Hawaiian Holdings Inc (HA) 2011 Q2 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings second 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 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, the floor is yours.

Great, thank you, operator. Welcome everyone, and thank you for joining us today to discuss Hawaiian Holdings second 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 4.00 Eastern time today. If you have not received the release, it is available on the Investor Relations page of Hawaiian's website, or you can always e-mail me.

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

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

Thank you, Susan, thank you for everyone joining us on today's call. The second quarter was an eventful period for our company. We enjoyed strong demand reflected in improved North American yields, as well as, towards the end of the quarter, a meaningful rebound in Japan traffic. All of this progress, however, was undone by consistently high fuel prices.

As a result, our financial performance deteriorated when compared to last year. You'll have seen the press release issued at the top of the hour, that our second quarter results include a one-time charge related to the accounting for the purchase of 15 previously leased Boeing 717 aircraft, which took place right at the end of June. Peter is going to discuss this particular item in more detail a bit later on in the call. Excluding this charge, and unrealized losses on our -- (technical difficulty) -- review the results for the quarter in more detail. Peter?

Thanks, Mark. For the second quarter we reported a net loss of $50 million, or $0.99 per diluted share. Adjusted to exclude a special charge related to the 717 fleet acquisition, and to reflect economic fuel expense, we recognized a $72,000 profit for the period, or $0.00 per diluted share compared to adjusted net income of $11 million, or $0.21 per share in the same period last year.

Operating revenue during the quarter was $395 million, up $79.1 million, or 25% year-over-year, on a 21.1% increase in capacity. Passenger revenue increased 27.3%, compared to the second quarter of 2010. Load factor for the quarter declined 1.7% to 83.9%, while yields improved 7.2%. Buying this produced the passenger revenue ASM improvement of 5.1%, which was stronger year-over-year than our first quarter performance, and on the better end of what we projected on our last earnings call.

As Mark noted, North America to Hawaii revenue trends improved throughout the quarter, and we saw a nice rebound in Japan traffic in the last part of the period. Other revenue grew at a slower pace than our capacity, which was also consistent with our expectations.

Several of our ancillary sources of revenue, most significantly, charges for checked bags, are not applicable on our international services. And, as result, during the period when much of our growth is to new international markets, we wouldn't expect the other revenue line to grow proportionately with passenger revenue. Notably, our cargo revenue grew at a faster pace than capacity, reflecting the advantage of the A330 from a cargo perspective, as well as the market opportunities associated with new international markets that have meaningful cargo potential.

Moving on to the expense lines, fuel remains our most notable expense challenge. On the operating line we saw an increase of almost $57 million in fuel expenses. Our fuel consumption was 40.6 million gallons, up 18.3% from last year, while our average price per gallon at $3.34 was 46% higher than last year's $2.29. During the second quarter economic fuel cost per gallon, which includes the portion of our hedging gains or losses related to contracts settling during the period, was $3.26 compared to $2.33 in the same period last year. We continue to maintain a consistent and disciplined approach to fuel hedging, with about 50% of our consumption for the remainder of 2011 hedged, and 10% of our expected 2012 consumption hedged. At this point, the vast majority of our 2012 hedging is for the first half of the year. Details of our current hedge positions are available in the press release.

Let me take a moment to explain the special charge related to the termination of our 15 717 leases. As disclosed in the 8-K announcing the transaction, we paid $230 million for these aircraft. These purchases were financed with 8 year loans from the seller totaling approximately $193 million. The down payment of $37 million in turn reflected a $25 million cash payment, and the application of about $12 million in deposits that were previously held by the seller associated with the leases. Our purchase price appropriately reflected the lease commitment that existed on these aircraft prior to the deal, and the overall transaction is net present value positive from our perspective.

Prior to putting the aircraft on the balance sheet, we completed a third-party appraisal of the asset to determine the appropriate GAAP valuation. And, because this valuation was less than the purchase price, we recorded a one-time charge on our books associated with the termination of the leases totaling just over $70 million for all 15 aircraft. Adjusted for tax, this charge reduced our net income for the period by $42 million, or $0.83 per share. Excluding the special charge and fuel, our cost for ASM increased 0.5% in the quarter, which is towards the better end of our guidance at the beginning of the period.

