Hawaiian Holdings Inc (HA) 2010 Q3 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings third quarter 2010 earnings 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, Shannon Okinaka, Senior Director of Hawaiian Holdings. Ms. Okinaka, you may now begin.

Thank you. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' third 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 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, we would 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 predicted 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 would like to turn the call over to Mark.

Thank you, Shannon, and thank you to everyone for joining us on today's call.

Well, we are pleased to announce our 10th consecutive quarter of profitability. Our results reflect continuing recovery in visitor arrivals to Hawaii, strong performance on our interisland routes, and solid gains from our burgeoning international network.

Competition remains robust across our key transpacific routes, but we are encouraged to report that increased industry capacity has met improved demand as the US economy slowly recovers from recession.

In June our first two A330s entered service, and during the third quarter these new aircraft flew a full schedule, with twice daily service between LA and Honolulu during July and August.

With the transition to our fall schedule in September, we are currently operating a single A330 round-trip on each of our Honolulu-Los Angeles and Honolulu-Las Vegas routes.

Operationally, the aircraft have performed every bit to our expectations, and more importantly, customer reaction to the new airplanes has been excellent, cementing our reputation of providing the best product and service between the West Western US and Hawaii.

As we move toward the end of 2010, our preparations for new service to Japan and Korea are continuing on schedule, and we are preparing for the arrival of our third A330 in November.

Before I provide more commentary on recent performance and discuss our outlook, I'll turn the call over to Peter to review the numbers for the quarter in a bit more detail.

Thank you, Mark. In the third quarter we reported GAAP net income of $30.5 million or $0.59 per share, compared to $30.7 million or $0.58 per share during the same period last year.

Our results during the period benefited from a discrete tax item related to the release of reserves for uncertain tax positions, the result of which was a credit to our tax provision of $5.7 million.

The EPS impact of this adjustment is about $0.14 in the quarter, which also includes the associated impact of a credit to interest expense that had been previously accrued on this tax reserve.

In last year's third quarter, our tax provision was even less intuitive, when we recorded a $20 million adjustment to our tax line.

As is our custom, we've provided non-GAAP adjusted results in our earnings release, which reflect our economic fuel costs for the quarter, which includes only those fuel hedge gains and losses that settled in the quarter.

On this adjusted basis, our net income for the quarter was $28.5 million or $0.55 per share, compared to earnings of $34.7 million or $0.66 per share in the prior-year period.

Combining both the economic fuel cost adjustment and excluding the tax items, our diluted EPS in the just-finished quarter would have been $0.41.

On a pretax basis, the year-over-year comparison on a economic fuel cost basis was $38.9 million pretax income, compared to $21 million last year, reflecting steady improvements in revenue and a good quarter from a cost perspective.

Operating revenue during the quarter was $352 million, up $46 million or 15% year-over-year on an 8.9% increase in capacity.

Passenger revenue per ASM came in 6% higher than the third quarter of 2009, with load factor for the quarter improving 2 percentage points to 86.9%, while yields improved 3.6%.

The capacity increase reflects increased flying this summer, as we took delivery of our two A330s before the peak summer season and were able to schedule some additional seasonal flying between Oakland and Maui, and San Diego and Maui.

Our non-passenger revenue grew at about the same pace as passenger revenue. 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.

We continue to see the year-over-year benefit of changes to our bag fees in the latter part of 2009, as well as the benefits of higher passenger levels, particularly on a transpacific line.

Consistent with the first half of the year, other revenue was lower year-over-year in the quarter, primarily attributable to two components of this line. First, the marketing component of our frequent flyer miles sales to third parties are lower in 2010 as a result of the shift of a proportion of these sales that we recognized in the current period relative to what we defer at sale and recognize over the period when travel occurs. The other drag on other revenue is cancellation fees, and as we've discussed, we've shifted our cancellation fees over the past year to the industry standard process of charging lower fees while collecting a fare difference on itinerary changes.

And partially offsetting these decreases was an improvement in our charter revenue as a result of our NFL charter operations.

Moving on to the expense lines, our biggest variance continues to be fuel, although the year-over-year increases were smaller in the most recent period than we saw in the first half.

On the operating line we saw an increase of $16 million in fuel expenses. Our fuel consumption was about 37.5 million gallons, up 5.9% from last year, while our price per gallon at $2.25 was about 16.6% higher than last year's $1.93.

During the second quarter, economic fuel cost per gallon, which includes the portion of our hedging gains or losses related to contracts settled during the period, was $2.28 compared to $1.91 in the same period last year.

