Hawaiian Holdings Inc (HA) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings Third-Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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. Thank you, Ms. Donofrio. You may now begin.

Great. Thank you, operator. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings third-quarter 2011 financial results. On the call with me today are Mark Dunkerley, President and Chief Executive Officer, who is participating from Asia where he is travelling on business, 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 contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them.

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

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

Thank you, Susan, and thank you to everyone for joining us on today's call. Before I begin my remarks today, I should note that as Susan has indicated, I'm participating in today's conference call from a location outside our Honolulu offices. I'm traveling in Asia, meeting with business partners, and I raise this so that in the event that the connection drops during the call, you'll understand why it may take a moment or 2 to get me back on the line.

As you can see from the press release we issued a little while ago, Hawaiian posted good results for the third quarter. Our operating income and income before taxes was stronger than the prior-year period, while net income was slightly lower because of a higher effective tax rate year over year, the details of which Peter is going to cover in a few moments.

Robust demand in each of the 3 main geographic areas of our operations, continued cost control throughout the business, and a slight moderation in the price of oil combined to help deliver these numbers. It's particularly noteworthy that despite widespread concern that poor customer confidence would affect our business going forward, we've not seen weakening in our forward bookings.

Our fleet transition continues apace with our fifth A330 joining the fleet just last week. This aircraft replaces the 767, which has been returned to its lessor at the lease end. Today we have 5 A330s and 16 767s in our wide-body fleet. Four additional A330s are scheduled to join the fleet in 2012. Committed financing is in place for each of the 2012 deliveries, and for 2 of our firm 2013 orders. With the recent volatility in the world's financial markets, we're pleased to have firm financing commitments on our next 6 deliveries.

Before I turn the call over to Peter, I'd be remiss if I did not comment on some of the recent changes we've made in our management team. This is going to be Peter's last call as our CFO, as I've asked him to move into a new position as our Executive Vice President and Chief Commercial Officer. Peter has built a strong finance and accounting team that has contributed greatly to putting us in a position to invest in the development of our business. We've got new aircraft arriving, and we're expanding into new geography with services to Japan, Korea, Australia, and the Philippines. Making sure that our revenues keep pace with this growth, and that which we have planned, is going to be key for our business over the next few years. For this reason, I wanted to strengthen the part of the business responsible for generating revenues. Working with Peter in his new role will be Glenn Taniguchi, who, as Senior Vice President of Sales and Marketing, has spearheaded our successful entry into Asia, and who is one of the most knowledgeable executives on the Hawaii market in any company in any industry.

As Peter makes this move, we're excited to be adding Scott Topping to our leadership group as our new Chief Financial Officer. Some of you may already be familiar with Scott, who's held positions of increasing responsibility at Southwest since 1995, and headed up Treasury functions there for the past 5 years. In this role, he was responsible for their successful fuel hedging and financing activities. We couldn't be happier about being able to attract a candidate of Scott's caliber, as Peter moves to his new role. We've made a bunch of other changes and additions to our management line-up, and we're going to be covering those in greater detail during our upcoming Investor Day in New York.

With that said, let me turn the call over to Peter to review the results for the quarter in more detail. Peter?

Thanks, Mark. I'm looking forward to new challenges as I move to a new role at Hawaiian, and echo your thoughts about welcoming Scott to our team.

For the third quarter, we reported GAAP net income of $25.6 million, or $0.50 per share, compared to $30.5 million, or $0.59 per share during the same period last year. Adjusted to reflect economic fuel expense, we recognized net income of $30 million, or $0.59 per share this year compared to adjusted net income of $28.5 million, or $0.55 per share in the same period last year.

Our effective tax rate in this year's third quarter was 46% compared to 28% in the third quarter of 2010. The primary reason for the higher tax rate this quarter is a change in certain of our state tax apportionment ratios that have the effect of reducing our future tax liabilities in these states. And as a somewhat paradoxical consequence of this change, we took a non-cash charge in this period to write off a portion of our deferred tax assets related to these states.

In the third quarter of 2010 by contrast, we enjoyed a lower than normal effective tax rate because of 1-time credits associated with the release of reserves related to uncertain tax positions for which the applicable statute of limitations expired. In both cases, the deviation from trend is related to items unique to the reporting period, and on a going-forward basis, we would expect to have an effective tax rate between 37% and 40%, which is slightly lower than our previous steady state assumption. On a cash basis, our tax liabilities are minimal in the near term because of depreciation benefits related to our recent aircraft acquisitions.

