Hawaiian Holdings Inc (HA) 2011 Q4 法說會逐字稿

Greetings and welcome to the Hawaiian Holdings Fourth 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. Thank you, Ms. Donofrio you may begin.

Great, thank you. Welcome everyone. And thank you for joining us today to discuss Hawaiian Holdings fourth quarter 2011 financial results. On the call with me today are Mark Dunkerley, President and Chief Executive Officer and Scott Topping, 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, undo 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. As you can see from the press release we issued a little while ago, Hawaiian posted strong financial results. Maintaining the momentum we've seen build over the second half of the year. Our fourth quarter operating and net income improved over 2010 when adjusted for the vagaries of fuel hedging accounting and for an unusual favorable tax provision in the prior year.

Demand in each of our three geographies remained robust and despite the increasing price of fuel, we did a good job of controlling other elements of our costs. We're particularly pleased that we could post these results during a period of expansion into new markets.

We continue to execute our announced strategy of diversifying our revenue base by growing into markets, which have not been a traditional mainstay of the business. For the most part, these markets are those from which we expect to see growing numbers of visitors to Hawaii.

With that in mind during the quarter, we announced the launch of Honolulu-New York service for early June. And just last week, we're also extremely pleased to announce the marketing relationship with Jet Blue, which will improve the accessibility of New York and East Coast customers to this new service.

We announced increased service to two of our international destinations, Sydney and Seoul. We also announced the third daily flight to Los Angeles from Honolulu. And we introduced non-stop service from Los Angeles to Maui. Both of which are scheduled to begin this summer.

For our local passengers in Hawaii, we introduced four neighbor island travel plans designed to appeal to particular subsets of local travelers. We've also announced plans to expand our Maui operations. This will augment our service from Maui to the other islands. And enhance connections to our direct flights between Maui and the West Coast.

Last November we placed orders for five additional A330s, which are scheduled to be delivered between 2013 and 2015. Our A330 order books will have us take delivery of 17 A330s between now and the end of 2015. During this time, we'll be retiring 10 Boeing 767s.

Prior to the third quarter, we had already announced Honolulu-Fukuoka service, which will begin in mid-April. So unsurprisingly, our agenda for 2012 revolves around the successful introduction of this and the other new services that I've just mentioned.

Before I turn the call over to Scott to cover the numbers in more detail, I'd like to welcome him to his first call as our new CFO. As you'll recall, Peter Ingram, our previous CFO recently moved to a new position as our Executive Vice President and Chief Commercial Officer where he'll strengthen the part of the business responsible for generating revenues.

Many of you are already familiar with Scott, who's held positions of increasing responsibility at Southwest Airlines since 1995 before joining our team last November. So, with that said, let me turn the call over to Scott to review the results for the quarter in more detail. Scott?

Thank you, Mark. For the fourth quarter we reported in GAAP net income of $20.9 million, or $0.40 per diluted share, compared to $70.6 million or $1.36 per diluted share during the same period last year.

Reflecting economic fuel expense, the Company reported adjusted net income of $16.3 million or $0.31 per share. This compares with adjusted net income of $11.3 million, or $0.21 per share for the fourth quarter of 2010, reflecting economic fuel expense and excluding beneficial tax adjustments that were non-recurring in nature.

For the full year, we reported a GAAP net loss of $2.6 million, or $0.05 per diluted share compared to $110.3 million, or $2.10 per diluted share during this same period last year. To put the two years on an apples to apples basis, we adjust for economic fuel costs in both years. And adjust for lease termination charges in 2011. And non-recurring beneficial tax adjustments in 2010.

On this basis, we recorded adjusted net income of $43.2 million, or $0.85 per diluted share in 2011 compared to $45.4 million, or $0.87 per share in 2010. Notably, despite much higher fuel prices throughout the year and lower year-over-year results in the first half, we ended 2011 with close to the same earnings as 2010.

Our effective tax rate for the fourth quarter was 36%. Returning to a rate closer to the statutory rate as Peter discussed on last quarter's call. The 2011 full year effective tax rate was not meaningful due to our slight loss on a GAAP basis. Going forward, we would expect an effective tax rate between 39% and 41%.

On a cash basis, our tax liabilities are minimal in the near term because of depreciation benefits related to recent aircraft acquisitions. Operating revenue during the quarter was $434 million, up $90.2 million or 26.2% year-over-year on a 16.7% increase in capacity.

Passenger revenue increased 28.1% compared to the fourth quarter of 2010. Load factor for the quarter declined 1.6 points to 84.1% while yield improved 11.9%. This load factor performance is partially driven by greater exposure to international markets that tend to track a bit below our system average load factor.