Excluding fuel, our cost per ASM decreased 1.6% in the quarter.

Now, at the beginning of the year, we had suggested to investors that CASM ex fuel would be challenged in the early part of the year but that we anticipated better year-over-year performance in the second half. And I'm pleased to be able to report that we delivered on that expectation in the third quarter.

Salaries and benefits expenses were up 7.8% in the period, reflecting increased capacity, the impact of the new labor deals which have been in place this year, and some of the productivity challenges associated with transitioning to a new fleet, offset in part by the economies of scale associated with growing our business, and our efforts to improve productivity across the operation.

Maintenance expenses were a bright spot during the period, declining $7 million year-over-year in the third quarter.

I should note that last year's third quarter was inflated by a couple of engine overhaul events on engines that are not part of our power by the hour programs. The absence of any similar engine overhaul events this year accounts for about $5 million of the difference between the two periods.

Aircraft rent expenses increased $4.2 million in the third quarter, with our two leased A330s pushing the number up, offset in part by lower supplemental rent, engine and parts rentals.

Commissions and other selling expenses increased disproportionately to our other expense lines in the quarter, so it's worth spending a moment explaining the changes.

Most of our commissions are incurred on international flying, and our revenue increase here was substantially higher than our system average, explaining a significant piece of the variance.

We also record adjustments to our frequent flier liabilities on this line. And the value of this liability is a function of the variable cost of flying a passenger, which in turn fluctuates with the price of fuel. So we are prone to volatility on this particular line as the forward fuel price moves up and down, and the rise in fuel prices at the end of the quarter resulted in an increase in the liability and a commensurate charge to expense.

Turning now to the balance sheet, we ended the quarter with $316 million in unrestricted cash and cash equivalents and another $34 million in restricted cash.

CapEx in the quarter was $6.4 million, in addition to which we made progress or pre-delivery payments of $28.9 million related to future aircraft and engine deliveries.

In the remainder of 2010 we expect CapEx of $6 million to $8 million, plus another $19 million for PDP.

We also contributed approximately $12 million into our pension and benefit plans during the third quarter, bringing year-to-date contributions to $37.5 million, which more than satisfied our required contribution for calendar year 2010.

We currently anticipate required contributions for 2011 to be about $10 million, a substantial reduction from this year's level. This number is of course subject to change based on year end valuations and actuarial calculations.

Our intention is to meet some of this obligation before the end of the current calendar year, but the pace of our contributions will moderate somewhat, now that we have ascended the summit of our 2010 commitments.

One balance sheet item of note during the period was the sale of the remainder of our auction rate securities, which was effected by a couple of transactions. The first and smaller of these was the receipt of $4.1 million through annual sinking fund payments at par. And the second was through an agreement to sell the remainder of our securities at a small discount, relieving the liquidity overhang associated with these investments.

Both of these transactions were identified as subsequent events in our second-quarter 10-Q.

In July our Board of Directors authorized a stock repurchase program under which we could repurchase up to $10 million of our outstanding common stock through the open market, established plans, or through privately negotiated transactions. We were active on the program during the quarter, and as of September 30 we repurchased approximately 1.9 million shares at a cost of $10 million.

One final note with respect to the balance sheet -- we are 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, and we look forward to providing further clarity on this in the weeks ahead.

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

Thank you, Peter. Having navigated 10 consecutive quarters of profitability during a turbulent time in the airline industry, our company continues to grow stronger and is well-positioned to embark on the next step of our expansion into Asia.

Service to Tokyo begins in less than one month, and our inaugural flight to Korea follows quickly in its wake in early 2011.

Consistent profitability has allowed Hawaiian to remain focused on executing our long-term strategy, and although we are yet to start either of these two new services, we could not be more pleased with the timing of these developments.

Our employees, as you've heard me mention before, deserve the larger part of credit for our performance. I am truly fortunate to have a long and deep pool of committed coworkers who, each and every day, deliver a level of customer service to our passengers and to our shippers that is unmatched by our competitors. In a business where the difference between success and failure is measured in narrow margins, their commitment to our business truly is the magic ingredient.

I spoke extensively about our outlook for our new Asian services during our last call and look forward to speaking to many of you next week when we host an investor day in New York, at which point we will have some time to elaborate even more fully on this opportunity. So rather than delving deeply into this subject on today's call, I will focus most of my comments on the parts of our business which today account for 90% of our revenue base.

