Hawaiian Holdings Inc (HA) 2011 Q1 法說會逐字稿

Greetings and welcome to the Hawaiian Holdings' first quarter 2011 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, Susan Donofrio, Senior Director of Investor Relations for Hawaiian Holdings. Ma'am, you may begin.

Great. Thank you. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' first quarter 2011 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 4 o'clock Eastern Time today. If you have not received the release, it is available on the Investor Relations page of Hawaiian's website.

Before we begin, we'd like to remind everyone that the following prepared remarks contains forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore undue reliance should not be placed upon them.

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

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

Thank you, Susan, and thank you, all, for joining us on today's call. As you've seen from the financial results we released at the top of the hour, we reported a small net profit for the first quarter of 2011, our seasonally weakest revenue period. Included in the results for the period are mark-to-market gains on our fuel hedge position without which our results would have swung to a smaller loss. At a high level, these results were consistent and even slightly better than we had expected at the beginning of our year, which is already giving us a mix of challenges and some opportunities. Higher fuel prices clearly sit at the head of the challenges column, while good levels of demand in almost all of our markets have so far helped offset much of the rising cost of fuel. More about these issues a little later in the call. Also, a little later on, we will talk about Japan and the outlook for the business. But first, Peter is going to take us through the last quarter. Peter?

Thanks, Mark. For the first quarter, we reported GAAP net income of $0.9 million or $0.02 per diluted share. Adjusted to reflect economic fuel expense, we recognized a $3.2 million loss during the period or $0.06 per diluted share compared to an adjusted net income of $0.1 million or zero cents per share in the same period last year.

Operating revenue during the quarter was $366 million, up $67 million or 22.5% year-over-year on a 21.2% increase in capacity. Passenger revenue per ASM came in 2% higher than the first quarter of 2010. Load factor during the quarter improved 0.5 percentage points to 84.1%, while yields improved 1.2%. This revenue performance exceeded what we expected at the beginning of the period and was at the high end of the revised guidance that we released in mid-March. This outperformance was relatively broad based across our network, as we beat our revenue budget for the first quarter in each of our interisland, transpacific and international entities.

As we discuss this quarter's results and our plans for the remainder of the year, it's important to note the impact of our new international services on our ASM statistics. Of the 21% increase in capacity, about two-thirds was attributable to the introduction of Tokyo and Incheon flying commenced in the fourth quarter of 2010 and the first quarter of 2011 respectively, and additional weekly frequencies between Honolulu and Sydney. The long stage length of these new services had significant leverage on our ASM statistics.

Our transpacific capacity increased about 9% in this quarter, primarily due to the introduction of three Airbus A330s to our fleet, which updates some of our West Coast flying and a 6% increase in departures. Most of this departure increase reflects the restoration of some frequencies that we cancelled in the previous year to facilitate winglet installations on our 767. In essence, beyond the substitution of larger airplanes for some slightly smaller ones, we've not expanded our activity in the transpacific market. Interisland capacity was basically the same as last year.

Consistent with our expectations, our non-passenger revenue did not grow as fast as the passenger line, but we did see improvements in both baggage fee collections and cargo revenue that contributed the lion's share of the $5.3 million improvement in our other revenue line.

Moving on to the expense lines, fuel was easily the biggest year-over-year variance. On the operating line, we saw an increase of $39 million in fuel expenses. Our fuel consumption was 38.2 million gallons, up 17.6% from last year, while our average price per gallon was $2.86, which is 32.4% higher than last year's $2.16.

During the first quarter, economic fuel cost per gallon, which includes the portion of our hedging gains or losses related to contracts settling during the period, was $2.82 compared to $2.19 in the same period last year. We continue to [maintain] a consistent and disciplined approach to fuel hedging, with about 42% of our consumption for the remainder of 2011 hedged. Excluding fuel, our cost per ASM decreased 3.1% in the quarter, in line with our guidance at the beginning of the quarter and at the weaker end of revised expectations we released in mid-March.

Late in the quarter, we experienced an unexpected engine removal, which added to our expenses and we also incurred some additional costs relating to our upcoming lease returns that are reflected in the aircraft rent line of the income statement. And these late in the quarter items contributed to pushing us towards the higher CASM end of our revised guidance.

Maintenance expenses increased 21% year-over-year in the quarter to $43.4 million, reflecting a combination of volume-related increases associated with our growth and some contractual increases that we alluded to on our last conference call. More specifically, the maintenance numbers reflect power-by-the-hour expenses for our Airbus A330-200s that we didn't have in early 2010, a higher level of maintenance expenses for our Boeing 717 aircraft as we progressed through our ten-year checks on this fleet, and contractual rate increases in our power-by-the-hour arrangement for our 767 engines. Combined, these three items reflect about 18 percentage points of the 21 percentage point increase in our maintenance lines during the period.

