Hawaiian Holdings Inc (HA) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings fourth quarter and fiscal year 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. Thank you. You may now begin.

Thank you, Joe. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' fourth quarter and full-year 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, 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'd like to turn the call over to Mark.

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

The results we released earlier today continue Hawaiian's strong financial performance throughout 2010, and conclude a third straight year of profitability. Our performance in the just completed quarter reflects our ability to adapt to higher fuel prices and industry capacity expansion across our transpacific routes.

At the same time, we've had our eyes focused forward during this period, with important developments in a number of key strategic initiatives. Since our last quarterly conference call, we've launched two new international services -- the first, a daily service to Tokyo-Haneda from Honolulu and, more recently, a four-times-per-week service to Seoul-Incheon.

We took delivery of a third A330-200 and expanded our firm orders with Airbus to include a total of 13 deliveries between 2011 and 2015.

And we've completed an important refinancing, establishing a four-year revolving line of credit and paying off the balances of our soon-to-be-maturing term loans.

Peter and I will review these items in more detail over the course of today's call, while also looking back on the recently completed fourth quarter.

As we look forward to 2011, the successful execution of our Asian expansion strategy will be an important focus. At the same time, we're not taking for granted the strong competitive position that we've established across our transpacific and interisland networks.

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

Thanks, Mark.

In the fourth quarter we reported GAAP net income of $70.6 million, or $1.36 per diluted share. As was the case in the fourth quarter of 2009, we had an unusual tax benefit during the quarter, which overwhelmed the results for the period. And so, let me address that up front, after which I'll generally talk about our performance, excluding the tax benefits.

Since Hawaiian Airlines' emergence from bankruptcy in 2005, we have maintained a valuation allowance on deferred tax assets, as is customary for a business in that situation until it reestablishes a track record of positive financial results. As a result of our improved financial performance over the past few years, we've judged it appropriate at this point to remove the valuation allowance in its entirety.

Last year in the fourth quarter we had released part of the allowance, contributing to the unusual tax benefit during that period. The removal of the valuation allowance resulted in a $56.9 million credit to our book income tax provision, or $1.10 per share in this year's fourth quarter.

Importantly, I should note that the removal of the valuation allowance affects book taxes only. It has no impact on our tax returns or the cash taxes that we pay.

Excluding the tax benefit, we would have reported net income of $13.7 million during the period, or $0.26 per diluted share, compared to $10 million, or $0.19 per share, in the same period last year.

Adjusted further to reflect economic fuel expenses, our net income would have been $11.3 million during the period, or $0.21 per diluted share, compared to $10.5 million, or $0.20 per share in the same period last year.

With the valuation allowance removed, we expect to have a book tax rate between 40% and 42% in 2011. And also, since we've now removed all of the valuation allowance, instead of a partial reversal like last year, we do not expect a further adjustment of this nature at the end of 2011.

Operating revenue during the quarter was $344 million, up $47 million, or 15.7% year-over-year on an 11.7% increase in capacity.

As we discuss this quarter's results and our plans for the coming year, it's important to note the impact of our new international services on our ASM statistics. A third of the 11.7% ASM increase in the fourth quarter is attributable to the introduction of Tokyo-Haneda flying, which didn't commence until mid-November. The long stage lengths of these new services have significant leverage on our ASM statistics.

Passenger revenue per ASM came in 4.7% higher than the fourth quarter of 2009. Load factor during the quarter improved 1.2 percentage points to 85.7%, while yields improved 3.2%.

Our capacity increase for the period reflects the availability for the full quarter of two A330s, which entered our fleet at the beginning of the summer, and a third, which was delivered in November of this year.

Moving on to the expense lines, fuel remains the biggest year-over-year variance. On the operating line, we saw an increase of $19 million in fuel expenses. Our fuel consumption was 36.7 million gallons, up approximately 8% from last year, while our price per gallon at $2.44 was over 17% higher than last year's $2.08.

During the fourth quarter economic fuel cost per gallon, which includes the portion of our hedging gains and losses related to contract settling during the period, was $2.45, compared to $2.05 in the same period last year. Excluding fuel, our cost per ASM decreased 1.4% in the quarter.

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 we anticipated better year-over-year performance in the second half. And I'm pleased to note that this is exactly what has come to pass.

For the full year, our CASM, excluding fuel, came in 3.2% higher than 2009, which is a couple of percentage points better than we anticipated at the beginning of the year.

Salaries and benefits expenses were up 11% in the quarter, reflecting additional headcount needed to cover our expanding operation. The impact of the new labor deals, which have been in place this year, and higher year-over-year profit sharing expenses, offset in part by the economies of scale associated with growing our business and efforts to improve productivity across the operation.