Our interisland roots in the third quarter continue to demonstrate the solid revenue performance seen throughout the first half of the year. This contrasts to last year at this time, when Mesa's Go! and Republic's Mokulele were jousting to determine which airline would become the islands' second carrier. This resulted in an unsustainable environment of overcapacity and promotional pricing.

This year, with supply and demand in relative balance, we have seen stable pricing and higher load factors. The net result is the strong rebound in passenger revenue per ASM and a significant improvement in overall economic performance on these routes.

More specifically, our interisland load factors in the quarter were up over 4 percentage points, while our passenger revenue per ASM improved by over 30%.

We remain the best positioned carrier across these key interisland routes, providing the best schedule, the best fleet, and the best service between the islands of the State.

Continuing on the trends of the first half of the year, the revenue performance of our transpacific routes has not been nearly so good. On a year-over-year basis, our PRASMs declined about 3%, consistent with the year-over-year performance we reported for the second quarter.

As we noted last quarter, while this number is clearly very different for the year on year numbers being reported by our competitors for their domestic networks, it is important that the raw numbers are viewed through the lens of the vastly different circumstances this time last year on the West Coast to Hawaii routes and the other domestic routes.

Unlike most of our competitors, who reported substantial losses last year, Hawaiian had a good 2009 on the back of a surprisingly mild slowdown in demand for Hawaii vacations. In fact, the decline in US West Coast to Hawaii revenue per seat mile for all of last year was a remarkably modest 5%, considering the state of the economy.

During this period, demand in other markets with their much higher exposure to business traffic was down substantially more.

It is not surprising, therefore, that both the recovery in demand for our transpac market is less dramatic than in other markets and that airlines have belatedly reacted to the good conditions of last year by adding capacity this year.

To illustrate the capacity difference, seat growth between the Western US and Hawaii grew 13.5% in the third quarter, as compared to a growth of 0.5% in the contiguous 48.

Nonetheless, we have been encouraged by the strong demand for our service and for travel to Hawaii in general. And our revenue performance was in line with the expectations we had entering the period.

Forward schedule information suggests that we will see the peak in industry capacity increases in the fourth quarter with capacity rising on the order of 18% between the Western US and Hawaii.

Based on what is in the schedule databases today, we currently expect increases of 13% and 3% in the first and second quarters of 2011, respectively.

The good news lies in the fact that visitor arrivals to Hawaii are growing and have not yet reached the peak level experienced in 2006/2007. Arrivals from the US West Coast rose 8.4% in July and August, and we expect a similar number to be reported for September.

The growth in transpacific capacity remains a challenge, but our bookings for the fourth quarter are building strongly and are higher at this point than they were a year ago.

Our growing international business continues to post solid revenue gains in 2010, and we've recently added a fourth weekly frequency to our Sydney service in response to strong demand.

Before I turn the call over to Peter to update you on our fourth-quarter outlook, I want to discuss a development with respect to our fleet that we announced in August.

We were able to seize an opportunity to move up a delivery that had been scheduled for the back half of 2013 to October of 2011. We have two 767s scheduled for return to their lessor next year, and before this transaction, therefore, we had only a single new A330 scheduled to enter the fleet during the year.

Given our new service to Japan and Korea, the timing of this opportunity was fortuitous.

I am particularly pleased that over the past few years we have built the financial strength to be able to seize an opportunity like this without unduly straining either our finances or our operations. This ability to be nimble and responsive is one of the key competitive strengths of our business today.

Now let me turn the call over to Peter to update you on our fourth-quarter outlook, before we take your questions.

Looking to the fourth quarter, we expect our capacity to increase 9.5% to 11.5% compared to the same period in 2009. Roughly 3.5 percentage points of this increase relates to the introduction of Tokyo service in mid-November, with the remainder of the difference attributable to the availability of our two existing A330s throughout the quarter, and the third, from about the middle of the quarter on.

We expect fourth-quarter load factor to increase about 1 to 3 percentage points, with yields between down 2% and a 1% increase.

The sequential reduction in yield growth is primarily attributable to a tougher year-over-year comparison on our interisland routes, where we started to benefit from improved results in the back half of the fourth quarter of 2009.

In total, we expect our passenger revenue per ASM to come in about 1% to 3% higher compared to the fourth quarter of 2009.

On the cost side, we continue to expect a modest change in CASM ex fuel performance, albeit without some of the year-over-year benefits on the maintenance line that we benefited from in the third quarter.