Maintenance expenses increased $13.2 million over the prior year quarter to $42.7 million, including a combination of volume related increases associated with our growth, the timing of some particular maintenance events, and some contractual increases that we talked about at the beginning of the year. More specifically, the maintenance numbers reflect power by the hour expenses for our A330-200 that we didn't have in early 2010. A higher level of airframe and heavy maintenance -- engine heavy maintenance activity for both our 717 and 767 fleets, and contractual rate increases in our power by the hour arrangements for our 767 engines. Combined, these 3 items reflect about three quarters of the increase in our maintenance lines during the period.

Aircraft rent expenses increased 14.8%, or $4 million in the second quarter. This is a slower growth rate than we saw in the first quarter as we passed the anniversary of the addition of a couple of A330s during the quarter. Going forward, the refinancing of the 717 fleet will result in lower rent expense, to be offset in part by an increase in depreciation and interest. I will provide the bit more perspective on this when we cover 3Q guidance later in the call.

Commissions and other selling expenses increased $6.2 million, or about 36% during the quarter. Since most of our commissions are related to international travel, that particular component of this line grew disproportionately. In all, about 60% of the increase in this line was related to higher commission payments.

Credit card fees and booking fees also increased during the period because of higher sales volume. And, providing a partial offset, our frequent flier expenses reduced during the quarter as result of the impact of lower fuel prices on the valuation of the frequent flier liability on our balance sheet. And, to clarify, that's lower relative to the last valuation at the end of a first-quarter, even though it is higher year-over-year.

Below the operating line, we reported non-operating expense of $12.4 million in the quarter, compared to non-operating expense of $8.1 million in the prior year period. The most significant difference year-over-year relates to the losses on our fuel hedge position during the period, as the forward curve for oil prices declined between the end of March and the end of June. As most of you know, our hedge positions are marked at fair value under our accounting policies. Excluding unrealized gains and losses on our fuel hedges for both periods, we have non-operating income of $1.1 million in 2Q '11.

Turning now to the balance sheet. We ended the quarter with $303 million in unrestricted cash, and another $5 million in restricted cash. Our revolving credit facility remained undrawn at the end of the second quarter, providing additional available liquidity of $65.4 million, which reflects the available borrowing base under the facility, net of certain letters of credit that are supported by it.

During the third quarter we expect are restricted cash to increase by $30 million to $35 million as a result of an increase in cash hold back on our primary credit card processing arrangement, that will be funded through advance ticket sale remittances. The level of hold back under this agreement is dictated by certain financial triggers, and based on the most recent calculation our hold back will be going back to the 25% level that it was at most recently at the end of the third quarter of 2010. Despite this, we are comfortable with our overall liquidity position, and based on our current projections, we don't foresee a further change in the hold back percentage this year.

Excluding the 717 acquisition that we talked about earlier, our CapEx during the period was $87.5 million. The majority of this relates to the final payments for the acquisition of our fourth A330 in April, and pre-delivery payments on future aircraft and engine deliveries.

We anticipate just over $100 million in Capital Expenditures for the remainder of 2011, of which the most significant items are an A330 to be delivered in October, for which financing is already committed, and pre-delivery payments on aircraft and engines.

During the second quarter we contributed $3.4 million into our pension and benefit plans, bringing the year-to-date total to $5.3 million. We expect to contribute an additional $6.7 million during the remainder of 2011. With that I'll turn the call back over to Mark for further commentary on the business.

Thank you, Peter. I'd like to start by following up on Peter's comments regarding our balance sheet. During the first half of 2011 we completed a series of financing transactions. We signed financing commitments for 5 of the 6 A330s that we will receive in 2011 and 2012.

In addition, we are in the process of negotiating terms on other financing that will cover our remaining 2012 delivery, and 2 of the 3 aircraft that we will receive in 2013. We also issued $86 million in convertible notes, altering our cash balances, and enabling us to take advantage of the opportunity to purchase the previously leased 717. These steps, along with the refinancing of our revolving credit facility late last year, leaves us in a comfortable liquidity position.