Aircraft rent expenses increased 41% or $10 million, mainly as a result of the addition of the three leased A330s to our fleet in 2010 and partially to costs related to the lease returns for the two 767s that are planned for later this year. Below the operating line, we reported non-operating income of $6.4 million in the quarter compared to non-operating expenses of $5.2 million in the prior year. The most significant difference year-over-year relates to the gains on our fuel hedge positions during the period, which are marked to fair value under our accounting policies.

Turning now to the balance sheet, we ended the quarter with $324 million in unrestricted cash and another $5 million in restricted cash. We improved our liquidity position during the quarter, with the issuance of $86.25 million of convertible senior notes, the proceeds of which were partially used to pay down the outstanding balance on our existing revolving credit facilities of $55 million.

Let me take a moment to explain the thinking behind our issuing the convert. We've been successful at strengthening our balance sheet over the past three years without accessing the capital markets. This has allowed us to build our cash balance and qualify for reduced levels of credit card holdback even as we've been making pre-delivery payments related to our ongoing fleet renewal program. Given our upcoming aircraft acquisitions, we thought it wise to bolster our balance sheet with additional cash.

After completing the convertible note financing, we ended the quarter with a cash balance of over 23% of our trailing 12-month revenue in addition to which we have borrowing availability of another $63 million under our revolving credit facility, which takes us to a combined available liquidity of 28% of trailing 12-month revenue. Given today's fuel markets, we're doubly pleased to now be in this healthy liquidity position.

Concurrently, with the issuance of the convertible notes, we entered into convertible note hedge and warrant transactions, which moved the effective strike rates of the warrants to $10, well above the $7.88 conversion price of the issue. Let me explain how this works.

Essentially, the convertible notes we issued during the quarter can be thought of as a combination of unsecured debt and an embedded warrant to buy our stock at a conversion price of $7.88 per share. The note hedge is a separate transaction that is designed to generally offset the economic impact of the warrant feature embedded in the notes. In turn, we sold warrants with a strike price of $10 per share to partially offset the capital outlay associated with the note hedge. The net result from an economic perspective is that we use some of the proceeds from the convertible note transaction to effectively offset the dilution cost of the note until our stock price rises above $10 per share. The turgid details of all of this were covered in an 8-K filing on March 24th and will be reported again in detail in the 10-Q that we intend to file this week.

With the liquidity on our balance sheet, we have the flexibility to consider various alternatives for our upcoming aircraft deliveries. And on the subject of aircraft financing, subsequent to the end of the quarter, we took delivery of our four A330s, which is the first of our direct order from Airbus after receiving three aircraft in 2010 from lessor order books. The aircraft was financed that delivery with three European financial institutions. So subsequent to the end of the quarter, we've added additional debt totaling $65 million to our balance sheet. This debt has a 12-year term with a mortgage-style amortization.

CapEx in the quarter was $35 million, which includes progress or pre-delivery payments of $26 million related to future aircraft and engine deliveries. During the first quarter, we contributed approximately $2 million into our pension and benefit plans, and we expect to contribute an additional $10 million during the remainder of 2011.

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

Thanks, Peter. Let me take a moment to follow up on Peter's comments regarding our balance sheet. Our fleet renewal program implies a substantial level of capital expenditure over the next five years. Over the past couple of years, we've positioned our balance sheet to embark on this period and we've developed a capital-raising plan that you've seen unveiled over the last six months. We started by establishing a new revolving line of credit. We paid down our term loans. We issued the convertible notes and most recently raised debt to finance our first direct delivery from Airbus. The underlying performance of the business these past few years, the strength of our balance sheet, and the desirability of the A330-200s combined to give us flexibility and choice as we look to finance our remaining deliveries. With that, let me turn to the results for the period.

As Peter mentioned, revenue performance during the quarter exceeded our expectations going into the year. I'll start with the revenue performance of our interisland routes, which represented about 31% of our passenger revenue during the first quarter. We operated almost equal capacity in the first quarter as we did a year ago. Traffic on our flights declined by about 1.5% year-over-year, but yields were about 13% higher, resulting in passenger revenue per ASM improvement of 12%. This rate of improvement is less than we experienced throughout last year, when we were recovering from a weaker 2009, but it is impressive nonetheless as year-on-year comparisons are now much tougher. We continue to enjoy the best competitive position on these routes.