Turning now to less convoluted issues, operating revenue during the quarter was $456 million, up $104 million or 29.5% year over year on a 16.1% increase in capacity. Passenger revenue increased 33.1% compared to the third quarter of 2010, reflecting double-digit PRASM increases in both our neighbor island and North America operations, and very strong results from our growing international operations.

Load factor for the quarter declined 1.7 percentage points to 85.2%, while yields improved 16.9%. Combined, this produced passenger revenue per ASM improvement of 14.6%, which was on the better end of the revised guidance we issued about 1 month ago. Our Japan to Hawaii routes were a notable highlight in the peak summer period, reflecting a rebound in demand from what was experienced in 2Q in the immediate aftermath of the terrible earthquake and tsunami.

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 to our international services. And as a result, during a 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, however, our cargo revenue continued to grow strongly, reflecting the superior cargo capabilities of the A330, as well as the market opportunities associated with new international routes that have meaningful cargo potential. In November, we will be introducing the A330 to our San Francisco flight, which we expect to enhance our cargo results on that service as well.

Moving on to the expense lines, fuel prices and, in particular, the crack spread remain high, although we did see some moderation in price levels from their most oppressive levels as the quarter progressed. On the operating line, we saw an increase of $52 million in fuel expenses. Our fuel consumption was 42.9 million gallons, up 14.3% from last year, while our average cost per gallon at $3.17 was 40.9% higher than last year's $2.25.

During the third quarter, economic fuel cost per gallon, which includes the portion of our hedging gains and losses related to contracts settling during the period, was $3.22 compared to $2.28 in the same period last year. We continue to maintain a consistent and disciplined approach to fuel hedging, with about 56% of our consumption for the fourth quarter hedged, and 20% of our expected 2012 consumption hedged. Details of our current hedge positions are available in the press release.

Excluding fuel, our cost per ASM decreased 2.3% in the quarter, which is better than anticipated by our guidance last month. Notably contributing to this improved performance was the rescheduling of some maintenance activity from the third quarter to the fourth quarter and into the beginning of 2012. We've also been able to expand our operations throughout 2011 without proportional increases in certain expense categories.

Maintenance expenses increased $6.1 million over the prior-year quarter to $36.3 million, resulting from increases associated with our growing fleet, as well as higher contract rates. More specifically, the maintenance numbers reflect power by the hour expenses for an A330 that we did not have in 2010, and contractual rate increases in some of our other power by the hour arrangements, partially offset by lower airframe heavy maintenance expense on our 767 fleet.

Aircraft rent expense decreased $4.5 million, or about 15%, in the third quarter, which reflects the refinancing of our 717 fleet at the end of the second quarter, partially offset by some additional lease return expenses we incurred on the 767 that we returned at the end of its lease a few weeks ago. Depreciation and amortization expense increased 21% year over year in the quarter, attributable primarily to the A330 we purchased in April and the transition of our 717 from lease financing to ownership.

Below the operating line, we reported non-operating expense of $13.6 million in the quarter compared to non-operating income of $2.9 million in the prior-year period. The most significant differences year over year relate to the recognition of losses on our fuel hedge positions, and increased interest expense associated with additional financings in 2011.

With respect to the fuel hedges, we recognized losses in the period of $9.7 million. As most of you know by now, our accounting policy on fuel hedges is to mark to fair value at the end of each reporting period, and at the end of September, WTI crude prices had fallen below $80 per barrel from over $95 per barrel at the end of June. Realized losses on hedge positions for the third quarter of $2.3 million are reflected in this number, and are also reflected in our economic fuel cost adjustment.

Turning now to the balance sheet, we ended the quarter with $289 million in unrestricted cash, and another $35 million in restricted cash. Our revolving credit facility remained undrawn at the end of the third quarter, providing additional available liquidity of $50.8 million, which reflects the available borrowing base under this facility net of certain letters of credit that are supported by it.

CapEx in the quarter was $28 million, which includes progress or pre-delivery payments of $19 million related to future aircraft and engine deliveries. Through the first 9 months of the year, our CapEx has totalled $176 million. During the fourth quarter, we expect CapEx to fall in a range of $80 million to $85 million, again, including pre-delivery payments on future orders, as well as a new A330 that we took delivery of in the first week of October. In addition during the third quarter, we contributed $7.6 million into our pension and benefit plans, bringing the year-to-date total to $12.9 million, which fully satisfies our required 2011 plan year contributions.