Let me now take a couple of moments to elaborate on the 717 transaction that we completed at the end of June. First, we agreed to lease 3 additional 717s to supplement our Inter-Island fleet. With these aircraft, we will be able to selectively add some capacity of peak hours of the day, and peak days of the week, to handle growing connecting traffic. In addition, introducing these aircraft into service will allow us to restore spare aircraft availability to better accommodate maintenance requirements and operational disruptions. The availability of these aircraft will add less than 1% toward total available seat miles in the fourth quarter.

At the same time we agreed to purchase the 15 717s currently in our fleet. This refinancing has a positive MPV, measured over the remaining term of the previous leases. In addition to this, owning these aircraft gives us much more flexibility at the end of the decade than would have been the case were the aircraft still leased. This transaction moves what was an off-balance sheet commitment, on to the balance sheet. But, we have not materially affected our overall level of obligation as a result of this transaction.

With that, let me turn to the results for the period. As I said at the beginning of the call, demand was strong during the second quarter, and our revenue performance was in line with expectations that we laid out in our last conference call. In particular, I'd highlight our North American routes between the Western US and Hawaii. On our last earnings call we projected double-digit revenue per seat mile improvement on this part of our network. A meaningful divergence from flat to negative performance that we've seen over the past couple of years. We actually posted a much higher 14% revenue per ASM improvement, chiefly as a result of higher yield. Much of the yield increase is attributable to the stabilization of industry capacity on the routes between Hawaii and the US mainland. During the just completed quarter, industry capacity between the Western US and Hawaii increased 0.7%, and that's compared to an average year-over-year increase of 11% over the 4 preceding quarters.

Looking ahead, we expect a continued improvement in North American revenue performance. PRASM on this part of the business should, again, approach double-digit increase for the third quarter. With fuel prices remaining high, it is doubly important that we continue to boost returns from the largest part of our network.

Our Neighbor Island business within the state of Hawaii remains relatively stable. For our part, we operated only marginally higher capacity in the second quarter than we did one year ago. Reflecting the stability in this market, PRASM improved by about 2%. We continue to enjoy the best competitive position by far on these routes.

Of course, much of the conversation on our last earnings update related to the nation's expansion of our international business. Particularly in light of the tragedy in Japan that had a meaningfully -- that meaningfully affected revenue performance on routes to and from Japan. As you know, we bucked the trend and decided not to reduce our service to Tokyo. We made this decision based on our first-hand assessment that the downturn in traffic would be short-lived. With the second quarter now in the rear view mirror, we can report that this assessment was indeed correct. During the month of June, Tokyo load factors rebounded to about 80%, while yields remain strong.

In a further indication of our confidence in Tokyo, we've recently upgraded equipment from the 767 to an A330 on this route. And, about 2 weeks ago we initiated daily service to Osaka. As we said last quarter, the business case for Osaka service has several compelling elements. First, like other Japan to Hawaii routes it has seen a reduction in capacity in the past couple of years as JAL has reorganized its international operations. Second, the distribution structure is identical to that in Tokyo, allowing us to expand our existing relationships. Lastly, our early success in Tokyo reinforced the opportunity and demonstrated the level of demand for our unique Hawaii Starts Here service.

Early signs for this market are extremely positive. We've received a warm reception from customers and the travel community, and we expect this route to develop into another cornerstone of our international network. With this latest addition to our network, we've now inaugurated service to 3 new international markets in the past 8 months. This represents a substantial evolution of our business.

That we've accomplished so much in so little time is a tribute to the dedication of all my colleagues here at Hawaiian. My confidence in our Asia strategy is in large part a reflection of my confidence in my coworkers. Gaining a foothold in a foreign market is never easy, but the quality of service that Hawaiian delivers, on the ground and in the air, and the hard work of everyone behind the scenes makes this challenge surmountable.

Our other international services also continued to perform well. Demand on our Sydney route remains particularly strong. In April, we expanded our service on this route to daily for the summer. This increase in capacity has been easily absorbed by the growing demand in the market. The strength of the Australian economy and of the Aussie dollar, has helped make this one of our stronger routes. Beginning in December, we will be returning to a daily Honolulu-Sydney schedule, having had to reduce to 5 frequencies per week in the interim as a result of aircraft availability constraints.

We continue to perform to expectations in the Seoul interim market, and are keen to see that presence grow as the market expands. And, we continue to enjoy a strong position on our Manila service with strong loads and improving year-over-year yields. Now let me turn the call back over to Peter to update our third quarter outlook before we take your questions.