Maintenance expenses were a bright spot during the period, declining $5.6 million year-over-year in the fourth quarter. Much of this improvement relates to the timing of maintenance events, as we had a lighter period for both airframe and engine maintenance in this year's fourth quarter than we did last year on the 767 fleet.

Unfortunately, the reverse will likely be the case in the first quarter of 2011. In addition to a higher level of inflation on a couple of our Power-by-the-Hour contracts in the coming year, we also expect a couple of significant engine maintenance overhauls to inflate expenses for the quarter. And later in the call, I'll talk a bit more about the expense outlook when we disclose first quarter guidance.

Aircraft rent expenses increased $7.4 million in 4Q, primarily due to the addition of the three leased A330-200s to our fleet during 2010.

Turning now to the balance sheet, we ended the year with $285 million in unrestricted cash and short-term investments, and another $5 million in restricted cash. The cash balance is somewhat lower than where we started the period, begging a bit more discussion.

During December we paid off our maturing term loan A, as well as the remaining principle balance on our term loan B, which was otherwise scheduled to mature in 2011. This was done in conjunction with a new agreement to establishing a four-year revolving line of credit.

The amount of the initial draw on our revolver is less than the principle balances on the term loans we paid back and, as such, this financing resulted in a net use of cash during the period.

The important point, of course, is that we addressed the significant maturities that we had in 4Q 2010 and 1Q 2011, which were about $75 million at the beginning of the fourth quarter. And as a result, we have no significant balloon debt maturities in 2011 or 2012, and are well positioned as we look forward to the continued renewal of our wide-body fleet.

CapEx in the quarter was $50 million, inclusive of pre-delivery payments of $38 million related to future aircraft and engine deliveries. In 2011 we expect CapEx of $220 million to $240 million, which includes roughly $200 million of fleet related CapEx, primarily the remaining payments on the two aircraft that we have scheduled for delivery in 2011, and pre-delivery payments on aircraft that will be arriving over the next few years.

In the first quarter of the year we expect CapEx of $35 million to $45 million, most of which is fleet related.

During the fourth quarter we contributed approximately $400,000 into our pension and benefit plans, bringing year-to-date contributions to $37.9 million. Over the course of 2010, we addressed all of our required contribution for calendar year 2011. Our intention, however, is to make additional contribution in the current year, albeit at a lower level than the contributions we made during 2010.

Now, having completed one important piece of financing activity in the fourth quarter, we've been actively engaged in discussions with several banks in respect of financing for the A330 deliveries that we have in 2011 and 2012. And the responses we've received from the market have been quite positive. We're working through the process of finalizing detailed terms with certain of these lenders and look forward to concluding agreements over the next couple of months.

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

Okay. Thanks, Peter.

For those of you that can hear a siren in the background, that is the once-a-month tsunami warning. It is no more than that. So, it'll disappear in a second.

Anyway, it's remarkable how much has occurred since our last earnings report just a few months ago. Since then, we have more than doubled our international services with the addition of daily flights to Tokyo-Haneda and four-times-per-week service to Seoul-Incheon.

These new services are the beginning of what we anticipate will be a broader expansion of our business westward over the next several years. Our focus on adding the service between Asia and Hawaii is simply explained. Asia is where the growth is.

Our service to Tokyo positions us in Hawaii's most significant international source of visitors, and lays a foundation for further expansion in Japan. Meanwhile, service to South Korea provides a beachhead in one of Asia's most important emerging economies, whose citizens now have a much greater propensity to visit the US with Korea's inclusion in the US Visa Waiver Program.

Both new routes are off to a good start and both are exceeding our internal expectations for their initial performance. Traffic and revenue metrics on our Tokyo service are strong, and we expect this service to reach maturity faster than we normally observe on new international services.

We've worked very hard to adapt our award-winning service and hospitality to the discerning expectations of Asian travelers, and we expect this to pay off in terms of our performance in the marketplace.

Our South Korea service is not reflected in the fourth quarter numbers, as it only began a couple of weeks ago. Nonetheless, we're encouraged by the response we've received for this new service.

We've also reported some important developments to our fleet since our last earnings report. In November we announced that we had reached agreement with Airbus to exercise six purchase rights for A330-200 aircraft. With this agreement, we have expanded our firm orders for the 2011 to 2015 period to 13. These 13 aircraft are incremental to the 3 leased A330s that we put into service in 2010.

During the same 2011 to 2015 period I just referred to, we have planned retirements for our fleet of 12 767s. So, the 13 A330s we have on order represents a net addition of just one aircraft to our fleet. Our commitment for A330s will therefore likely rise by one or two more during this period to provide for modest additional growth to the number of aircraft we operate.

However, the top-line revenue growth from operating the new fleet of aircraft should be substantially greater, as the A330 is a larger aircraft, carrying 13% more seats than our 767s, as well as a greater increment of additional cargo. Since a substantial portion of the costs of operating a fleet of aircraft are tied to the number of flights operated, the up-gauging of our long-haul fleet size is intended to allow us to grow our revenue while reducing our unit costs and improving margins.