At 52% of revenue in the first quarter, our transpacific routes between the Western United States and Hawaii continued to represent the largest part of our business. This percentage is down from the 60% share of revenue at year-end, in part because of seasonality, but mainly due to the expansion of our international flying. The transpacific routes didn't enjoy as robust an increase in passenger revenue per ASM as our interisland routes, but the 2% gain we recorded year-over-year in the first quarter was against a backdrop of a 12% increase in industry capacity. It was the largest increase in two years and the first positive year-over-year result since the first quarter of 2011 -- first quarter 2010.

As we enter the second quarter, we're also entering a period of more favorable industry capacity dynamics. Looking backwards, capacity between the Western US and Hawaii increased 12%, 18%, 13%, and 10% respectively year-over-year each of the past four quarters. Looking forward to the remainder of 2011, we are expecting essentially flat year-over-year industry capacity in the second quarter and declines of 3% and 2% respectively in the third quarter and fourth quarter.

Against this backdrop is perhaps not surprising that as the past quarter progressed, we began to experience more favorable revenue results in each month. Our outlook for the next three to four months suggests even more meaningful improvement. Based on our current bookings, we anticipate a double-digit year-on-year percentage improvement in transpacific PRASM for the second quarter. Given the dearer fuel prices, this improvement in our outlook is particularly timely.

While interisland and transpacific represent the majority of our business today, those of you who have followed our business will know that we are in the early stages of a plan to grow our network in Asia. The reasons for this are quite simple. Asia is the world's fastest-growing aviation market and it will be the fastest-growing source of visitors to Hawaii. In the past few months, we've initiated daily service to Tokyo and four times per week service to Seoul. Both of these new services have been and continue to be successful and our enthusiasm for their long-term prospects remains undimmed.

But let me take a moment to talk a little more extensively about Japan. Unlike many other carriers, we've not reduced service to Japan following the earthquake. We have in fact reaffirmed our commitment to this market not only by not reducing existing frequencies, but also in our decision to begin daily service to Osaka in July.

Traffic on our Tokyo route is down over 20% as we shared before, but we hope and we expect to see a recovery in bookings as we progress through the second quarter. This view is formed by looking at the experience of Japan following the Kobe earthquake of 1995 and by taking extensive soundings from our Japanese travel partners. We've had several members of our management team, myself included, visit Japan since the disaster to better assess conditions in the market.

What we saw in Tokyo and Osaka contrast to the perception of relative chaos in Japan that has been broadly presented in our media. Except for national effort to preserve energy, Tokyo's impressive infrastructure appears unharmed. We've all been struck by how citizens are going about their everyday lives despite the scale of the disaster. Osaka, which is even further south of the epicenter of the earthquake, seems even less affected. Perhaps most noticeable was the absence of Western faces in Tokyo immediately after the earthquake. This perhaps explains why airlines that are more business travel oriented and which carry a greater proportion of passengers from outside Japan appear to have been more severely affected than has Hawaiian. Given our leisure focus and our single daily frequency, we quickly concluded against a short-term frequency reduction. We did however decide to postpone the introduction of A330 service to Haneda, allocating the aircraft to the West Coast instead.

Our focus next turned to whether it makes sense to defer the planned start of daily service to Osaka in July. We announced this new service on February 14, with a planned start date in mid-July. The business case for Osaka has several compelling elements. Like other Japan to Hawaii routes, capacity has reduced in the past couple of years, as JAL has reorganized its international operations. The distribution structure in Osaka is identical to Tokyo, allowing us to leverage our existing relationships. Our early success in Tokyo reinforced the opportunity and demonstrated the level of demand for our unique Hawaii's top-tier service.

So after visiting our industry partners in Osaka, we concluded the demand in Osaka will be less adversely impacted than demand in Tokyo. Reinforcing this, we had planned with one of our distribution partners to operate a charter service from Osaka for Japan's important Golden Week. In the immediate aftermath of the disaster, we offered to relieve them about their obligations to us and to cancel the charter. To our surprise, they affirmed their commitment to the charter and they have in fact been successful in selling all of the seats on both of the charter flights.

Turning away from Japan for the moment, let me comment briefly on our other international services. Our service to Seoul-Incheon commenced in January and continues to track above expectations. We're developing a presence in the market and we're keen to see that presence grow. We continue to see very strong demand on our Sydney route and have expanded from three times per week service a year ago to daily service for the summer and five times per week later in this year. The strength of the Australian economy and the appreciation of the Australian dollar have helped us make this one of our stronger routes. We continue to enjoy a strong position also on our Manila service, with solid improvements in both yield and loads year-over-year.