Looking to the third quarter, we expect our capacity to increase between 15% and 17% compared to the same period 2010. This increase reflects the additional long-haul international services that we've added over the past 8 months, but is lower than the past couple of quarters as we've now passed the anniversary of adding 2 of our A330s.

While the year-over-year increase in our international operations remains notable, Neighbor Island capacity will be close to flat in the coming quarter, and North America capacity will decrease slightly year-over-year, as we've moved some aircraft into international service. For the full year, we continue to expect capacity to increase 17% to 19%.

We expect third quarter load factor to be slightly lower year-over-year, within a range of down 2% to flat, reflecting slightly lower load factors on the more rapidly growing international routes than we enjoy on our North America business. Yield, meanwhile, is expected to improve between 8% and 11%. Combining these numbers, we expect passenger revenue per ASM to increase by 6.5% to 9.5%.

Other revenue will, again, grow at a slower rate than passenger revenue for the reasons I highlighted in my earlier comments. As a result, we would expect operating revenue per seat mile to increase about 2% to 3% less than the growth rate in passenger revenue per ASM. On the cost side of the equation, we expect CASM, ex fuel, to be relatively stable year-over-year in the upcoming quarter, within a range of down 0.5% to up 2.5%.

As we experienced in the just completed quarter, our maintenance line is expected to grow faster than ASM. Much of this is due to bringing a new aircraft into the fleet under power by the hour agreements, which smooth maintenance expenditures over the aircraft life, but thereby forego the normal maintenance holiday for new aircraft in favor of more stable cost profile over the aircraft life. While at the same time, incurring higher maintenance expenditures on older aircraft that are not covered so comprehensively by such agreements.

We'll also be seeing some upward pressure from commissions and credit card fees and other revenue related expenses. As you'd expect, we are reducing many of our other components of unit cost as we increase our capacity.

Also reflected in our CASM, ex fuel, guidance is the change in the ownership structure of our 15 existing 717s. Primarily as a result of this change, we expect aircraft rent expense to decline between $6 million and $7 million compared to the just completed second quarter. At the same time, our depreciation and amortization expense is expected to increase about $3 million from the second quarter to the third quarter, in part due to the offsetting impact of bringing the 717s on to the balance sheet.

Reflective of our recent financing, we would also expect interest expense to increase approximately $3 million from the second quarter to the third quarter. Fuel prices remain our most substantial cost challenge, but sticking with our normal practice, we are not going to give guidance at this time. We expect our fuel consumption to be 14% to 16% higher year-over-year in the third 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. I will turn the call back over to the Operator now to open the line for Mark and I to respond to your questions.

Thank you, sir. We will now be conducting a question and answer session.

(Operator Instructions)

One moment, please, while we poll for questions. Our first question is coming from the line of Bill Greene of Morgan Stanley. Please state your question.

My first question was just about Alaska starting some new service from Southern California to Hawaii. Do you think you need to start to augment some of your non-Honolulu flying? Is that a risk factor that you need to think about? Will that take from Inter-Island? How do we think about all of these efforts to go to some of the islands not through Honolulu?

Hi, Bill. I think first of all, the most recent announcement by Alaska is to fly San Diego to Honolulu. It wasn't actually neighbor island flight. But if I understand question correctly, one of the -- the gist of it, if I have it correctly, is does this increased level of flying direct to neighbor islands take away from within State of Hawaii flying.

The answer is, probably yes, a bit, but it is being quickly replaced by a lot more connections from Asia as the Asian business grows. We've seen a great deal of interest in visiting neighbor islands, Honolulu is the only port of entry at the moment in the State of Hawaii, so we are picking up that traffic.

The other thing that I would mention is that a great deal of the traffic that flows between the islands of the State of Hawaii are people who are residents here going about their everyday lives. And their travel patterns are unaffected by the capacity that will be going direct from the US mainland into the neighbor islands.

Okay, that's helpful. I know -- you obviously just give the guidance for the full quarter on PRASM. But given the leisure mix that you tend to have, and I tend to think of September as having a little bit less leisure, is there any qualitative comments you can offer about, I know that's far out, but you do have a long booking curve, about how it looks into the fall? Is there reason to worry as we look out that far, or does it look consistent throughout the quarter, is that what drives the guidance?