Somewhat lost in this explanation of our fleet re-fleeting strategy is that the new aircraft allow us to provide an unrivaled onboard product. This helps us sustain our reputation for providing the best service in the markets that we serve.

With that, let me turn back for a moment to the quarter we just completed. As Peter noted, we reported a 4.7% year-over-year increase in passenger revenue per ASM, bettering the expectation we had at the beginning of the period.

Our international routes -- I'm sorry, on our interisland routes, our PRASM gains were over 20%; this despite more difficult year-over-year comps toward the end of the quarter as we passed the one-year anniversary of the merger of our two primary competitors on these routes.

Supply and demand across the interisland routes has remained in balance through 2010, resulting in a strong recovery in our revenue metrics and a significant improvement in the overall economic performance of this part of the business.

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

Continuing on the trends we've seen throughout the rest of the year, we faced a challenge of a substantial increase in capacity in our transpacific markets. Despite an 18% increase in total capacity between Hawaii and the West Coast, PRASM across our transpacific routes was just about flat year-over-year in the fourth quarter, which is somewhat better year-over-year performance than we saw during the second and third quarters, and which was ahead of our expectations.

As we noted in previous calls, the rebound in travel to Hawaii has been more modest than the recent rebound in business travel, but this is not to indicate an inherent weakness in demand for the Hawaii vacation. Instead, it reflects the much different year-over-year circumstances of the West Coast to Hawaii routes than the other domestic routes this time last year.

In 2009 the demand for travel to Hawaii remained extraordinarily robust when compared to the demand for business oriented travel elsewhere. It's unsurprising, therefore, that as the economic recovery takes hold, the year-over-year changes in demand are more modest for Hawaii travel than for other forms of travel.

Forward schedule information suggests we've seen the peak in industry capacity increases during the fourth quarter. Based on what is in the schedule, we currently expect capacity increases of 11.7% and 0.5% in the first and second quarters. For the third and fourth quarters, we would anticipate a decrease of 1.1% and an increase of 4.2%, respectively. This would result in an overall increase in industry capacity of 3.5% for the full year.

Visitor arrivals to Hawaii continue to grow and have not yet reached the peak levels experienced in the 2006-2007 season, indicating further recovery potential. Arrivals from the US West Coast rose an impressive 17.3% for the quarter. The growth in transpacific capacity remains a challenge, but our bookings continue to build strongly and are higher at this point than they were a year ago.

In response to strong demand, we are adding frequencies to our existing international services as well. In October we added a fourth weekly frequency between Honolulu and Sydney, and will be serving the route daily from April through August first, after which we will fly five times per week in this market.

Given that the overwhelming proportion of our customers on our international services are foreign residents traveling to Hawaii, a weak US dollar tends to raise demand and strengthen our yields. As a result, our growing international business continues to post solid revenue gains.

Before I turn the call over to Peter, let me make one final announcement of particular note to the financial community.

As part of our efforts to improve our outreach in communication with the investment community, we've recently asked Susan Donofrio to join Hawaiian as the Senior Director of Investor Relations. Susan will be familiar to many of you, having spent a number of years on the other end of conference calls like this one. She'll be based in the New York area, giving us better time zone access to many of you.

Shannon Okinaka, who you heard at the beginning of this call, remains with us, supporting investor relations in Honolulu. And she's also serving currently as the Interim Vice President of Accounting and Controller for Hawaiian.

Now, let me turn the call back over the Peter to update our first quarter and 2011 outlook before we take your questions.

Before I go through the specifics of our 1Q outlook, let me take a moment to discuss some of the unusual statistical issues that we will see throughout 2011.

Over the course of the year, there are a couple of themes that will be clear in our year-over-year comparisons. First, the bulk of our additional flying is on longer stage length segments, meaning that our seat-mile growth is vastly greater than our departure growth.

Our Tokyo and Incheon routes alone, with only 11 frequencies per week, will account for three-quarters of our expected ASM growth for the year.

Second, our wide-body fleet is slightly larger in number this year, and our average aircraft size has grown with the addition of the A330. And this, again, will tend to boost ASM production relative to the growth of other statistics.

Over the course of the year, starting in the current quarter, these statistical quirks are going to have some affects on the metrics like RASM, CASM, and ASMs that we use to organize our thinking about the business.

With that as background, looking to the first quarter, we expect our capacity to increase 18% to 20% compared to the same period in 2010, virtually all of which is attributable to longer stage length flying. Over 60% of the increase relates to the introduction of our Tokyo and Incheon services in this period.

Notably, while the ASM increases our substantial, our year-over-year change in departures is expected to be essentially flat.