Before I turn the call back to Peter to quantify some of our expectations for the second quarter, I want to touch briefly on our fleet plans. We currently have four A330-200s in service, having added the latest of the fleet earlier this month. During 2011, we'll take delivery of one more A330. We'll be returning two 767s to their lessors. So we'll end 2011 with the same number of aircraft at 36, with which we began the year.

In 2012, we'll take delivery of four A330s, three of which were referred to during our last earnings call and one, which we committed to under the terms of a lease that closed in early April. With this commitment in place, we now have a total of 14 A330s deliveries scheduled between 2011 and 2015, including the aircraft delivered just a few weeks ago. Over roughly the same period, we will see 12 767s leave the fleet through either retirement or lease return.

Pete is now going to update our second quarter outlook before we take your questions. Peter?

All right. Looking ahead to the second quarter, we expect our capacity to increase between 20% and 22% compared to the same period in 2010. As we saw in the quarter that we just completed, this increase reflects the impact of three more airplanes in the fleet at the start of the second quarter than last year, and more importantly, the addition of some much longer haul flying with the startup of Tokyo and Incheon service as well as an increase in our Sydney flying.

Roughly 18 percentage points of the increase, well over 80% relates to the introduction of Tokyo, Incheon and additional Sydney flying. So while we have a meaningful increase in our international operations, our capacity in transpacific and interisland is fairly stable again year-over-year. Notably, while the ASM increased our substantial year-over-year, our change in departures is expected to be about 3% in the second quarter and again most of this is new international services.

For the full year, we now expect capacity to increase 17% to 19%, which is slightly above what we had expected at the beginning of the year. The change is attributable to the addition of another long-haul destination with Osaka joining the network beginning in July. For the full year, all of this capacity increase is attributable to international, as our transpacific capacity is now forecast to be lower year-over-year in the second half.

We expect second quarter load factor to be somewhat lower year-over-year between flat and a 3 percentage point reduction, with Japan diluting this number to a degree. Yields in contrast are expected to improve between 5% and 8% and combining these numbers, we expect passenger revenue per ASM to increase by 3% to 6%. As Mark noted earlier, this passenger revenue per ASM improvement reflects our expectation of a meaningful up-tick in our transpacific PRASM, as industry capacity is stabilizing after four quarters of significant increases and continued strong performance on our interisland routes. Dampening the system numbers is the fact that the long haul flying that we've added to the network tends to have lower RASM and CASM by its nature.

I'd also note that similar to the current quarter, we'd expect other revenue to grow at a slower rate than passenger RASM, diluting the growth in operating revenue per ASM compared to passenger revenue per ASM. On the cost side of the equation, we expect CASM ex fuel to increase slightly between flat and 3% for the quarter. As we experienced in the just-completed quarter, our maintenance and aircraft rent lines are expected to grow faster than ASM, much of it due to bringing new aircraft into the fleet under power-by-the-hour agreements which smooth maintenance expenditures over the aircraft's life, thereby foregoing the normal maintenance holiday for new aircraft in favor of a more stable cost profile over the entire life and while at the same time incurring higher maintenance expenditures on older aircraft that are not covered so comprehensively by such maintenance agreements.

We've also mentioned before we're giving our 717 aircraft their midlife checks, which further inflates the maintenance line. This is not the only area of inflation. Airport charges are growing much faster than the rate of inflation and we have little ability to mitigate this increase. We'll also be seeing some upward pressure from commissions and credit card fees and other revenue-related expenses. As you would expect, of course, we are reducing many of our other components of unit cost as we increase our capacity.

As usual, we are not going to give guidance for fuel prices at this time, but it's clear that if current price levels hold, fuel will remain our most significant cost headwind and in my opinion, the single biggest near-term challenge that we face. We expect our fuel consumption to be about 15% to 18% higher year-over-year in the second quarter as a result of our capacity increases.

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

Bill Greene, Morgan Stanley.

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

Hi, Ned.

How are you guys?

Good. Thanks. You?

Doing well. Thank you. Mark, over the last month since the tragedy in Japan, we've seen a number of comments from some of your peers at hotels talking about Hawaii bookings and the impact they've seen. Now, you guys obviously offer commentary on what you've seen in Japan to date, but I'm wondering if you can update us on what you're hearing from the hotels today rather than in the immediate aftermath of the tragedy? And if you can help us sort of understand some differences between what you guys experience and what they do reconcile the two?