In that light, we expect our fourth-quarter year-over-year change to be in the range of down 1% to up 2%.

Fuel prices remain higher than last year's levels, and unfortunately they are a fair bit higher today than they were through most of the third quarter. Given the volatility of the fuel market, consistent with our custom, we aren't giving any specific price guidance at this time.

We do expect our fuel consumption to be 5% to 6% higher year-over-year in the fourth quarter as a result of our capacity increase.

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

(Operator Instructions). Bill Greene, Morgan Stanley.

I'm wondering if we can talk a little bit about your growing footprint in Asia combined with an increase in some of this transpacific capacity. Do you think it makes sense to maybe think about joining a global alliance at this point? Perhaps that could blunt some of that growth from the mainland and augment your revenues to Asian destinations.

It's a good question. We do look at whether or not it is in our long-term interest to join an alliance periodically. We look at it periodically.

So far we've determined that the costs would outweigh the benefits. But it is a changing equation as we see the development of our industry move in a pro-alliance way.

You will note that we have recently signed arrangements with ANA, with Korean Airlines. We have got Delta now code sharing with us interisland. These are all developments in the last few months.

I think it is reasonable to say that while we compete against all of these carriers, many of them also see a fairly unique role that Hawaiian and Hawaiian only can perform in this marketplace.

I'd only finish up by saying that we are seeing a lot of capacity coming into the transpacific markets. We are very close to what appears to be a high water mark. We have talked about the first and second quarter of next year, see a declining rate of growth in capacity. And throughout this our transpacific routes have been important contributors to our overall success. So obviously not as important as they were last year, but we are not in a position where we are suggesting that these are routes that are a problem in our portfolio.

So it's interesting. So if you have some interest from some of your peer airlines to code share with you on certain routes, and obviously the US mainland carriers have certainly found the Hawaiian market to be attractive enough to at least add some capacity, does it sort of follow that there would be interest from any of them in perhaps either equity ownership or even a more strategic move? In other words, have you had solicitations of interest from any of them to have a more significant ownership or even outright ownership of Hawaiian?

Well, obviously I can't comment on that directly.

What I can tell you is that we are very clear sighted, the management of Hawaiian, as to what we are trying to accomplish here, which is we want to run a business that is successful in its own right so that whether or not it is of value to an alliance or of value to another company from the perspective of merger, that regardless of whether that is true or not true, we have the ability to move forward under our own steam and maximize the returns to our shareholders.

Okay. I just have a couple of detail questions. Just as we think about the new markets you will open in Asia, how does that affect stage length at the overall enterprise level?

Yes, it's certainly going to affect it. It's sort of interesting to note that we've got getting on for 200 flights a day interisland, and the total ASMs flying interisland is -- I'm looking at Peter here -- it's about the same as our international ASMs, which is barely a couple of aircraft's worth of flying (multiple speakers)

It will be less next year because interisland is going to be less than our international from an ASM perspective, although we will have to do quite well on our revenue line for interisland to beat -- to lose the crown to the international.

And I think the point there is that we are an airline that has operations at either extreme of the -- of range. We have this large short-haul operation -- very, very, very short-haul operation -- and we have a relatively small but fast-growing very long-haul operation. And that will play with the statistics.

Okay. And then on -- Peter, you mentioned the pension contribution. But I didn't catch it if you mentioned pension expense for 2011. Do you have an early read there?

I don't have that at my fingertips right now. I think we've got some sense of it, but that piece is actually even more prone to some of the adjustments at the end of the year because I think it's going to be affected by the discount rate. So let me get back to you on that one, Bill.

Okay. And then just one last one detail one just here on the booking curve. Mark, you mentioned that it's up year-over-year. But how does it compare to years prior to 2009? If we look back kind of maybe even to 2007, is it sort of normal or is it sort of down from even what we would suggest would be more normal years prior to 2008, 2009?

Given the choice between normal and down, I would say it's normal, so it is certainly normal.

Okay. Thanks for the time.

Michael Linenberg, Deutsche Bank.

Just a couple of questions here. Peter, on the pension, I wanted -- I just -- your contribution this year you indicated was I think $35 million, and I think that was above and beyond what you had to contribute. And then you said next year it is going to be around $10 million. Why is that so much lower? I mean, you would think that as you adjust for a lower discount rate there would be some negative impact there. But maybe your plan had some very good years in the returns on assets. How should we think about it? What's driving that?

Well, there's a number of things that drive it. We did -- we obviously had a not very good year in returns in 2008. And that drove some of what was required for plan year '09, which ends up rolling into calendar year 2010.