We remain well positioned with our financing activities, and reached a couple of milestones in this regard over the past few weeks. As I mentioned a moment ago, earlier this month we took delivery of our fifth A330, which was debt financed through an agreement that was announced at the end of June. As this transaction closed, we elected to fix our interest rate for the 12-year term of the loan, locking in advantageous rates. We have additional commitments in place for debt financing for our first 2 deliveries in 2012.

Last week, we also completed an agreement for sale leaseback financing for 1 of our firm A330 orders in 2012, and 2 firm orders in 2013. We were quite pleased with the market's appetite for this financing, and that is reflected in terms that we think are quite competitive. This recent deal with Hong Kong Aviation Capital further diversifies our lending sources, as it is our first financing with an Asian institution. With this agreement behind us, we have financing commitments in place for our next 6 deliveries between now and the middle of 2013, as I hand the reins for this activity over to Scott next month.

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

Thank you, Peter. As I said at the beginning of the call, demand was strong during the third quarter, and our revenue performance exceeded the expectations we laid out on our last conference call. A substantial increase in yields was partly offset by a full reduction in load factor, leaving us with a healthy 14.6% increase in passenger revenue per ASM.

Our North American routes between the western United States and Hawaii remain the largest part of our operation. The margin by which North America flying is the largest part of our operation has nonetheless declined in line with our strategy of diversifying the sources of our revenue. This quarter, in fact, marks the first time since 1993 that the western US to Hawaii routes account for less than half of Hawaiian's total passenger revenue. This percentage is down from a revenue share of close to 60% for the comparable period last year.

On our last earnings call, we projected double-digit revenue per seat mile improvement on this part of our network, and our actual result for the quarter was a gain of 12%. Industry capacity between the western US mainland and Hawaii fell 2.7% year over year in the quarter, the second consecutive modest quarterly decline after substantial year-over-year increases each quarter since the first quarter of 2009. Based on published schedules, we anticipate industry capacity to decline year over year by 1.6% in the fourth quarter, and to increase by 1.4% in the first half of 2012.

In this environment, we expect to post another solid improvement in PRASM for the fourth quarter on our North American routes. This expectation is based, as I said earlier, on our not having seen any meaningful effect on forward bookings, despite the economic gloom and doom so widely reported.

Our neighbor island business within the state of Hawaii remains strong. It represents a bit more than 0.25 of our passenger revenue.

We operated slightly less capacity in the third quarter than we did 1 year ago, largely as a result of having performed some lengthy mid-life checks on our Boeing 717 fleet, which had the effect of reducing aircraft availability. Neighbor island PRASM also posted a double-digit year-on-year improvement in the quarter, an impressive rebound from a weaker second quarter, which was affected, by some degree, by connecting traffic declines from Japan after the March tragedy. We continue to enjoy an outstanding competitive position on these routes.

International services accounted for more than 0.25 of our passenger revenue for the first time in the third quarter. This diversification reflects the execution of a plan that we began several years ago, which has accelerated over the past 12 months. Impressive revenue gains were registered across our burgeoning international network, and we are particularly gratified by the success of our Japan routes, that's Tokyo and Osaka.

Loads on our Japan routes met anticipated levels throughout the summer, validating our decision to not only maintain service levels to Tokyo after the earthquake, but also to continue with our plan to launch service to Osaka in July. Strong load factors and robust yields in the peak summer season produced financial performance that exceeded our expectations for these new services. Buoyed by this success, and the warm reception our Hawaii flights service has received in Japan, we've announced plans to introduce a third flight to Japan in 2012 with service to Fukuoka, Japan scheduled to commence in mid-April. While Japan has become an important pillar of our network, I should also note that we've also seen strong revenue gains on our other international operations contributing to the fourfold year-over-year increase in international revenue during this period.

As the destination carrier to Hawaii, an important element of our strategy is to match our capacity to those markets which will generate visitors to Hawaii. We believe that our share of Hawaii's visitors coming from abroad will likely grow in the years ahead, and we have made significant investments in this belief. We're extremely pleased with the early indications of success from the pursuit of this strategy.

Let me now turn the call back over to Peter to update our fourth quarter outlook before we take your questions.

All right. Turning to the fourth quarter, we expect our capacity to increase between 15.5% and 17.5% compared to the same period in 2010. This increase reflects the new long-haul of international services that we have initiated this year, and the entry into service of an additional A330 that we took delivery of this month to replace a 767 that we have returned to its lessor. Consistent with the just completed quarter, our capacity increases are entirely attributable to new international services, while domestic services will see capacity decrease modestly year over year.