Yes, thanks for the question Ned. I actually don't think today their experience is necessarily very different from ours, at least from what I'm hearing. I mean I too read a lot of the sort of doomsday predictions that were being issued by the hotel industry. My colleagues who are in touch with them on a day-to-day basis have reported to me more recently that they're not seeing those kind of big initial drops persisting.

Obviously, you have to get more accurate picture from them directly. I will say, I can talk more knowledgeably about what's happening to us and what we are -- the expectation that we have, which was formed largely by talking to our travel partners who are closer to the source of demand than we are is that a sharp downturn of the sort that we're seeing is predictable. They believe that they will start to see a recovery in early May at the conclusion of Golden Week. It will take a while for demand to build back again from that. But, that's what we have been told and that's certainly what we're hoping to see.

Okay. Great. Thanks. And certainly, you guys spoke to taking an aircraft a bit earlier here as you guys further commit to your westward expansion. Mark, we talked about this last quarter, but I'm interested if your views remain the same or if they've updated at all. Do you think a strategic relationship with one or more carriers could help you maximize the value you're creating with that westward network? And if you do think that helps in the value creation, is this something that's of interest?

Well, I'd sort of answer your question in two parts. First of all, I think we have got some important strategic relationships in our international destinations. We have terrific relationship with ANA in Japan, we got a terrific relationship with Korean Airlines in Korea and we've got a terrific relationship with Virgin Blue in Australia. So, we have not been slow to develop our sort of strategic alliances in the destinations that we operate to. It's important to bear in mind that most of the people sitting on the airplane between Hawaii and these westward destinations are actually citizens and residents of those countries and that makes us quite different from most US airlines, which depend on a balance of traffic that is US originating and Asia originating on their flights.

As to the broader question about value creation through strategic alliances, we remain very open to such ideas. We do periodically conduct essentially cost benefit analyses of opportunities that come up from time to time. So far, we are satisfied with the decisions that we have made have been best for our shareholders.

Understood, just as a quick follow-up. Certainly it makes sense for the Asia point of sale concept in your strategic relationship. But certainly feeder from the US increased demand would never be a bad thing. I guess maybe the question at its core is, is Hawaiian Airlines a westward focused growth carrier? Or is there an intent to grow more from sort of your east demand base as well?

Okay. In terms of east, I mean we do look periodically east, we are not expanding as Peter has mentioned in our prepared comments here, particularly on the West Coast, this is a market that we serve. We serve essentially all of the really big [city players] and we like our position there a great deal. We do periodically look at other destinations going eastwards as well. Whether we are going east or whether we are going west one thing is true, which is the point of sale is always outside Hawaii and what we are selling is Hawaii as a destination.

In all of our cities that we serve outside Hawaii, we do -- we try and create levels of relationship to help feed our flights and some of those relationships are with airlines clearly. And some of those relationships are also with travel partners.

Understood guys. Thanks very much.

You bet.

Michael Linenberg, Deutsche Bank.

Hey guys, good morning.

Good morning, Mike.

I guess, good afternoon to some on the call. Quick question here on the guidance. Did you give a CASM ex-fuel guidance for the quarter?

We did, Pete?

Yes, we did. We said up 0% to 3%.

Okay. So up 0% to 3%. And then, when I look at the PRASM, you gave us the load factor, you gave us the ELTs and you said, PRASM, I think, could be up in the 3% to 6% range, Peter. Now, I think, Mark, you indicated that transpac looks like it's going to run, it could be up double-digit for the June quarter, is that right?

Yes, that's correct.

Okay. And so, did you give an interisland number?

We did not.

Okay, okay. And who knows, I mean maybe the interisland is the missing piece, but if you assume that that's somewhat flattish or maybe up a little --

I think one of the bigger impacts here, Mike, is the effect of the changing nature of our network and that we've started to find these super long-haul destinations.

Yes.

And that's really, we can easily get into a situation where everything is up a little bit, but the aggregate is actually down, simply because of the length of haul of some of our new routes.

Yes, I just -- I was just trying to figure out how much down the Asia -- the international piece is and then recognizing that, I think Sydney is doing pretty well and Manila seems to be stable. It's not hard to get unit revenue down, 15%, 20%, but I guess, maybe that would be Japan, maybe even worse than that right at the start of the quarter and then maybe we see some improvements through the quarter. But I guess, maybe to your point, you have long haul and you do have a bit more seats, or, I mean I guess that the game plan is to bring in the A330s with more seats. So I mean that's what I'm trying to get to here is, you could have a sizeable unit revenue decline in the Asian operation.