And then we had a better 2009 in terms of asset returns, and so that helped bring the number down in the subsequent year.

Plus there are, through the vagaries of some of the calculations, there are some quarterly requirements. So some of what we've made in the calendar year this year is actually for -- it was plan year '10 and calendar year '10, and if I haven't confused you yet, I'm sure I'm getting close.

But suffice to say, this was -- as we look at it, was a peak year, absent another really distorting event in the market. As we run scenarios of various different market outcomes and discount rate outcomes going forward, we don't see a high likelihood of returning to a peak like this going forward.

And as I think you know, Mike, our -- we have -- most of our pension plans are frozen. We've got one plan that is not entirely frozen, but the population of our pilots who are continuing to accrue benefits under that plan is declining over time. So we don't think we will see another year like this in terms of required contribution.

Okay, that's good and definitely a pleasant surprise.

My second question, just Mark, you talked about the customer acceptance of the A330, and you sort of said that -- I think you dictated it was probably the best product between the West Coast and Hawaii. And I'm curious if you are actually seeing that in the fares. And I think you are sort of uniquely positioned where you have some of your markets like LA-Honolulu, where you have the A330 flying side-by-side with the 767-300.

And I realize there's a bit more capacity on your A330s. But as you look at anything at least anecdotal or anything that you can see that -- where maybe people look in the schedule and paid more for the better product? I mean, what -- is there anything you're seeing on it that you can share with us?

First of all, I would just say with real confidence, it is the best product flying from the West Coast to Hawaii. And that's certainly the feedback that we're getting.

I think where we see the value of it is that people tend to look out for the A330 operation, book to it, and that helps us move up the revenue management curve that way.

So the fares are actually the same, the fare levels are the same, but we have had the 330 book up really very, very nicely indeed. And there's a lot of word-of-mouth from this community.

Harder to get word-of-mouth in a community as large as Los Angeles, but in a community like ours, the word-of-mouth is certainly out there.

The last thing I would mention is that it's really helping us on the cargo line. It is an aircraft that has much greater cargo capabilities than our existing aircraft, and as we look to the future of our business, we've made some very heavy investments to improve our cargo products. The A330 is part of that, and that's going to be a big focus as we move forward.

Okay Mark. And then just one last -- if I could just squeeze in one last one, you've had the Haneda route out there for sale for the last month. What is the early read? And then sort into that, or incorporated into that is the fact that the point of sale is nominally on the Japanese side. Are you seeing just a better fare or better mix, given that the yen is at a 15-year high vis-a-vis the US dollar?

Yes. First of all, let me say that I think the early bookings on that flight have been very promising indeed. I'd caveat that ever so slightly as we haven't yet operated our first flight, and so we're always a little cautious, but -- about declaring victory before we've even operated our first flight.

But certainly against our internal expectations for this stage, bookings are extremely strong. That's number one.

Number two is, absolutely the strength of the yen has certainly helped our revenue outlook on this flight. The overwhelming majority of our costs of course are denominated in dollars, and you're right to say that the perhaps equally overwhelming in opposite direction revenues are in yen. So the change in the yen/dollar exchange rate has been extremely beneficial.

Okay, very good. Good job this quarter.

Helane Becker, Dahlman Rose.

So just on Hawaii in general, I noticed that out of the tourism board some of those numbers you cited, but also visitors from Canada have been increasing pretty dramatically. And I don't know if you have plans with the A330 to go up to that market, but I wonder if you could just comment about that opportunity.

And two, I think given what's gone on in Mexico recently with respect to just the concern that the US has indicated that people travel there, there's been a shift in West Coast flyers from Mexico to Hawaii, so maybe you could talk about if you're seeing that as well.

Okay. Well, first of all, Canada -- I think Canada is an increasingly attractive prospect. It is something we are looking at. We are currently not at this stage committing to grow there.

I would say that in general international destinations are likely to look increasingly good if you're a believer in the fact that the US dollar current weakness is likely to remain or indeed get worse. It is clearly the case, as I mentioned a few minutes ago, most of our costs are in dollars, and when we fly overseas, most of our revenues are in the overseas currency.

With respect to Mexico, it's a little hard to draw the thread all the way through some of the difficulties Mexico has had and the results on Hawaii.