For the full year we expect capacity to increase 15% to 17%. And again, the bulk of this, or three-fourths of the increases attributable to Tokyo and Incheon, while total departures will be close to unchanged.

We expect first quarter load factor to be very similar to the first quarter of last year, with a year-over-year change of plus or minus 1 percentage point, while yields are expected to decline by 1% to 4%. In combining these numbers, we would expect passenger revenue per ASM to decline by 1% to 4%.

Importantly, I should note that this RASM outlook is a function of some of the statistical anomalies that I prefaced my comments with. Incorporated in our expectations is year-over-year improvement in PRASM for both the interisland and transpacific part of our business, as well as our same store international routes. But, since we have ASM growth that is concentrated in longer haul and therefore lower RASM flying, we're seeing downward mix pressure on our PRASM.

On the cost side of the equation, we expect CASM, ex-fuel, to decline between 2% and 5% in the quarter. This is not a pace of decline that we would expect to be able to maintain throughout the year, but we would expect at this early stage the CASM ex-fuel will range from flat to a 2% increase for the full year of 2011.

Fuel prices have been higher in recent weeks than they were throughout the fourth quarter, as we've seen both -- increases in both crude oil costs and the crack spread. We're currently paying about $2.84 per gallon for fuel. We do have some hedging in place for the quarter and for the year.

Given the volatility of the fuel market, and consistent with our normal custom, we aren't giving any specific fuel price guidance at this time. We do expect our fuel consumption to be about 14% to 15% higher year-over-year in the first quarter as a result of our capacity increases.

With that said, we've reached the conclusion of our prepared remarks. I'd like to thank all of you for being with us today and for your continued interest in Hawaiian. And 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.) Hunter Keay, Stifel Nicolaus.

Just want to clarify. I want to make sure I heard this correctly. Did you say full-year CASM ex-fuel was going to be flat to up 2% in 2011?

Correct.

Okay. Can you maybe explain to me some of the moving parts of that? How much of that is from higher lease expense, and maybe what are some of the other cost pressures, because that was a little higher than I was looking for.

I would say a couple of the drivers, the bigger drivers in there are on the maintenance line, where I mentioned in my comments that the first quarter was going to see some pressure on the maintenance line. Some of those factors carry out throughout the year.

The Power-by-the-Hour rate increases are obviously -- they don't just come for a quarter and go away. So, those will affect us throughout the year.

We have a number of -- an increase in some of the heavy check events. That is just timing related on airframe expenses. For example, on the 717 fleet we've got eight of the 10-year checks, which is a big check on that aircraft, coming up this year. We had four last year. We had none before that because none of the airplanes were 10 years old, and we won't have any the year after because they all will have been done. So, there's just an ebb and flow to some of the maintenance costs like that.

On the wide-bodies, we've got some life-limited part replacements on the engines that are coming up this year that are on an expenses-incurred basis. So, there's a couple of things on the maintenance line that drive it up.

You mentioned rent, Hunter. That is an area where we'll see the full impact of the three A330s that are leased coming in this year. That should then steady out through the year because those are the only leased aircraft.

The other line item I might point out -- well, maybe two more. One is there's a little bit of pressure on the airport costs that we continue to see, primarily here on some of the costs in the state of Hawaii. And the other one is, on selling expenses, there are -- some of the lines like commissions are more oriented towards international activity. We don't pay big commission numbers on domestic flying. And so, as we grow internationally, that one will grow a little bit disproportionally.

Okay. So, it sounds like some of these expenses are kind of based on the current capacity plan I kind of locked in. Is there anything that maybe you see could be -- provide a little bit of variability that maybe could surprise us on the upside? On the good side, I should say.

Well, clearly we're not going to just sit there and say, well, that's a given and we're going to be satisfied with this. We do have some cost-savings initiatives underway. We are going to be focused on productivity and how we can improve our general level of productivity.

And we have got a new procurement department information at the moment, and we would expect them to go out and get some important cost savings. How much of it will actually fall in this calendar year is uncertain. And as is our custom when giving some general levels of guidance, we try and stick to what we have some degree of confidence we can achieve.

Sure. I understand that. Okay, thanks. And one quick follow-up. This -- I may be wrong, but I'm looking at OIG data through the balance of the year, at least for the next nine months, and it looks like you guys are using a 767 indefinitely on the new Incheon and Haneda service.

Correct me if I'm wrong; I may be mistaken. Did you guys say you were going to use an A330 on that route at some point later this year? And if so, does the strategy change and is it maybe -- are you using a -- are you sort of down-gauging because some of the bookings are coming in maybe a little softer, or am I just incorrect in assuming that was going to be an A330 at some point?

No. Well, first of all, all of this stuff is going to become A330s soon or later. The question is, is it sooner or is it later? I think the Japan service is going to go to an A330 in a sort of April or May timeframe of this year.