Subject to the caveat that we have in this business in general, we've got limited visibility going into the future. I would say that we certainly have been cognizant of headlines in the newspapers talking about level of consumer confidence taking a dip, and so forth.

We have not seen that reflected in bookings going forward. And there is no part of our comments at the moment that are indicating a weakness that we see at this stage.

Okay. That's very helpful. Thank you.

Thank you our next question is coming from the line of Hunter Keay. Please state your question.

Hi, everyone, thank you.

Hello, Hunter.

As we think about 2012 a little bit for a modeling perspective, it is probably safe to assume obviously you're going to be annualizing some of these new services as the long tail stuff to Asia. Probably safe to model in well over 10% capacity growth, at least maybe on a preliminary basis for next year at this point? That's a question, sorry.

Yes. No, the silence is us thinking.

We haven't, obviously, under given guidance on 2012. I can tell you from a fleet perspective, obviously, we've now annualized two of the four A330s that we're flying today. So, much of this year's growth in capacity is really last year's aircraft deliveries, because, in fact, in 2011 we've had two A330s come in the fleet and two 767s will leave the fleet over the course of the year.

So, it is a little less of that capacity that we'll be rolling into the coming year. Offsetting that, we do have some fleet deliveries in the first half of next year. We have four A330s that will join the fleet over the first and second quarter. So, you will probably see that capacity grow. I think your numbers probably not too far off, although, I wouldn't be quoted on it at this point.

And you can expect it to be more back end loaded in 2012 than it was in 2011 because we do have aircraft coming in the early part of the year and they will be hitting just in time for the summer peak in demand.

Okay, thank you, Peter, that is helpful. As I think about, obviously, the change of bringing the 17s onto the balance sheet and the impact that has on, obviously, rent D&A, and I thank you for that color. Then again, you're going to probably be looking at pretty meaningful capacity growth next year.

I know this year was a big bull wave for heavy checks and maintenance events, and whatnot on the 717 engines. Any reason why I shouldn't be pretty optimistic about CASM, ex fuel, next year in 2012?

Yes. Again, I'm not going to get into specific to guidance yet. There's a couple of things I could suggest, though, that perhaps gives you some level of optimism. One of the issues we were dealing with this year was a -- some inflation in our power by the hour contracts.

There are a couple of things that drive that, and this is on the 767 engine, some of it is annual escalation factors that are indexed to certain inflation indices, those obviously continue, but we did have some step function increases that don't come into play next year. They aren't repeated next year, so that should prevent a little bit of what hurt us some coming into 2011.

We're also going to be getting to the end of our seat checks, our heaviest seat check on the 717 fleet. That airplane has got its heaviest check at the 10 year point in its life, and we've completed all but three of those now. The other three will be done in the back half of this year. So, there's a little bit of relief on that, but still too early to give you guidance on 2012, and more specificity than that.

I would just add some color, which is to say, this is a year of heavy maintenance activity. We would expect less of that heavy maintenance activity going into 2012. There are some rate issues which will come into play, but that is the way you should look at it.

Okay, thanks both of you. Appreciate it.

Thank you.

Thank you our next question is coming from the line of Michael Linenberg of Deutsche Bank.

Hi, good afternoon guys.

Hi, how are you?

Hi. Peter, can you just walk through again the increase in the hold back. What was the trigger? What drove that? What is the metric?

There is a fixed charge covenant -- there's actually three triggers in that contract. One is our level of unrestricted cash, one is our trailing 12 month operating income, and one is a trailing 12 month fixed charge covenant. And as we have seen some negative year-over-year financial comps over the last couple of quarters, those have just tripped us into the 25% level as we come to the end of the second quarter.

Okay, then, so basically your restricted cash -- what is it? It goes up to $30 million -- did you say $30 million or $35 million, what was--?

It will go up about $30 million to $35 million. It fluctuates, obviously, with the amount of hold back or with the amount of credit card liability that's outstanding under those particular contracts, that's Visa and MasterCard so it is our biggest credit card deal. It is not all of our ATL. There's a lot of other things that go into our ATL, including some frequent flier liability, so, it is 25% of a piece of the ATL.