But I would sort of reiterate that it was fairly extraordinary last year that the middle of a pretty devastating recession that sent every other carrier into loss-making territory, we actually posted our best year ever in terms of financial results. And that was clearly on the back of a surprisingly strong demand, considering we were in a recession. Some of that must have -- surely have been driven by Mexico.

I think I would add on top of that the observation that it is not often that you're confronted by markets where you see capacity grow 13% up year over year, and notwithstanding that, we have seen demand for our services grow. And we have been able to keep our transpacific operation as an important contributor to our overall profitability.

So I can't quite connect the dots directly, but it certainly is the case that demand for a vacation in Hawaii has been a remarkably robust story over the last two years.

Right. Well, I've seen that, too, in the monthly numbers, but also I'm wondering if with some of the other airlines, have been announcing increased competition -- or increased service to Mexico again, if that might not help kind of alleviate some of the transpacific capacity growth that you guys are seeing. So that may bear watching.

On cargo, so if we think about bag fees and cargo lines, how are we going to get a sense of what the cargo revenue growth is going to be from using the A330? We you be able to give us a sense of what those numbers are?

I think the answer to that is yes. We are not quite at the point yet where we can speak with the level of confidence we would like to. But clearly as we look forward -- I mean, we have only got two A330s at the moment. We've got a third one coming in November. We've got another one coming in the spring.

So in the next couple of quarters I think we are going to be able to lay out for you and for everybody a sort of roadmap around our cargo plans and strategy.

And clearly, when you're operating wide-body equipment on the transpacific market against narrow bodies, you should be able to generate not only a unit cost advantage, which we believe we have, but also because we can carry cargo and they can't, a unit revenue advantage looked in the totality as well. And that is clearly part of our game plan.

Okay, great. And just for Peter, two questions. One, on the taxes -- is that whole tax situation something that we always have to think about for the third quarter?

And two, when is the correct share count then for the fourth quarter?

Let me talk about the tax item first. This is a relatively unique item. This is a tax item that we had claimed in a prior year that was classified under FIN 48 has an uncertain tax item. The statute of limitation simply expired on it, so that is a fairly discrete thing.

There is one other one, as you will see when you get our 10-Q. You will see in the tax footnote that there is another one out there for a different year on our income taxes that is a smaller amount. But it is not something that is annual or recurring in any sense.

Okay.

And in terms of the share count, let me just see if we can get that one. Maybe we can go on to another question, then I can get you a share count. You were looking for the share count at the end of the quarter?

Well, no. I have the share count at the end of the quarter. I'm just kind of looking at the 1.9 million shares that you've bought back have to come in. So I am looking for the fourth quarter share count.

Okay. Well, the end of a quarter number should be about right. But let me just make sure we've got that one. We'll come back to that one.

Okay, that's fine. Thank you very much and will see you next week.

Kim Zotter, Imperial Capital.

So based on your current delivery schedule and your moving up an A330, could you give us any color on your longer-term capacity growth plans for I guess next year and beyond? And how much of that would be attributable to your Asia expansion?

Okay. I will -- let me answer it in general terms, and then Peter has got the actual numbers I believe to -- on the capacity growth.

If you -- as you think about our business, I think you are right to think about Asia as sort of separate. I think our general philosophy is to have good capacity discipline, meaning very modest growth on the routes that we already serve domestically, which we think is right, given the nature of the economic recovery and the positioning.

So I know that many people who follow the airline industry, one of the very important things for them, and I can certainly understand why it is the case, is capacity discipline in the domestic marketplace. We intend absolutely to be -- we share that view, and we intend to be responsible participants.

At the same time, we think there is real growth opportunity in markets which today aren't really well served. And there we are going to see very high rates of growth but off a very low base.

And so it is important if you -- considering Hawaiian Airlines that you think of our blended growth number as being -- as comprising those two rather distinct elements.

And let me see, have we got -- Peter, have we got the actual numbers on that?

We are just -- we are looking for the capacity number. Let me give the share count number that Helene asked about. Share count is right about 50 million shares right now, and the fully diluted number of course can vary a little bit because, based on the average share price during the quarter, which affects which shares count in dilution.

And Kim, we will get you the -- a capacity range for next year.

Okay.

Okay, we'll take the next question.

Okay. So also -- so you mentioned in your release a reduced level of engine overhaul expense in the third quarter. Now, was that as expected? Or were there any events that were pushed into the fourth quarter, I guess meaning should we expect maintenance expense to be sequentially higher in 4Q?