We expect fourth quarter load factor to be close to flat year over year within a range of down 1 percentage point to up 1 point. Yield, meanwhile, is expected to improve by 8% to 11%. Combining these numbers, we expect passenger revenue per ASM to increase by 7.5% to 10.5%. This rate of increase is slightly lower than what we saw in the third quarter, which is largely attributable to significant seasonality differences between the quarters, and the fact that our new international services will tend to amplify some of our seasonality. As Mark noted, our forward bookings remain strong, and we haven't seen evidence to suggest that concerns about economic weakness are having a meaningful effect on demand to date.

Other revenue will again grow at a slower rate than passenger revenue. As we've discussed previously, certain categories of other revenue are unique to domestic operation, and as our growth is focused internationally during this period, it's natural that non-passenger revenue grows at a slower rate. As a result, we would expect operating revenue per seat miles to increase by about 5.5% to 8.5%.

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 1% to up 2%. Our maintenance line in particular, is expected to be substantially higher year over year in the quarter. Consistent with the first 9 months of the year, we'll see the effect of contractual rate increases in certain of the power by the hour contracts we have on the 767 and 717, and we're also seeing a growing impact from our A330 maintenance contracts with the fifth aircraft joining the fleet this month.

Exacerbating the fourth quarter numbers in particular, is the impact of several discrete engine and landing gear maintenance events that we account for on an as-incurred basis. The confluence of all these factors is expected to make our fourth quarter maintenance expense higher than any of the previous quarters this year, in contrast to what we experienced in the fourth quarter last year. We'll also continue to see upward pressure from commissions and credit card fees, and other revenue-related expenses during the quarter. Offsetting these, of course, are ongoing efforts to reduce other components of unit cost as we increase our capacity.

Reflective of our recent financings, we would expect interest expense to increase by about $1 million sequentially from the third quarter of 2011 to the fourth quarter. Fuel prices remain a 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 12.5% to 14.5% higher year over year in the fourth 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'll turn the call back over to the operator now to open the line for Mark and me to respond to your questions.

(Operator Instructions) Hunter Keay, Wolfe Trahan & Co.

I'd like to flush out some commentary on the demand environment stuff because I'm hearing a lot what I perceived in my own personal opinion as kind of mixed messages. The yield's obviously decelerating a little bit. I'm a little surprised to see that given the fact that the comp was much different. I understand the seasonality, but you're saying bookings are strong, but you just released a fair sale a couple weeks ago. I don't recall, when you guys raised your PRASM guidance earlier in the quarter for 3Q, I don't recall ever seeing a Company really jack it up by that degree to that extent. Is it possible that a, is this conservative PRASM guidance for one and b, is there still concern beyond maybe a 6 to 8-week window where you're just not sure what's going to be going on in the business at that point? Sorry, long question.

That's okay, Hunter. First of all, let me see if I can answer the points that you've raise. It's a large part of our PRASM guidance improvement came out of our experiences in Japan, which when we gave guidance at this call, at the last quarter, we were taking a fairly conservative view as to recovery in Japan for reasons which I suspect everyone on the call can understand. The guidance for our domestic services and for several of our other international services, indeed, really didn't change that much. It was largely around Japan. Second, we're in that funny place where what we're seeing is we are not seeing any backing off in terms of the rate of bookings for our services going forward. Everybody keeps asking and intimating, given the negative news about consumer confidence, is it going to start happening tomorrow?

Is it going to start happening the day after? The short answer is, we don't know. There is nothing in our forward look that suggests that it's on our horizon. Again, I bring you back to Peter's point about seasonality. One of the things that we learned during what was our first summer in Japan, and it certainly wasn't a normal summer as you'll understand, but what we came to understand about the market is that it has greater seasonality than our other markets. That will tend, all other things being equal, to in the first year push year-over-year PRASM improvement higher during the summer than it would do in fall and winter. And then the last thing I'd say is, that fare sales are part of the tactical makeup of this business. It would be hard to read into any particular fare sale any big picture concerns about bookings.

Thank you very much, Mark. That's really helpful.

Having said all that without the benefit of Peter to give me concerned looks across the table, is there anything you'd like to add?

No, I think you covered it very well, Mark.

