down, might turn and hit us on the way back up.

Thanks, guys.

Our next question comes from the line of Dominique Mielle from Canyon Capital Advisors. Please proceed with your question.

Hi, guys.

Hey, Dominique.

Hi, Dominique.

Hey. If you have extra cash, by the way, we have an excellent product for you (inaudible) --

We'll take that under advisement.

Yes, exactly. Can I have the CapEx number for the quarter?

Yes, CapEx was -- one second. CapEx during the quarter was $18.2 million plus another $5.3 million for pre-delivery payments.

Okay. The notes payable of $9 million, are these the IRS notes?

Yes, that's right. That was a settlement dating back to 2005 that had a fairly long payment tail. I think that note pays down bit by bit through 2011.

So the balance was $23 million in Q1, and it went down to $9 million? Is that right?

I don't think it was that much. I think that is going down on a pace of something like a little over $1 million a quarter. So the $23 million, you're probably thinking about the term loan A.

Okay.

-- or in that ballpark.

Okay. Lastly, on the share buyback, you haven't bought any stock yet, am I correct?

Well, we just announced the buyback right -- it was either the end of the month or July 1st, so we intend to update that on a quarterly schedule, as we normally would. We'll give you an update at the end of the third quarter on where we are on the share buyback.

Right, but you had a month, potentially, right?

It was right at the end of June where that was --

Oh, I see, got it. Okay, thanks a lot.

Okay.

Okay.

Our next question comes from the line of [John Reedon] from Crowell, Weedon & Company]. Please proceed with your question.

Hi, Mark, hi, Peter. Thanks for taking my call. I want to talk about the growth of the Company, and in particular the A330 deliveries. According to my notes from prior calls, you have another one coming in November of this year and one coming next year, is that correct?

That's correct.

Okay. Secondly, according to some prior comments, Haneda represents about 100,000 seats a year. Does that mean that Incheon, with two slots -- (technical difficulty)

John?

We lost his line, sir.

Okay, Operator. Perhaps we'll leave it for a minute.

Okay.

Just to answer John's first part of his call for the benefit of everybody coming in, we're taking deliveries in November and April. Before everybody thinks that these are all big net additions, we do actually have some lease returns. At the moment, if you look out a little longer on a longer term, we have 18 767s, we have two A330s. Over the course of particularly the next five years and actually the tail end of it will go on for almost a decade, we intend to replace those 18 767s with A330s.

The A330s we have on order are 10, so we actually still have additional A330s to source. As we work hard to make that happen, it's important that when people see announcements along that line they don't immediately jump to the conclusions that these are all additive to the fleet.

Not wishing to keep everybody on the line, Operator, I think we might conclude at that point, if Mr. Reedon is not yet back on the call.

Hold on one second, I believe he is. Let me just make his line live.

Okay, very good.

Mark?

Yes, sorry about that.

Yes, yes, okay. Come in, Rangoon. Speaking of Rangoon, I was looking at the -- the second question was, is Incheon also going to be about 100,000 seats a year?

Well at the moment we've announced four times a week service, and that's about I believe 58,000 seats -- 54,000 seats, excuse me -- each way. We would very much be intending to grow that service to daily as we think there are going to be real opportunities there. When we do, so it'll be more like 100,000 seats (inaudible).

Okay. Last question, for what has been the longest conference call I can remember for Hawaiian Air, the A330-200, according to Airbus' website, they come in various ranges, but they have a maximum range variant that is 6,750 nautical miles. Will you be taking delivery of any of the ultra long-range planes?

Well, the aircraft variant we have is the A330-200. It is not as long-legged as the A340. It is nonetheless an aircraft that has a longer range than the 767 that we currently operate. It gives us comfortable range with payload to get to certainly the East Coast of the U.S. We already have that capacity with the 767s. But it does get us to essentially the coastline of mainland Asia.

The A350 we take delivery of in 2017 will have considerably greater range and will actually carry a full payload from Hawaii, for example, to Europe.

Great. Thank you very much.

You're welcome. Thank you, everybody, for joining us today. With nine consecutive profitable quarters in our rearview mirror, we're working hard to make sure that we can extend this streak. We've taken this last few years to strengthen our business and our competitiveness in all of the key elements of our network, and this in turn has positioned us well, we think, to execute our strategy with respect to Asia.

We look forward to updating you on our progress on this front in a quarter's time.

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