That was as expected, and let me just explain a little bit what these are. When -- for the engines that are not on power by the hour programs, when we have a requirement, either because of time on wing or the engine hits certain operational limitations, to do an overhaul, that is expensed as incurred. So we will take the full overall expense at that point in time.

We can't always predict when those are going to come up. We happened to have an unusual circumstance last year where two of the engines that weren't in power by the hour programs went for overhauls during the same quarter, and it obviously was a big [ball of] expense in that quarter on the maintenance line.

We didn't expect any in here. You can't always predict when one is going to come up. So it can rear its head in the next quarter, but there's nothing that we've pushed there systematically.

And about next quarter? Is that a part of Kim's question?

Repeat that of a part, Kim?

No, I was just wondering if any events are kind of pushed into the fourth quarter. So would --

Yes.

-- fourth quarter sequentially be higher than third quarter?

There is not anything on that line that is driving into the quarter.

So nothing planned, but engine events happen, and then we would have to expense it at that time.

Okay. And then lastly just a -- more of an accounting question. Earlier in the quarter you mentioned that you had received a litigation settlement from LAX. Where was that booked? And I guess is that included in the special charges that you cited?

No, the LAX settlement was -- effectively what we have done is sold our interest in LAX Two Corporation, which was the entity that owned or leased the -- paid the ground rent on Terminal 2 in LA and operated the facility.

That has now been -- with the settlement of the various legal issues that were outstanding, we've turned that ownership of the -- and control of the facility over to LAWA in Los Angeles.

As part of that we received a $9 million settlement. That $9 million, although we've received the cash, we entered into contemporaneously a new lease at the airport that goes out I believe seven or eight years. We will effectively accrue the benefit of that $9 million gain over the term of the lease. So we'll treat it as a reduction in lease expense over the term of the lease.

Got you. Okay, thank you.

Glenn Engel, Bank of America.

Can you go over -- you were kind enough to give the transpacific capacity. Can you go through the interisland capacity growth and what it was in the third quarter? And what it looks like in the fourth quarter?

Okay. Well, we will pull those numbers out. Peter, have you got them right there?

Yes. In the third quarter I am showing that interisland capacity year-over-year was down about 18% and in the fourth quarter will be down about 10%.

And that does reflect next year?

It flattens out next year, yes.

And that just reflects the kind of lapping of the moment when Go! and Mokulele came together.

And can you talk about -- you talked about the West Coast arrivals to Hawaii being strong. What's happening to the Japanese arrivals over the summer and the non-Japanese Asian arrivals?

I don't have exact statistics on my fingertips. I can tell you that it's been very, very strong indeed and at almost every level. The carriers currently operating in the marketplace I think will be thinking that this has been really very, very good times for them. And again, I couldn't be more pleased with our own [plans].

Finally, you talked about the last quarter a change in yield tactics. Got more aggressive. Can you just talk about how that played out in the quarter and how you are approaching this quarter?

Sure. You are exactly right. For those -- for the rest of you on the call, last quarter one of the things we observed is that we held back inventory for higher yields, and in hindsight we probably held back a little bit too far. Of course, these things are always clearer in hindsight.

I think this quarter, we had more of a balanced approach, and I think we are pretty pleased with the decisions that we made.

As we look ahead into the fourth quarter, we are making decisions on a market by market basis. When we look at the capacity picture, we've said that overall it's going to be up about 18%. It actually varies quite a bit market by market, and we are making decisions market by market.

So some, we are sort of opening up the inventory relatively soon and relatively early. Some other markets, we are holding back.

One of the things we're clearly cognizant of is that the fourth quarter has a bunch of holidays in it, and holidays are -- in good years and bad are traditionally periods of time where you can sell last-minute inventory at decent yields.

Thank you.

Steve O'Hara, Sidoti & Company.

Yes. I just had one question about the capacity, the -- I guess the industry level of capacity. How much of that increase is in your exact markets? Or is that just an overall increase in capacity to the islands?

Well, most of it -- it depends how you define our exact markets. Most of it is coming out of cities we serve -- not all, but most of it. And most of it is going into the neighbor islands in markets that we -- so we don't serve the exact routing. But clearly if you look at, for example, Sacramento to Maui, we do fly people from Sacramento to Maui every day. We connect them here in Honolulu. So when a competitor goes Sacramento to Maui non-stop, it is competitive. It's not exactly in the same route. So most of it is in origin cities we serve but to neighbor islands.

Okay. And maybe you touched on this, but I guess the other question is, with the new Japanese routes starting up, what is your visibility like at this point? And when did that start to improve?