Combined, this produced passenger revenue per ASM improvement of 9.8%, which was on the high side of the guidance we previously issued. As expected, other revenue grew at a slower pace than capacity with much of our growth geared to international markets, certain sources of ancillary revenues, such as fees on checked baggage are not applicable. And it follows the growth in the other revenue line would lag capacity growth.

That said, it is noteworthy that cargo revenue increased by 34.3%, which exceeded our capacity growth, reflecting the superior cargo capabilities of the A330 aircraft, and opportunities in new international routes with significant cargo demand. This is a trend we would expect to continue in 2012.

Our capacity increase for the period included availability of A330 deliveries in November 2010, and May, and October of 2011. Offset by a couple of 767 lease returns during the year and was also driven by the addition of longer haul flights to the network.

Moving now to the expense side. Not surprisingly, fuel remains the biggest year-over-year variance. On the operating line, we saw an increase of $42.8 million in fuel expense. Our fuel consumption was 42.3 million gallons, up 15.3% from last year, while our average price per gallon at $3.13 was 28.3% higher than last year's $2.44.

During the fourth quarter, economic fuel costs per gallon, which includes the portion of our hedging gains or losses related to contract settling during the period. As well as option premiums related to those contracts was $3.20 per gallon, compared to $2.45 per gallon in the same period last year.

We continued to maintain a consistent and disciplined approach to fuel hedging with 62% of our consumption hedge for the first quarter and 35% of our expected 2012 consumption hedge. Details of our current hedge positions are available in the press release.

Excluding fuel, our costs per ASM decreased 1.3% in the quarter, which is slightly better than anticipated by our recent guidance. Maintenance expenses increased $19 million over the prior year quarter to $47.4 million resulting from a growing fleet as well as higher contract rates for certain power by the hour expenses. Several factors drove the year-over-year change, including some 767 engine overhauls not covered by Power by the Hour agreements this quarter compared to none in the fourth quarter of 2010.

In addition, the maintenance numbers for the quarter reflect Power by the Hour expenses for two more A330s that were not present last year as well as two additional 10-year 717 heavy C-checks that we did not have a year ago.

Aircraft rent expense decreased 29.4% in the fourth quarter to $22.3 million, which reflects the refinancing of our 717 fleet at the end of the second quarter as well as the return of two leased 767s that were replaced with two A330s, which are financed with bank debt.

Depreciation and amortization expense increased 24% year-over-year in the quarter, driven primarily by two A330s we purchased in April and October in the transition of our 717 fleet from lease financing to ownership. Below the operating line, we reported non-operating expense of $1.8 million dollars in the quarter compared to non-operating income of $1.1 million in the prior year period.

The most significant differences year-over-year relate to increased interest expense associated with additional financings in 2011, partially offset by gains on fuel hedge positions.

Turning now to the balance sheet, we ended the quarter with $304 million in unrestricted cash, and another $30.9 million in restricted cash. Our revolving credit facility remains undrawn at the end of the fourth quarter, providing additional available liquidity of $56.9 million, which reflects the available borrowing base under the facility, net of certain letters of credit that are supported by it. In addition, debt financing for our October A330 delivery is now reflected on the balance sheet.

During the first quarter of 2012, we expect approximately $26 million to move from restricted to unrestricted cash, resulting from a return of the cash holdback related to our primary credit card processing agreement. The level of holdback under this agreement is dependent upon certain financial triggers. And based on the most recent calculation in the holdback, will be going back to the 0% level as it was at the end of the first quarter of 2011.

CapEx in the quarter was $108 million, which includes progress or pre-delivery payments of $36 million related to future aircraft and engine deliveries. CapEx for the year totaled $362 million, mostly aircraft and pre-delivery payment related.

During the first quarter of 2012, we expect CapEx to fall within a range of $110 million to $120 million including pre-delivery payments on future orders as well as the new A330 coming in March. For full year 2012, we expect approximately $290 million to $300 million in CapEx. This includes $275 million of fleet related CapEx primarily related to the remaining payments on four aircraft scheduled for delivery in 2012 and pre delivery payments on aircraft that will be arriving over the next few years.

With respect to our pension and benefit plans in the third quarter we contributed $7.6 million, bringing the year-to-date total to $12.9 million. This fully satisfies our required 2011 plan year contributions. Looking ahead to 2012, we expect to contribute $10 million to $15 million during the year.

With the recent volatility in the world's financial markets, we're pleased to have firm financing commitments in place for all four of our 2012 A330 orders, and a portion of those slated for 2013. More specifically, six of our next seven A330 deliveries between now and the middle of 2013 have commitments. Of the six, three will be leased. And the other three will be owned.

Going forward, we will continue to diversify our funding options, both in terms of markets and geography. With that, I'll turn the call back over to Mark for further commentary on the business.