Okay, then you listed the different components, and I think you said there is a fixed charge covenant, presumably doing the 717 deal, where you have leased airplanes and then putting them on balance sheet, that -- the way the math worked, or the way it's defined, that one tripped it, right?

No, not per se. This was not something that occurred because of that transaction or because of the change in ownership.

Okay. Perfect. That's what I was getting too. And then, my second question, when we think about Haneda, out of the box it did really well. And then you, obviously, had the consequences of the earthquake and the tsunami.

Recognizing that we are back to, I guess, I think Mark said strong yields and an 80% load factor, that's good. Can you give us any color on a feel for how that margin of that route today, how it is doing today versus your initial success. I mean, is it a similar level of profitability? We can get back to decent -- good loads, and we can get back to strong yields.

But if it turns out that we are break-even, or maybe even only modestly profitable, any color that you can give on this. I know you cannot give us route by route dynamics, but we are really trying to get a feel here, because this is a good quarter for you typically, and you come in with a break-even result. How much of it is that these international routes are actually a drag on the P&L. I'm trying to assess that.

Okay. Let me see if I can answer your question. Yes, we think that Japan is making profits for us as it was before the tsunami. To try and estimate the financial impact of the tsunami on us, which was basically one route, it probably -- well, it rounds to $6 million.

Okay.

Over that period in time. The second quarter, just by the way, seasonally is not necessarily one of our strong quarters. It tends to be stronger for the business focused carriers than it does for us as a leisure focused carrier. That's not in any way trying to suggest that we are singing from the rooftops about these results.

Fair enough.

I did want to correct that.

Okay. Thank you, then.

Sure.

Thank you, our next question is coming from the line of Steve O'Hara of Sidoti & Company. Please state your question.

Hi, good afternoon. With the number of aircraft coming in next year, what ability would you have to cut capacity, or what steps could you take should fuel spike at that time or even later this year? And I know you have some hedges in place, but not a terrible amount of protection, I guess.

Yes, we own some aircraft, and so, we have the ability to put some airplanes on the ground in that scenario. Let me just emphasize that we don't see anything in the tea leaves at the moment to give us concern that that's a likely scenario, but this is a fast-moving industry and we always have to be prepared for those sorts of outcomes.

But I think we are in a position to put some planes on the ground. I think we've got a number of services, both within the islands of the State of Hawaii, and particularly on the US mainland where we can take frequencies down without abandoning routes and basically losing the investment that we placed into the routes.

Okay. Then, in terms of the -- you had said that the Tokyo load factors had recovered to the 80% range. And, where were they in the depths there?

They were down to between 20% and 30% once.

Wow, okay.

Not to 20% or 30%, down by 20% to 30%

Right. And then, finally, the frequent flier liability change, what was that in dollar amount on that line item there?

It was -- it is not a huge number. I think it was, roughly, in the $1 million range. But you'll remember, Steve, in the first quarter there was a substantial increase in that liability as fuel prices went up very, very rapidly in the first quarter. So unfortunately that adds a little bit of variability to that selling expense line and that's just a function -- a gift of gap is what I will call that.

Okay. Thanks a lot.

Thank you. Our next question is coming from the line of Kevin Crissey of UBS. Please state your question.

Hi.

Hello, Kevin.

Hi, thanks. Hotel sales, maybe you could talk about your attach rates. Are you seeing -- is there a difference from US point of sale versus international, given how much you sell through tour operators in Japan and such?

Sorry, Kevin. I'm not sure I'm familiar with the expression attach rates.

For every airline ticket you sell, how many hotel rooms -- for every 100 tickets you sell, how many hotel rooms are you selling attached to that?

That is not a big part of our direct business. When we are selling in Japan, for example, we are selling the air portion, which is put together in a package by the very significant travel companies that operate in Japan. And, they do the packaging.

They do the production of the material, all of the add-on extras, and so forth. So we are not centrally in the hotel selling business. It is actually an area that we're trying to develop, principally, with the focus on selling off the US mainland as opposed to overseas where local knowledge of the market is tremendously important.

Okay. So, it is still a very small percentage, even from the US mainland, then I would take it?

Yes, it is a very small percentage.

Thank you very much.

Thank you our next question is coming from the line of Rob McAdoo of Avondale Partners. Please state your question.