Well, it is inevitably the case that no matter how much preparatory work we've done -- and we've done a tremendous amount of preparatory work -- we are going to discover things about the marketplace done through actually operating there and flying there.

As I say, all -- at the moment, as we do with every route, we have ramp-up assumptions. We never assume that a route is going to optimized day one out of the bag. And according to our assumptions, Japan and Korea are already well ahead of our ramp-up assumptions.

I think we are going to get greater visibility into these markets not at an instant point in time, I think it's going to grow over time. And -- but I think probably 3 to 4 months into operating this route, we will have learned a tremendous amount more about how demand is actually realized and what some of the travel patterns are.

Okay. And then I guess, I think in the past you had stated that you kind of thought it would be -- Japan would be abnormal in terms of its ramp-up, and I think it was almost expected to be profitable in the first year. And Korea was more of a -- South Korea was more of a normal ramp-up. Do I have that correct? And has that changed at all?

You have that correct. That was the sentiment that we expressed earlier. I think the only thing that has changed is that we are sort of (technical difficulty) for this early stage, we are ahead of plan in both circumstances.

Okay, great. Thank you.

Bill Greene, Morgan Stanley.

Just a couple of follow-ups. On the interisland question, I am just sort of curious what the framework looks like or why you think we haven't had any new competition there, particularly in light of the RASM. Historically this has been sort of an irrational market. What are sort of the things we need to watch for if there is going to be a new entrant there?

Well, I think it's significant that we have had new entry in the past, and none of them I think would claim that they have been successful. None of them have I think returns of the cost of the investment of moving into this marketplace.

And the reason for it is very, very straightforward. Unlike all other markets that you would be familiar with in the continental United States, the interisland marketplace here is not prone to stimulation.

The so-called Southwest effect -- and of course Southwest sort of pioneered this, you'd fly it then, and you'll draw people off the roads -- it doesn't apply here because there aren't roads between the islands of the State.

And so what new entrants who come here have discovered is that they really can't get more people to fly because it is the only means of transportation between the islands as it is. That is the first thing that they discover.

The second thing they should discover is that it is a market that is already extremely well served. We operate 24 times a day between Honolulu and Maui, for example. So we have a very good pattern of service. Our product is very good. We've got a good relationship in the community.

We can never stop somebody coming into the marketplace for a look-see, but certainly history suggests that it is not a successful strategy.

Okay. Then you've had some time now to ponder Allegiant's coming into the Hawaiian market. So how are you thinking about the strategy for competing there? And maybe you can just touch upon sort of the ancillary question that sort of immediately follows that, sort of how do you make those grow faster? Is that a part of the strategy?

Well, in terms of the Allegiant coming in, Allegiant obviously announced that they are coming into the marketplace. They are still working through, we understand, their certification issues before they can arrive here. We would expect that they will get through that.

We compete as it is with all of the major airlines directly except for Southwest. I don't think there is a more competitive marketplace. And the reason that we succeed in spite of this is because we understand our (technical difficulty) [marketplace] better than our competitors do.

Allegiant I think will join that roster of competitors. They do have a different model. We are doing really two things about it.

One is we are obviously watching to see how they are likely to develop demand for the Hawaii vacation. Their existing model on Las Vegas, if you kind of overlay it on Hawaii, suggests that they will be flying to markets that we don't currently serve. But obviously they haven't announced where they are going to be flying from, so it's not clear to us whether they will be keeping to that.

But that one -- if that is true, that's going to somewhat dull the effect.

The second thing I would say is that we are looking at ancillary revenues. And rather than running sort of headlong into the ancillary revenue world with a sort of sticky tape and string approach to trying to exploit ancillary revenue opportunities, we are actually taking a more fundamental look at our systems, at how it would -- delivery and fulfillment and so forth.

We'd obviously like that work to go more quickly. We would like to be further along than we are today. But we are absolutely committed in this direction, and the presentations I've had recently give me every optimism that our ancillary revenue product, when we are ready to push it out the door, will be very competitive.

Okay. Thank you for the time.

I would now like to turn the floor back over to Mark Dunkerley for closing comments.

Okay. Well, thanks everybody for joining us today. Having booked our 10th consecutive profitable quarter, we are looking forward to posting a strong finish to another successful year.

I do hope that many of you are going to be able to join us in New York next week for our investor day, when some of my colleagues in management will be joining me in presenting a more extensive review of our business, our strategy and our prospects moving forward.

So with that, again, thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Think of your participation.