I agree. And the other question is on cost -- obviously, big beat this quarter because of the CASM X and it looks like some timing events. As I think about the CASM run rate going into '12 now, it sounds like some of the maintenance stuff is going to creep into next year, I look at the amount of capacity you guys are going to be likely adding this year and next year. Do you think it's feasible for me to consider CASM ex-fuel getting back down to maybe a 2009-ish absolute level? Let's say for a second we assume double-digit ASM growth through 2013, do you think it's an unrealistic assumption to think that maybe at some point by the time we get to the end of 2013, your CASM ex-fuel is back down to '09 levels on an absolute basis?

Hunter, on that, I don't have the numbers immediately in front of me here in my hotel room, so let me answer that in general and then pass you back to Peter for some more specific analysis. We have highlighted the fact that in 2011, we've had a confluence of some relatively one-off type expenses largely on the maintenance side which should abate going forward into 2012. That, combined with the growth, leads us to the expectation that we will be seeing CASM ex-fuel come down. I don't have numbers in front of me to tell you whether 2009 levels is in the ballpark, but perhaps, Peter, you'd like to add?

Yes, just to add to that, Mark, I think it's premature for us to give specific guidance on 2012 at this time. Although we'll certainly be talking more about that going forward as we go into Investor Day and certainly when we have our earnings call at the end of the fourth quarter. But I would echo your thoughts that we do have some additional growth on the horizon next year with more aircraft coming into the fleet. And at this point, as we look forward we see some of the more unique aspects of our cost pressures this year abating. Some of the other things like the power by the hour charges that are increased are going to be leveling off and then we won't see that level of increase again. I think there is an opportunity for improvement next year. I wouldn't put a specific quantification to it at this point.

Okay. Thanks, Mark and Peter. I appreciate it.

Bill Greene, Morgan Stanley.

Mark or Peter, my question is a little bit of a follow-up here on the last point, which is, I recognize you're not seeing anything right now in the forward data that would suggest you're seeing a downturn, right, but obviously investors are very concerned that that's on the horizon. And so maybe you can help us understand what it looked in '08 in terms of, was there a canary in the coal mine, was there something that you said, wow, that actually was the first sign that something was deteriorating. What are the things we should be paying attention to and watching?

It's a great question. 2008, 2009, there was, for us, at least no canary in the coal mine. If you recall, actually, we had our best year of financial performance in recent memory was actually in 2009. One of the things that happened going into 2009 in the middle of the financial crisis and the subsequent recession, was that we discovered that the Hawaii vacation for the US domestic visitor is not nearly as discretionary in their minds as perhaps a number of people might have feared. I can't tell you that will necessarily be the case going forward. But when we look back, no indications came up that demand for Hawaii was going to be weakening and indeed demand did not weaken and we had actually a very good year.

One of the things I would point out about our future plans is that -- Hunter was asking about our growth, your question is obviously about how would we start to see declining demand, obviously, there must be some level of interest in the nexus between those 2 things. I would point out that, in terms of our domestic capacity, going forward, that's going to be largely flat. There will be probably some increase associated simply with trading out a 767 for an A330, but our growth that we're going to have next year is flying into new markets, where the purchasing power of their currencies, in US terms, is going up and where we're seeing a lot of demand.

So, if I think about what also happened in '08 and '09, my recollection was that we had a pretty big drop in hotel rates in Hawaii which probably helped the overall price or the overall cost to the consumer of going to Hawaii. So, right now, how do those look? How do the occupancies look? How are we looking at it from a total cost perspective and does that sort of change the picture at all?

I think you would ask the hotel guys, I think they would describe this as reasonably good times. I don't think they would be jumping up and down and saying they've never seen anything quite like it, but I think that they're seeing steady demand as well. Prices, I believe, are doing fine for them. So, I think it is different, in that sense, than it was in 2008, 2009. But, again, we haven't seen any effect yet. There's no indication yet that consumers are being priced out of the Hawaii vacation.

Okay. Just one last question -- you have some relationships with some airline partners. Thinking just in a bigger picture as you extend your footprint around the world, should we think about a more extensive relationship with a global alliance or this sort of thing or is your leisure focus just the kind of thing where you say that's just not really in the cards for us?

Well, we do periodically look at alliance membership. We've been approached by a number of the alliances to see what our level of interest is. Like any of these things, there are costs and benefits associated to joining an alliance. So far, given what we do, we believe that the costs of joining an alliance outweigh the benefits we have been able to secure by not being formally part of one alliance or another. That calculus may change as the industry develops and grows and as we develop our network, but we will kind of make that call when we think that the balance tips the other way.