Yes, on next year 2012, you had four 330s that are coming in, you said, towards the early part, in time for the summer. What do you have in the way of returns? How many of those are net incremental aircraft versus where you are today?

Rob, we've got 3 net incremental airplanes with, if you include the one that goes out right at the end of 2012.

So, you'll have all of your 767s plus 4 aircraft until the end of the year and then you're down -- then it goes back to just up 3?

That's correct. This year we are essentially flat. We've got 2 in and 2 out. Next year has these -- it is going to be plus 3. With, essentially 4 for the summer period which is obviously our peak, and the situation that we like.

Okay. Then I didn't understand when you were talking to Michael a minute ago, you said something rounds to $6 million, what was that?

That is the financial impact of the tsunami on our Japanese business in the second quarter.

That's a revenue impact, or a bottom-line impact? You flew every day so it would be revenue equals bottom line, I guess?

Yes, its contribution. There's some that we've taken out there for the fact that it wasn't quite as expensive to operate when we didn't have as much fuel to carry, with the lighter loads and so forth.

All right, great. That's all I had. Thanks.

Thanks.

Thank you, our next question is coming from the line of John Reardon of Dominique and Dominique.

Hi, good morning.

Hi, John.

I was just looking at some of the fares. Is it safe to say that the Osaka fares are higher than the Haneda fares? And then, secondly, just to follow-up with your response to Bill Greene, looking at the fall fares from the West Coast it appears that they are hanging right in there.

And could you maybe comment, as much as you can see, on advanced bookings. And finally, recently there's been a couple of odd articles in the news press about travel agents, here in the US, pushing for Visa relief for tourists from China. Are you seeing anything on those -- on that front?

Okay. Let me just deal with those in the order you served them out. Osaka, yes, we do have a small fare premium for Osaka over Tokyo reflecting, frankly, local conditions in the marketplace. So, we are not going to posit that it will be that way for all time, but we obviously move and flex our fares according to what we think supply and demand conditions are route by route.

With respect to fall fares, as I mentioned a little while ago, so far as we can see, and we can see out a few months, we don't speculate much beyond that because this is a very fast-moving business, but from what we can see going forward, I think we believe that the strong level of demand that we have seen for Hawaii vacations this summer will continue into the fall. We have not seen any indication of a weakness in demand.

In terms of travel agents and others trying to bring pressure to bear for a change in the Visa regime between the United States and China, I haven't seen specifically what you're referring to. I know that there are many interests who, in travel and tourism, which after all is an important export of the United States, that would like to see some changes that would help US exports with China, and we would certainly count ourselves amongst them.

Okay, thank you.

Thank you. Our last question is coming from the line up Hunter Keay of Wolfe Trahan. Please state your question.

Thanks for taking my follow up. Peter, can you tell us what you paying for jet fuel right now?

Too much.

Too much, is what Mark says. And he's right. LA spot prices were about $3.11 yesterday, and today, I didn't see what happened in the last couple of hours of the day, but it didn't start off as a good day.

I suspect we are somewhere in the $3.10, $3.15 range right now, and obviously, that's been moving around a fair bit. And, I hope that we are on the verge of a little bit of relief, as soon as they can sort out however they are going to pay our bills in, Washington.

Wait, just to clarify that for a second. I'm talking, like, what is the into plane cost -- when you've given this metric in the past, I don't know if you've been citing the spot price, or the number that actually flows through the non-GAAP P&L, that's what I'm driving at at this point.

I think in the past I've quoted that spot price, but I would say all in into plane, we are probably not too far off from where we were on average through the second quarter right now. And it's been, obviously, quite volatile over the last little while.

And are your Hedges in the money including what you're paying for premiums at this point?

We are net in the money, and you can see there is a fair bit of detail in the table in the press release that should indicate how those sit.

Okay, great. Thanks.

Thanks, Hunter.

Okay, thank you, everybody, for joining us on today's call. The second quarter was an eventful time for us highlighted by a continuing expansion of our network, several important financing transactions and strong revenue improvements. We do continue to face very substantial headwinds over the course of the next quarter given the escalation in fuel prices.

But the consistent strengthening of our business over the past several years positions us pretty well to meet this particular challenge. We appreciate everybody's interest, and we look forward to talking to all of you again before too long. Thank you, very much.

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