Let me see if I can explain a little bit more clearly. I think on routes in which we have -- we're operating, this time last year, I think every single operation will have a positive year-over-year RASM improvement.

Okay.

We have a number of routes most specifically Tokyo and Seoul, which are new to us in the last six months. There is no basis for comparison on that. There is month-to-month comparison, but no year-on comparison. The fact that they are longer haul than our average will have a substantial impact on the Company's net statistics.

That's helpful the fact that you gave me the same-store sales, I mean, your -- the Japanese stuff and the Korean stuff, there's no comp in it, it's just -- it's a different calculation. That's right to get to that unit revenue number. Okay.

Yes.

That's good. Then just one quick last one, when I look at the hedging it indicates that it's crude oil, is that WTI or is that something else on uncrude oil?

Yes. No that -- it's WTI, right.

Okay. Is that -- Peter, is that something -- does it make sense, I mean, some carriers have done that move to swap out of line and move into another and of course there is cost associated with that especially when you're at the point of most divergence between the two, so there is obviously, timing is key here. Is that something that you look at on closely at or does it -- is the cost just prohibitedly expansively?

We're obviously looking at this all the time. I would say in general not inclined to make a major swap out of one and into another with the existing portfolio, but I would certainly not rule out and I think there is some likelihood that we might mix some different products in going forward. And on that I would say it's not necessarily just brain through some other crude oil number but looking at refined product, particularly heating oil. And there is obviously some pros and cons to that.

Yes.

There's a reason why we haven't done that recently, but we have had heating oil in the past and I certainly would not rule that out going forward.

Okay. Very good. Just wanted that clarification. Thanks guys.

Sure.

Okay. Thanks, Mike.

Bob McAdoo, Avondale Partners.

Hi, guys.

Hey, Bob.

Question on commissions which jumped a bunch and I assume that's because of the way tickets are sold in Japan. Can you kind of walk us through how we should be thinking about that going forward because otherwise I can't figure out why it should have jumped so much in the fourth quarter?

There are two things in that line and I'll get Peter to be more precise than I can be, but there are two things in that line. One is commissions, which are just as you suggested. Typically commissions that we pay on our sales overseas, because of the nature of distribution there. And we also have in that line things like credit card fees that we pay when we process payment through credit cards. So starting with the latter part, that tends to be just volume of credit card related. We have seen no surprise in any rate that we pay there. It really is just a question of simple arithmetic.

On the commission side, what you are seeing is again no surprises on the rates that we've agreed to pay in terms of commissions overseas, but actually a very substantial increase in the volume of overseas sales and that's tied very directly to not only Japan as you've suggested, but also Korea and our expansion of service in Australia. Now to help us to think about it going forward, I'll turn the hard stuff over to Peter.

Yes. Just to follow-up on that, Bob, when you think about commissions themselves, more than half of our revenue comes from our website and particularly through our interisland business, our West Coast business. And that occurs because we generate it ourselves, this comes with no commission. So when you think about commission, traditionally it's coming from the international and we grow that part of the business close to double. You are going to see the commission's line grow at that rate not at the rate of the overall growth of our business.

The other item that's on that line and this one is a little bit of a confusing accounting item, but we have -- the frequent flier, the change in our frequent flier liability on our balance sheet gets run through the commissions and other selling expenses line. And a portion of our frequent flier liability going forward is represented by how much it's going to cost to carry those passengers in the future and in turn the biggest variable piece of that is the fuel price. So we have this odd result that happens when the fuel price goes up between the beginning of the period and the end of a period. If we have the same number of miles in our liability, the liability grows and we have to run that liability growth on our balance sheet through the income statement and it hits on this line. And I'll be happy to have someone take you through the key accounts if you really want to get into the [terrible] accounting explanation.

I understand the theoretical accounting and how that could work, I guess the real question and it is pretty straightforward, the credit card fees, if your revenue stream is up 20% then you are probably going to see 20% more credit card fees. That fees is probably pretty easy to deal with.

Right.

But trying to pick out how much is Asian commissions versus this change in the value of the liability, it would be helpful if somebody can help us -- maybe certainly give me a call, we'll just kind of go through, so I get a sense of how much of it is what so I can think about. Okay, as we go forward Japan and et cetera is going to be up X percent so therefore I need to throw some extra (inaudible)?

Yes, listen you're making [entirely a] fair point. And we obviously don't have an adequate response for you now. Why don't you let us take away? We need to think about what kind of guidance we give to this more generally obviously to the market because it is a cost element that has a bunch of important moving parts with potentially big swing. So let us take it away, you make [an entirely] a fair point.