Okay. Thank you for the time.

Michael Linenberg, Deutsche Bank.

Hello, Mark. A couple questions here -- as you moved more into the Japanese market, at what point or maybe at present, how much of the business on your services is provided by the big travel agencies, the consolidators? I know a lot of those contracts are set pretty well in advance, 6 to 9 months out, does that give you some visibility on pricing trends in that market as we look out into the first half of 2012? Can you talk about that market and what contribution it is to your business?

Yes, a large proportion of the people sitting on our airplanes out of Japan coming to Hawaii are sold through the large tour operators with whom we work. You're right that we do sign contracts with them that sets out the price. There is, in addition to that, within the Japanese system, a fuel surcharge calculus that kicks in automatically which obviously goes up and down based on the current price of fuel. The big variable tends to be exactly how many people show up for your services and we've been very pleased to see our airplanes in the over 80% full level. I don't know until relatively close in what the final load factor is going to be, that's where the challenge comes in terms of predicting contribution. But so far, everything has gone extremely well in that department.

In terms of the overall contribution of Japan, I'd say that Japan has been a very successful business for us, notwithstanding 2 or 3 months of a difficult downturn in traffic immediately after the tsunami. Our confidence in Japan is such that having started Haneda, we have kept flying to Haneda through the earthquake and tsunami aftermath. We did not delay our inauguration of Osaka in July. We have no reason to regret that decision and indeed, we have announced Fukuoka from April of next year which is yet a further indication of our confidence.

Mark, with the improvement in the Japanese market, was there ever a point where maybe you thought about using some of the Haneda frequencies that currently are not being utilized? I realize it would be on a temporary basis, but maybe day of week, additional service, utilizing them in the near-term or was aircraft availability a consideration?

Aircraft availability is always a consideration. We don't have airplanes exactly lying around with nothing better to do. But we like Haneda as a destination, it works for a well for us. We have indeed petitioned US DOT on several occasions now to reaward the awards that they gave to competitor carriers who aren't using them to give them to Hawaiian so that we can use them. So far, the DOT has chosen not to do that, but they're pretty well familiar with our desire to increase in our presence in Haneda and I think we would move very quickly to take advantage of such an opportunity.

Okay. Just the last question on the recent agreement with ANA to do something marketing and co-chairing. And I realize it's not just inter-island, I believe it's also some [trans-pac], how would that fit in the antitrust immunized JV that ANA now has up and running with United and Continental? How can you get a piece of that business when you have 2 other carriers doing the same thing that you're doing, particularly United, are there any crumbs even available for you? Is it more really inter-island? How should we think about that?

Well, clearly, we're not subject to an immunized JV with ANA. We are competitors on the route. By co-chairing we're giving customers of either company benefits of access to our respective networks. In that sense, it doesn't abut the immunized JV in any way. It is the case, that when you look at Hawaii flying, it is a different kind of animal than most of the flying covered by the global JVs that are out there. Most of the JVs are very focused on business traffic network, connectivity spread. One of the reasons why I think it makes sense for us to work with ANA is that they have a bunch of customers in Japan who would like to come to Hawaii on vacation and we are a very efficient and effective way of helping them meet the needs of their customers.

Okay. Very good. Thank you.

Helane Becker, Dahlman Rose.

My question is following on what Mike just asked about ANA -- does that similarly hold true for the Virgin Australia co-chair agreement? Or you just mentioned it in passing and I think that was signed this week or the week before, so I was wondering if you could just give us some other details?

Yes, I think what I said to Mike a moment ago about ANA does very much apply to Virgin Australia. Hawaii is not a particularly good trans-pacific connecting point now with the advent of long-range airplanes. You can pretty much fly from any point on the west coast of the Americas to the East Coast of Asia without stopping in Honolulu. The people traveling to Hawaii tend to be coming to consume the Hawaii vacation. Our product, our timing, our services are tailored for that and I believe that our partners understand the discrete nature of the market and have been happy to work with us because they feel that we meet the needs of that segment of their customer base coming to Hawaii.

Got you. Okay, and then, just one kind of unrelated follow-up on the airport, I think there's going to be some construction going on or maybe it's in the process of going on, does that affect your operations at all? Is there any issues related to that, that we should think about?

We're obviously very hopeful that it will affect our operations and improve them. It's an airport which is in desperate need of modernization. We're very pleased to hear that the current administration is interested in moving ahead with airport modernization. It's very important for the state. There are clearly some important local benefits in terms of construction jobs.