The main thing that's holding us back in terms of, for example, using an A330 today on Japan is that, with just three, we have to schedule them efficiently. And with such a small fleet, it's not possible to put Japan on the schedule, or Korea on the schedule, and actually keep our aircraft utilization where it needs to be.

So, the next airplane that gets delivered in April should actually allow us to go to Japan with the A330. We've got a further aircraft delivery in November. We'll be looking at the schedules there and figuring out if we can put that on -- we're clearly going to put that where we think it would go best.

If we had a kind of free hand, if utilization wasn't an issue, I think we'd already have the 330 on Japan.

Bill Greene, Morgan Stanley.

This is actually Ned filling in for Bill. I know that we've actually talked about this in the past but, given your growth into Asia and the competitive capacity that you continue to highlight here from the Mainland to Hawaii, I wonder if it makes sense for you all to consider joining an alliance. Obviously, to date you've determined that the costs outweigh the benefits in that scenario, but maybe you can help us think about what those key costs are and what the benefits need to be to make that a good idea.

Sure. As I've said before, and I say again, it continues to be the case, we do actually look at the costs and benefits of joining an alliance periodically. And we're always open to the idea once we think it's actually in our long-term best interest to make that leap.

The kinds of benefits that we would get out of it would be a certain amount of incremental traffic out of the network alliance.

I think what we would lose is likely some amount of traffic from the other partners that we currently have that would not be in the alliance that we ultimately chose. And it's trying to kind of figure that balance that is the kind of main puts and takes of the alliance -- the assessing the alliance question for us.

Okay, thanks. And also, as I'm sure you've seen, it appears that Allegiant's entrance into Hawaii is delayed until mid-2012 or so. How are you guys thinking about this strategically? Is this an opportunity to prepare for an eventual new entrant? If so, how might you do that? In particular, we're sort of thinking about what you might do in an Allegiant-like third party sense in the Hawaii travel market.

Okay. Well, first of all, let me just say, I mean, there's a lot of -- I mean, we've had some -- quite a bit of new entry in this last year. After all, in the quarter just completed we've grown 18% increase in capacity. And I suspect that as you all follow other industry participants, you'd have to look long and hard to find a market that's enduring 18% capacity increase.

I would just emphasize that, not withstanding that, we've actually continued to do very well and our position is sort of unchanged in terms of our market position and the financial performance of those routes. So, we're really pretty pleased with that.

Looking ahead, the thing that I would point out is that most of the new entrants are looking at entering the market with aircraft that we think are not ideally suited for this marketplace. We think that we will continue to have a cost and revenue generating advantage over them.

And we believe that we understand the market better than anybody else does in saying that. A lot of the new markets that have been recently opened up are incredibly small markets, and we are focused on the larger markets where we continue to enjoy a very, very solid position.

In terms of ancillary revenue, we are, as I've mentioned on previous calls, very much focused on that. Some of the areas that fall within that include cargo. An A330 is a much better cargo carrier than many of our 767s are. So, we think that that's an important source of additional revenue for us. But also, on the consumer side, working on packages and insurance and hotels and things like that.

We currently do have those offerings through our website. We have seen very good year-on-year improvements off very, very small base. They're just not a material part of our business at the moment, but we have got strategies in place to change that and make it an increasing part of our business going forward.

Okay. Thanks, Mark. And Peter, just two quick ones. One, when we look at the optics of your PRASM in 1Q, is that reflecting the full run rate of your expansion into Asia, or is the stage length going to change such that we could see a bit more pressure on the optics there in 2Q-3Q? And also, what's the pension expense year-over-year in 2011? I know you talked about contributions, but expense.

Yes, let me check the pension expense. It may take a second on that. In terms of whether it's the full run rate of the longer stage length in the first quarter, it's pretty much all in there in that we had, obviously, the Haneda service in place for the full quarter and Incheon was in there by the middle of January. So, Incheon is there throughout the period. Plus, some of the other A330 growth that we had was we had all three of the aircraft in from the beginning of the period.

So, I think you're going to pretty much see it in the first quarter, and maybe it's even more amplified in the first quarter because we didn't have any of the A330s on the property last year in the first quarter; whereas, when we get to the third it'll be more of an apples to apples.

And Ned, we'll check that pension number for you. We're just -- we have people scrambling through pieces of paper here. So, we'll come back and pick that one up before the end of the call.

Michael Linenberg, Deutsche Bank.

Hi, guys. This is (inaudible), actually, filling in for Mike. Just a few questions, if I may. The first question, with regards to your service to Asia, and from your positive commentary I can see that it kicked off to a pretty solid start. But, I was hoping you could elaborate on what are some of the more difficult challenges you are finding regarding your operations there and how you're coping with those difficulties.