Right. One last thing and maybe I'm doing my math wrong, but when I -- you say that your income is $0.02 and then you make an adjustment for the hedges and it goes to $0.06. I thought maybe you're already plugging in that $8.4 million as an extraordinary item to the credit, which basically says that the X item number would be a loss of $0.15 not a loss of $0.03 or $0.04. I'm trying -- somehow I can't figure out what you used to get from the $0.02 to get to a $0.06 adjustment?

Basically Bob, we took the fuel hedge number that you are looking at, the -- (multiple speakers) roughly $8 million, but it's a tax adjusted number that we used.

Got it. That's what I forgot to do. Thank you.

Yes.

Hunter Keay, Wolfe Trahan.

Hi, how are you guys?

Good. Thanks, Hunter, you?

Very good. Thank you. Good, good. I'm wondering if you can sort of help me think about the elasticity of the customer base and your interisland business and sort of how conducive that is to fuel surcharges versus some of the other areas, more mature areas, will [that mature, let's call] it transpac. Is it fair for you to conclude maybe that you don't even really have to hedge that portion of your business since there is hardly any competition in the majority of your routes or is there any elasticity points that's obviously built in at some point that we are bumping up against?

Okay. The traffic that's flying on those routes isn't just interisland O&D traffic. In order to make the economics of that business work, we carry a blend of Inter-Island O&D traffic and connecting traffic from the mainland connecting for example on us, mainland connecting on other carriers and traffic from Asia on us and all of the other Asian carriers that sever here that are also connecting. The interisland portion, the true interisland O&D portion is relatively low-income elasticity demand, [there is also a low] price elasticity demand. That is not true for the other forms of connecting traffic because there is in addition to the alternatives they have flying interisland and there are several and those we do compete very, very aggressively here interisland, but also the increase in number of point-to-point services from the US Mainland, in particular to outer island represents direct competition to a lot of the traffic on the route. So, there are some practical limitations around the elasticity, the price elasticity demand of what's sitting on the airplane interisland.

Okay. That's interesting. Thanks for that Mark. And I may have missed it, but I don't think they have but I have DOT ruled on your application for back-up authority on the Haneda routes based on Delta's signaling that they may or may not be able to use it in time. And I knew you guys had applied for I think the ability to fly that route. Did they say anything to that application yet?

No, we haven't heard from DOT. Our interest in flying additional services to Haneda from Honolulu is undiminished and we applied for that one when we put in the first application and we thought it was a timely reminder to DOT that our interest remains as strong today as it did six to eight months ago.

Also you'd be able to use that slot to Haneda, you wouldn't have to use it from LA.

Correct.

Okay. All right. And Peter, I think you told us in the last call what you were -- I know you're not going to give fuel guidance, but can you tell us what you are paying for fuel right now?

The sort of spot market LA and Singapore prices, which are what affects us today is in the $3.30-ish range.

Okay. That includes any kind of present hedging gains, or is that the (multiple speakers)?

No. That's pure spot price.

Okay, okay. I think that's quite a way. Thanks a lot for the time.

Thanks, Hunter.

Steve O'Hara, Sidoti & Company.

Hi. Good afternoon. Could you just talk about the Honolulu Airport, is that adding any cost, I mean, I think they are redoing either your hangars or part of the airport?

Sure. Honolulu Airport charges have increased very, very steeply really since Aloha went away, essentially we've had the cost of the airport weren't reduced in the aftermath of Aloha's failure. So to begin with those costs were divided into less activity, so our rates went up. The rates have gone up again as we are funding the airport modernization, which is overdue and I think there's broad agreement of -- both among users and for example, the community here in Hawaii, that airport modernization is overdue. So, yes, we have seen substantial inflation in airport costs here in Hawaii.

Hawaii is not alone however and when we look nationwide and at our new services in Asia, there is a trend in airport cost, which though they may not be as high a rate of inflation as we are seeing in Hawaii is none the less well above, in general, well above the rate of inflation that we're seeing for other elements of our cost-based fuel accepted.

Okay. And then in terms of the convert hedge, what is that cost and how does the accounting for that work? I mean, what does that play out to? Does that happen only if the -- you need the hedge or if you can just walk me through that quickly?