It would represent a very substantial boost to the local economy and that's one of the reasons why we've been as supportive as we have of the process going forward. The plan has a sequencing of projects largely tied around the need to continuing operating while the construction takes place. I think we are still some time away until we are at the point where we'll be able to fully gauge how intrusive it is to our operations. But the plan certainly is to keep that intrusion down to a minimum.

Got you. Okay. Thank you very much for your help.

Glenn Engel, Bank of America.

Good afternoon and congratulations. A question on commissions first -- you had $60 million more revenues in the third quarter than the second, yet your commission and selling expense was basically the same. I know sometimes the frequent flier mileage estimate gets in there, but I would have thought with all that high commission Japanese revenues you did, I'd see a bigger jump.

Let me turn that over to Peter to help on the commission side.

Yes, your diagnosis is correct, Glenn. We did get a benefit in this period from the balance sheet adjustment we make to the frequent flyer liabilities, which runs through the income statement in that line, as fuel prices went down from $95 a barrel to $80 a barrel over the course of the quarter. The liability we have for servicing those future frequent flier mile obligations reduces, so that gave us a good guy on that line. We do have higher commissions on just the pure commissions. It is a higher number period-over-period reflective of the growth in the international business. Some of that is driven by Japan, it's also some of the other countries have commissions structures that are more what you would have seen domestically 15 or 20 years ago. Australia is an example of one that has a higher commission structure built in there.

I was surprised by the drop in the rental cost. Is this a new run rate going forward?

Yes, effectively that is. That reflects the fact that the 717s are now off of their operating leases and are reflected in interest and depreciation expense. The A330 that we took this month is also a debt-financed aircraft, so that one won't affect aircraft rent. We actually had a little bit of extra aircraft rent, as I mentioned on the call, in this period related to the lease returns that we had. The lease return costs tend to run through the rent line.

The one item in the near-term that will push things up a little bit, depending on how the aircraft eventually get accounted for, whether it is operating lease or capital lease, is the 717s that are going to be joining our fleet in the fourth quarter and first quarter. And then, we won't have another aircraft that is operating lease-financed coming in new until we get into the second quarter next year when we have a sale-leaseback A330 and then a straight lease A330 as the third and fourth deliveries next year.

Finally, are your hedges still WTI-based not Brent? And any view in changing how you do your hedge program?

Yes, the detail is in the call or in the earnings release. You can see our crude oil hedges remain WTI-based over the course of the quarter. If you looked at where we started the quarter and where we ended the quarter in terms of where the fuel hedges are, you'll see we did a little bit more heating oil at the end. Heating oil gives us some crack spread cover, which is one benefit of it. It also, I think, has been more correlated with what's been going on in Brent than WTI, which as you know, Glenn, has been a little bit dislocated from the rest of the oil markets. We're always looking at opportunities to reevaluate and reassess the plan and I think certainly, as Scott joins the team next month, one of the things we'll want to do is have discussions with him and get his insights on other alternatives with respect to fuel hedging.

Thank you very much.

Bob McAdoo, Avondale Partners.

Could you just talk briefly about Fukuoka and how we should think about it in terms of what kind of community it is, how big a travel group there might be that lives around there as compared to something like Osaka or Tokyo, which it's easier to track because there's just been more US business in and out of there? What kind of a city is it? Is it one-third the size, 0.5 the size, the size of Osaka in terms of what you think the travel market might be there?

Fukuoka is the largest city in the southern island of the Japanese archipelago and I don't know it's size, but it will be several millions of people. It's a very substantial large city, one of, probably I'd say, the top 6 sized cities in Japan. It had nonstop service before in the past and it is serviced by many of the same tour operators that traditionally send people to Hawaii.

Is there a reason why the US carriers haven't been as active there? Is that something related just to treaties or anything else as to why the US carriers haven't been as active there as they are in Osaka?

No, they must, obviously, you have to ask them, ultimately, but I would suspect that at the times when they saw the need to pull back from Japan, this is one of the services that they cancelled.

That's okay, that's good enough.

We can get you some more demographics.

Yes, if that's possible, that would just be helpful. Sometimes we're far enough away, it's a little hard to really know what you're looking at and know whether you should get excited or not so excited or whatever. So, any help you could give would be appreciated.

Yes, we'll get that to you.

Steve O'Hara, Sidoti & Company

Can you just talk a little bit about South Korea and how that route's shaping up versus your expectations?