Okay. Well, first of all, I think operationally we're not finding any difficulties at the moment. In fact, I think we've been extremely pleased by how the operation is going.

I think more broadly, the challenge that we have is that, whereas we are a household name on the West Coast -- we do, for example, brand awareness, name recognition studies periodically. And over the last five or so years we have always come up at the top of the list in people's minds who live on the West Coast when they consider travel to Hawaii.

So, we start with a very sort of strong brand identity in our existing markets on the West Coast. And then, moving into Asia, we've got to establish ourselves in the minds of consumers. So, I think that's probably the number one challenge.

We've got -- we've been very pleased with the way we've been received by the sort of travel trade community. And the distribution in Asia, particularly in Japan and Korea, is very different than it is in the United States, where the travel trade is extremely important. And so, I think we're really off to a very good start. We've got no complaints at this stage.

Very good. And secondly, with regard to debt repayments, I know Peter you mentioned that you don't have any balloon payments due now in 2011 and 2012, but I was just wanting to get a sense of whether we may see some pre-payments of debt? If you have any sort of targets along those lines?

No, nothing that really stands out at this point in time. We actually don't have a lot of debt on the balance sheet right now. We've got the revolving credit facility and, obviously, the nature of the revolver. And so, we could go up and down as appropriate with our cash position. We've got some debt associated with a few of our 767s. That matures at the end of 2013. We don't have any plans to prepay that at this point in time.

With us, with the aircraft coming in, our focus right now is on the financing for the 330 deliveries that are coming this year. And we're pleased to note, as I said over the course of the call, that the response to that has been very good. It's very well regarded aircraft in the financial community and we're looking forward to putting some attractive financing in place for that.

Helane Becker, Dahlman Rose.

Are there plans to do another city this year?

We're looking at that at the moment. We have the capability of doing another city this year, and I think there is a reasonable likelihood that we will make that decision shortly -- make the decision shortly. I don't think we will start it shortly, but we are looking at an additional city this year.

Okay. So, it would be a second half event then? Is that it?

It would likely be a second half event.

Bob McAdoo, Avondale Partners.

It seems like I read something the other day about rearranging some employees and having them move to new departments and stuff. There was kind of a general article written here in the Mainland about it but, could you tell us a little bit of what was going on?

Yes, absolutely. Over the course of the last four or five years, Hawaiian has been the fastest growing legacy airline, and I'm also pleased to say the most profitable legacy airline during that period. But unsurprisingly, as we've grown quickly, we've absorbed the kind of -- we've moved into the void left by Aloha. We've now, as we've talked a great deal about on this call, moved into the international sphere.

The old management structure didn't best meet our needs going forward. So, what we've done is we've reorganized the management structure to focus on international, ancillary revenue, procurement. We're now a bigger company. We have better leverage in procurement. It's a leverage we feel we need to do a good job of exploiting. So, we've made those kinds of choices.

We had a number of people leave the Company, but we've created actually more openings than the number of people who left the Company. So, that's really all there was to it, which sounds trivial. To the people who are affected, obviously a big deal.

Yes, I could imagine. And then secondly, do you have a phone number for Susan?

Yes, we do and we will put it out and share it. If somebody would actually hand it to me --.

It's -- hi, Bob. It's on the press release. But, I'm out here in Hawaii. So, maybe you guys -- yes, we'll send an email out with where to reach me.

Okay. You have a cell phone or something, or what are we doing here? You going to have an office in New York City or are you going to -- or what?

Yes, I have a -- it's 908-719-3206.

There, I found it on the press release. There you go.

Yes, that's okay. And then, just while I'm out here, we'll have you call Shannon's number.

Okay. Very good. Thank you a lot. Congratulations.

Okay. Thanks, Bob.

Steve O'Hara, Sidoti & Company.

I was wondering, in terms of looking at additional routes in Asia, and given I guess what appear to be the economics for the first quarter and the cost pressures, I mean, at what -- maybe price of fuel or at what price do you start to kind of back away from that, and is it based on fuel or is it kind of based on where you see demand?

Well, just to be clear, I think our expansion into Asia is about a -- we're turning to Asia because that's where the growth is. And the question I think you rightly proposed is, at what speed do we expand into Asia. We have metered our expansion plans to be at a rate that we think is in the best long-term interest of our business.

If circumstances change dramatically, that would include the price of fuel, it would include anything that would interrupt demand for travel to Hawaii, then we'd obviously have to relook at those plans.

We don't see anything at the moment on the horizon. Our bookings for, for example, career remained very robust. Even when there was the issue with North Korea, there was simply no hiccup in the rate of bookings there. And Japan has grown very strongly, mainly driven, candidly, by the strength of the yen and the won against the US dollar, which we also think is likely to be a long-term feature.