Basically, in round numbers, the net cost to us and I'm looking for confirmation on this was about $7 million. And that's paying, I think it was $19 million to buy effectively the warrant that are added in the note and then receiving $12 million to sell the warrant at the higher strike price. And there are tax advantages to that as well as how it gets treated for the one pieces is, we will benefit from a tax deduction over time for the warrant we bought and the warrant we sold is treated as equity and so that is not treated the same for tax. So, net-net, we think this is really a tax effective and sensible way to protect our shareholders from some of the dilution that's naturally associated with the convert.

Okay. Thank you very much.

Operator, can we get the next one please.

Glenn Engel, Bank of America Merrill Lynch.

Good afternoon. A couple of quick questions. One, cargo -- can you break out what cargo and freight was alone?

The split there was about 5050 in terms of the two components I mentioned, the baggage fees and the cargo.

In terms of the increase?

In terms of the year-over-year change.

And I guess what surprises me is, why wouldn't cargo be up much more given the Asian routes I would think would be higher cargo routes?

Actually a good question. Haneda actually is an exception to the rule. Haneda is until recently essentially a domestic airport in Japan and the infrastructure for supporting international cargo at Haneda has been -- is very small. Most of -- the overwhelming majority of international freight activity -- air freight activity in Tokyo takes place out of Narita. And so, the volumes that we've seen out of Haneda have been very, very small indeed.

Candidly, this is a bit of a surprise to us as well. We've actually had very good results on the passenger side that have more than offset what we're discovering about the cargo market and of course we're working diligently to try and overcome the reality that when [fodders] and shippers in Japan think air freight, they send their stuff to Narita.

Secondly, you mentioned some cost of 767 lease returns, what was the amount and where did it show up in the expense line?

It shows up on the aircraft rent line and we didn't give the detail of the number.

Would I expect then my aircraft rent though to be less in the second quarter than the first quarter because those won't show up?

Yes, I think so. And the question is, there is a little bit of wild card around a couple of these trends. But generally, yes, that should be the expectation.

Third on the commission line, in the first quarter the commission selling was up 16% and revenues were up 23%, but you said again, that's because last year you had some frequent flyer hits. If I looked at the commission alone, how much would have been that as the year-over-year increase? I'd assume that would have outpaced revenues.

Yes, Glenn, given Bob's question earlier, we're going to go off and think about the way we can give some sort of broader information around the commission line. What I would say is, commissions alone for the reasons we discussed about international being where most of that commissions get generated in our international business growing by almost doubling, the rate of growth in the commissions itself is significantly above what you see in terms of the overall growth of our business.

And finally, can I assume that Seoul, the expectations for Seoul were for a slower ramp-up than Japan before the earthquake and that takes a while before you get to company-type margins more than you would have expected Japan, if the earthquake hadn't happened?

Yes, absolutely. Korea as a source of visitors for Hawaii is a developing market. It's grown very quickly off a very small base. Japan, we went into a very mature market with service to Haneda, the preferred airport. So Japan is naturally further down the maturity curve in terms of a route than (inaudible).

Thank you very much.

Bill Greene, Morgan Stanley.

Hey, Peter, just one quick cleanup here. I know that you guys have highlighted how the stage length adjustments can affect PRASM over time and that certainly makes sense. The flip side of that is, it obviously affects CASM ex-fuel side of the line as well. Just wondering if you're willing to give us some insight into how you expect the full-year trend to track here, not just the second quarter?

Yes. Right now, Ned, I'd say we're not giving guidance beyond the second quarter like we normally try and keep things to a quarter-by-quarter basis. What I would say is we would expect to see some of the trends continue. There's obviously some quarter-by-quarter differences that happen sometimes in the prior year numbers as well, but in general the trends are similar.

What will happen as we get further into the year, however, is that you're going to see flatter year-over-year comparisons in terms of some of the A330s being in the fleet last year and that's going to mean that some of the maintenance costs, et cetera were reflective in the prior year numbers.

Got you. Just to be clear, when you said the run rate from 1Q, you mean sort of quarters in the back half you expect to be up slightly as well although exact guidance is [to come later]?

Yes. As I said, we'll -- sort of we're not giving any guidance on the back half of the year CASM at this point.

Okay. Thanks.

Okay.

Thank you. There seems to be no further questions. I'd like to turn the floor back over to Mr. Dunkerley.

Okay. Thank you, operator, and thanks everybody for joining us on today's call. High fuel price is clearly something that Hawaiian along with everybody else is contending with. We see some pretty good demand dynamics out there. We are going to be working very hard to work on those costs that we can control and we look forward to talking to you at the end of the next quarter. In the meantime we'll get back to you with some guidance and some methodology on how best to look at our commissions and other selling line expenses.

So thank you all very much for joining us today.

Thank you. And that does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.