Sure, South Korea's a very different marketplace than is Japan. It's very much a developing marketplace, as opposed to a market that's already very well-developed for travel, which would be Japan. Unsurprisingly, it is not going to be as strong a performer in the initial growth phase as Japan would be, but we actually believe that probably over the long-term, Korea will be, if anything, perhaps stronger than some of our routes and markets out of Japan. The launch of our service has gone well. We're tracking ahead of our external expectations for it and we're looking forward to building our presence there and watching the market grow.

Okay, and then you had mentioned load factors were strong in Japan. Can you kind of give us an idea of where they started, where they kind of bottomed out at and where they might be today?

Really thanks to a lot of hard work by ourselves and marketing team, all of our routes have started out extremely well. In Japan, we've started out with loads in the mid-70s right off the bat. The first month or so you get -- there's a curious mathematical anomaly because obviously, people are coming to Hawaii on vacation, so the first outbound to Japan flights are virtually empty because you haven't yet had the opportunity to bring the people to Hawaii that you have to then return. Removing that kind of anomaly, you see load factors in the mid-70s. Nowadays, we're seeing load factors in the 80s. In the period immediately after the tsunami and earthquake, they dipped briefly down into the 60s.

Okay. Thank you very much.

John Reardon, Dominick and Dominick.

I have a question, Mark, in 2009, you sensed some robust demand in the third quarter of that year. You held off your inventory, allowing your competitors to fill up with lower revenue-generating customers and then were there to charge a higher price with more of the last-minute travelers and it worked out. I was wondering, did that happen this quarter? Did you play a little [cuts] ball with the fares?

John, certainly that's something we're always on the lookout to try and to achieve that. That's something that is sort of easy for us to aspire to and difficult for us to execute in practice. What I would say about this year, was that it's quite different from 2009. This year, we saw robust demand. We were writing the melee of the marketplace between the US West Coast and Hawaii. We are always one of the carriers looking to see if there are opportunities for increasing yield.

The big upside on our revenue performance, particularly against expectations, is really mainly to do with our performance in Japan. The beginning of the summer, we had hopes that Japan would rebound. That's why we took the decisions that we took. But you'll understand that we thought that a little bit of prudence about expectations around Japan would be the right thing to do. It turned out that Japan was very strong for us.

Okay, and then I was wondering, the other airlines delayed or cut back on their business into Haneda and you fellows, you stuck with it and then opened in Osaka. I'm just kind of wondering, on a theoretical thing, did this engender some local goodwill for you as Hawaiian in the Japanese travel market in your opinion?

I certainly hope so and it would never be our intention to profit from everybody else's misfortune. The last thing we would ever want would be to characterize the dreadful events of the tsunami and the earthquake in Japan as somehow something that created a good outcome for us. But there was an opportunity during that period of time to show that despite the fact that we were very new in the market and not a brand name that was widely known, not a proven business partner, we did have an opportunity to demonstrate very early on that our commitment to the market was for the long-term and this in turn, perhaps, has given our Japanese partners even greater confidence in doing business with us. And it is certainly the case that we've seen the relationship with our business partners in Japan grow and develop throughout this very difficult period.

Thank you, and congratulations to Peter Ingram on his new position. I am sure he's going to do just fine.

Kevin Crissey, UBS.

Good quarter, guys. I appreciate all the commentary. I thought you guys did a nice job giving details here. Quick one -- any incremental progress on the cross selling of hotels at all? I'll leave it there.

Peter, do you want to answer that one?

Yes, that is something that we are continuing to work forward on and we have a number of things in the works to advance our participation in the package vacation selling. I think what I would say and maybe leave this as a bit of a tease, now that I'm becoming a marketing guy, stay tuned and we may have more things coming up over the next quarter in terms of how we're going to participate going forward in the package business.

Okay. Thank you very much.

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

Thank you everybody for joining us on today's call. Third quarter, as you've just heard, was an eventful period for us with some strong revenue improvements throughout our business and the successful expansion of our network overseas. Clearly, dealing with consistently high fuel prices and robust competition throughout our network and all of this makes it really important that we remained focused on cost control and the quality of our service. I appreciate everybody's interest in our Company. Before signing off, I'd like to put in a plug for our Investor Day, which is scheduled for November 17 at the Four Seasons Hotel in New York. At this event, you're going to have the opportunity to meet several members of our leadership team as we update the investment community about our business plans going forward. I hope to see many of you there. With that, thank you very much, and thank you for taking the time to join us today.

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