Okay. And then I guess the -- just a follow-up on maybe Hunter's question on the costs. And I guess I'm just wondering -- and if you said this, I apologize, but when would you expect those cost pressures to kind of abate and maybe kind of trend in the same direction as PRASM?

Well, I think the -- if you look at the maintenance line in particular, 2011 is going to be a heavy year for maintenance. Once you get into the -- once we complete the mid-life checks with the 717s, that falls away. A number of the 767s that have heavy checks will eventually go back to the lessors to be replaced by new aircraft that will enjoy a bit of a maintenance vacation. And so, I think those cost pressures will abate likely in -- is it fourth quarter or first quarter of next year, Peter?

Some is fourth quarter. There's more first quarter next year.

What I might add, Steve, just to be clear, I mean the guidance for the first quarter is for a CASM ex-fuel decline of 2% to 5%. So, what we've focused a little bit, or at least I focused in responding to Hunter's earlier questions on the negative in the way that a CFO often will, there really area number of things that we're doing to help keep the costs under control. So, for every one of those things that's pushing things up, we've obviously tried to find some offsets in our budgets and savings elsewhere.

But the full year was for CASM to be up, ex-fuel CASM to be up -- or flat to up 2%. Is that right?

That's right.

Just before we take the next question, if I can follow up on the one earlier that Ned has asked about pension expenses. And I'll give you the number for pension and other post-retirement costs, which includes our post-retirement medical expenses. It should actually be a little bit down this year at roughly $17 million for the whole year, compared to about $17.7 million for the previous year.

So, there are some offsets in there. A little bit higher on the post-retirement medical side. A little bit lower on the pension side, reflecting the funding that we had this year and the vagaries of pension accounting and the influences of the discount rate on those numbers.

John Reardon, Dominick & Dominick.

I was just wondering, as you're introducing your flights to Haneda and Incheon, have you had to be more aggressive in pricing? I guess what I'm asking is, as time goes on and as these markets mature, are we going to see probably a better revenue number coming out of these flights?

And the second question is, I noticed that on the Haneda run your Business First product goes for about $5,200 plus, round trip, depending on the various days. And I was just wondering, are the Japanese tourists and the Korean tourists, are they more inclined -- do you get a better Business First market out of that crew, or is it worse or is it about the same?

Okay. Well, first of all, let me answer your first question, which is do we expect the revenue metrics on Japan and Korea to improve, and the answer is absolutely yes. We're moving into a new market. We expect to attract more customers to get a higher load factor, and we expect our reputation to become established and be good in the marketplace, giving us more pricing power. So, the answer is unequivocally, yes, we expect improvements in revenue over time in Japan and Korea.

As for the Business First question, I mean, we are a predominantly leisure destination. So, unsurprisingly, we have a smaller percentage of Business First seats on our airplane than you would typically find flying into Japan from, for example, the United States. That's not to say that there are no people looking to fly and to improve the comfort of their seating. And it's very early days yet to fully understand what the dynamics are in Japan when it comes to this sort of travel.

But, I can point you in the direction of Australia. And one of the surprises of our Australian service has been the number of people who have chosen to buy our business product over the competitors' business product. One stop in Honolulu. It is cheaper. It is less fancy than the lie-flat seat, for example, that many of our competitors offer. But people like the value for money proposition and we have seen quite strong demand for that.

Hunter Keay, Stifel Nicolaus.

So, just on fuel. Peter, I think you said you're paying $2.84 a gallon now, correct?

Yes. And obviously, that's a number that changes every day.

Sure, of course. If I think about -- I see the way your fuel hedge book has changed since the last disclosure. It looks like you've layered on much more of a call option-focused hedging strategy.

So, as I'm looking at this discontango curve, I'm looking at the jet fuel cracks. I'm thinking about how you're going to expense these options premiums. Not necessarily asking for guidance, but is it maybe -- if I just, again, look out at the curve and expected options expenses, is it an unrealistic assumption to assume you'd be paying something north of $3 if the curve kind of holds as is at some point in the relatively near future?

I'd say the answer is, I certainly hope not. I think -- and hope is, of course, not a really good plan. I don't necessarily project it out that way. And I think the real wildcard on that, Hunter, is what we see in terms of the crack spread. We've had some blowout in the crack spread over the last couple of weeks that has been much wider than what we've seen outside of hurricane seasons over the last few years.

And I guess if you take the crude curve and project it forward and then you keep that crack spread at that level, we'd come up with levels that no one in our industry is going to be really too terribly excited about. But the question is, do we maintain those levels. And I'll leave the crystal ball on that to you and your colleagues.

Okay. But the $2.84 does include some component of premium expense in that, correct?

The $2.84 includes -- is a number that corresponds to our fuel line on the income statement, which would include the crack spread, which would include taxes and duties and differentials at different locations, etc.

And premium expense, or is that in a different portion of the P&L?

The premiums hit elsewhere in the non-operating.

Okay. And as sort of a second follow-up. We talked about some of the incremental capacity that's coming onboard here from Mainland to the Islands. Maybe just think longer term and into next year. When we think about Allegiant, and potentially even Southwest longer term moving in, how do you guys think about sort of quote, unquote, defending your turf?

Are you prepared to do -- get involved in pricing wars and sort of keep your footprint in place, or would you be prepared to maybe sort of pull down some of that capacity and maybe reallocate towards potentially more lucrative routes and become more of an Asian-oriented airline and sort of deemphasize the West Coast line?

Well, I think as we grow in Asia, the West Coast deemphasizes, just in the same way as we've seen the mix effect on our ASMs. So, I think that happens naturally.

I do think that none of the competitors that are coming into the marketplace come in with an innate competitive advantage relative to us on those West Coast routes. I think what we are seeing in terms of pressures in the West Coast have simply to do with the number of seats, not with any fundamental weakness in our business model.

Indeed, I think one of the things that we've taken away, as we've looked back at the increase in capacity by our competitors, is that our position has remained remarkably strong in these markets. And we have not seen anything in what the competitors bring to the market, other than just more seats, to suggest that our business model shouldn't work in this route -- in this region.

Bob McAdoo, Avondale Partners.

One other thing. As I'm sitting here listening to all the talk about Japan and Korea, and the way you've talked about bringing on the A330s and whatever, and trying to think about just what might be the economics that those two new destinations are bringing to the group, is it--? I mean, if I remember right, Manila is a destination that was -- where the socioeconomic levels of the people who were getting on the plane was not particular great, and a lot of those tickets were bought -- purchased by people who live in Hawaii and are bringing their relatives to visit them.

And this sounds like this -- that the Japanese and Korean clientele, clearly a different one. And is it reasonable to think that we're already close in Japan to economics that kind of match the second or third year of maturing of Manila? And that hopefully Korea will be there before the end of this year, in terms of the spool-up? Is that -- or is that way too optimistic?

I think that's exactly right. That's exactly what we're seeing. Japan and Korea is all about tourism visitors arriving into Hawaii. Japan's a very big market that's had a very substantial cut in capacity with JAL's problems. We have partially filled the void and we're obviously serving Haneda. You're absolutely right. We're at least two to three years into the maturity cycle already for Japan.

With respect to Korea, visitor counts from Korea to Hawaii were up almost 100%, 2010 over 2009, driven largely by -- driven by two things. One is the economic recovery in Korea. But the second is by Korea's inclusion in the US Visa Waiver Program. We expect that momentum to continue going forward and Korean to become a very important source of tourism here in Hawaii.

And so, thinking about six to eight months from now, nine months from now, being the equivalent of the second or two-and-a-half years into the Manila cycle. Is that a reasonable way to think about it?

Yes. I would actually hope Korea gets there a little bit faster. But we've been in Korea now for two weeks maybe, three weeks. That's really --.

You mean it's too early to tell? (Laughter.)

Yes, it's a little early to tell, but that's certainly what our hope would be.

Bill Greene, Morgan Stanley.

Hey, Peter, thank you for following up on the pension question earlier. Just one quick clarification on the CASM ex-fuel guidance. Certainly, given the increase in stage length, I think a lot of us were expecting potentially a down year-over-year. What I'm wondering is if there are start-up costs included in the CASM ex-fuel guidance for 2011. Particularly by that, I mean things that are a part of your new aircraft or route startups that aren't going to be around in 2012. And if they are there, can you approximate sort of how many point of that CASM growth guidance they are?

I wouldn't say there's a meaningful amount of that. We do have some startup costs on the new routes, but it wouldn't be something that I would typically sort of carve out separately in the numbers.

As we transition to more A330s, I think you still see some transition costs and hiring related to growing in the business and training costs. So, those are in there. I think the other items that we pointed out are probably the bigger negative items that are keeping us from an even better CASM outcome.

Again, for the first quarter we expect CASM ex-fuel to be down. We gave preliminary guidance for the full year that is flat to slightly up. And hopefully, we can go out there and find some of the other savings that Mark referred to on an earlier question, in areas like procurement and the efficiency around our operations, and deliver an even better performance than what we're suggesting today.

There are no further questions. Thank you. I'd like to turn the call back over to Management for closing remarks.

Okay. Thank you. And thanks, everybody, for joining us today. 2010 ended with another positive financial performance for Hawaiian and we're going to work hard over the next few quarters in a situation where we think we're well positioned to bring forward the fleet renewal and our international expansion. We're looking forward to talking to you all again in the next few months. So with that, thank you very much.

This conclude the teleconference. You may disconnect your lines. Thank you for your participation.