Thanks, Scott. Looking over the course of 2011, we're pleased with the progress we made. It was a year of growth, particularly in new markets. We took delivery of two A330s and introduced service to Seoul and Osaka.

Despite the rising price of fuel, and the travel consequences of the terrible earthquake and Tsunami in Japan, we were able to post strong underlying financial results. ASM's rose by 18.6% in 2011. While our passenger numbers increased to a record 8.7 million. We're also pleased to note that our rate of yield improvement was at the top of our peer group for the fourth quarter, which is remarkable given our rate of growth.

On the cost side, we weathered a difficult and unusual year in terms of maintenance expenses. But we were still able to lower our chasm, excluding fuel and the lease termination costs by 1.5%.

The thanks for all of this goes, unequivocally, to the best employees in the airline industry. It's my privilege to work with everyone in the Hawaiian family, or Ohana as it's known here. By every measurable facet of our operational performance, from our now well-known position as the industry's most punctual airline, to being the most responsive airline to customer calls, Hawaiian's employees have set the industry's gold standard.

Harder to measure directly, but no less evident to customers and shippers alike is the warmth and hospitality of the service our team delivers. As I've mentioned on this call before, the hard work of our staff over the past years gives us in management confidence to grow the business. They have my heartfelt thanks.

Our North American routes between the Western United States and Hawaii remain the largest source of our passenger revenue, though the growth of our international flying is diluting the relative size of the North American business. This part of our business was responsible for slightly less than 50% of our revenue, down from the 60% range, which was the norm in recent years.

While we're focused on further diversification, we nevertheless continued to look for selected growth opportunities in this region. Our recently announced third daily flight from Los Angeles to Honolulu and the introduction of non-stop service from Maui to Los Angeles, both beginning this summer, are examples.

On our last earnings call we expected to post another solid improvement in PRASM. And this is what we saw. Our passenger revenue per seat mile on this part of our network improved over 12% year-on-year. Industry capacity between the Western US and Hawaii was relatively flat this quarter. Based on the published schedules, we anticipate industry capacity to increase 2.4% in the first half of 2012.

Our neighbor island business within the state of Hawaii remains strong. It represents a bit more than 27% of our passenger revenue. This is less than the roughly 30% that it contributed a year ago, again, largely due to the growth of our international flying. Neighbor island PRASM posted a more modest year-on-year improvement in the quarter of a little over 5%.

We continue to enjoy an outstanding competitive position on these routes. It remains extremely important that we find ways of improving our service offering on these routes. And in that vein, we recently rolled out our neighbor island travel programs which provides a measure of savings for our local customers who travel more frequently.

Just a few weeks ago, we announced the creation of a Maui hub that will offer improved connections between the Valley Isle and other points within the Hawaiian Islands as well as to and from the West Coast. Revenues from our international operations accounted for roughly 25% of our passenger revenue similar to last quarter. This is a trebling of our international revenue when compared to the prior year.

Not only are we pleased by the success of our Tokyo and Osaka routes, but we are also confident enough in the demand for our Sydney and Seoul flights to offer daily frequencies in both markets. Sydney started daily flights in December. And Seoul gets them from July.

We are eagerly looking forward to the start of service to Fukuoka, our third city in Japan. In terms of airline relationships overseas, we expect our recently announced co-chairs with Virgin Australia and NA to not only help travelers seamlessly connect to our flight network but also to add to our visibility and revenues in both Australia and Japan.

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 the share of Hawaii's visitors coming from abroad will likely grow in the years ahead. And we've made significant investments in this belief. We're extremely pleased with the early indications from the pursuit of this strategy.

Let me now turn the call back over to Scott to update you on our first quarter outlook before we take your questions. Scott.

Before I go through the specifics of our first quarter and full year guidance. I'd like to take you through some detail around how the timing of our deliveries and new service will impact ASM statistics throughout the year.

First, it is important to remember that in 2011 we retired two 767s and replaced them with two A330s. Our growth was therefore largely driven by continued expansion into long haul markets and not by departures. ASM production was front end loaded as a result of the timing of deliveries in 2010 and 2011.

In contract, growth this year will be driven primarily by four new A330s introduced in the first half of the year and no planned retirements. The new aircraft will be placed into service from March through June, creating higher capacity growth in the second half of the year relative to the first.

Turning now to the first quarter, we expect capacity to increase between 10% and 12% compared to the same period in 2011. This increase reflects new long haul international services initiated in the second half of 2011.

The entry into service of two additional A330s offset by two 767 aircraft returned at the end of their leases, consistent with the just completed quarter, the vast majority of our capacity increase will be driven by new international service. But our forecast also reflects a modest increase in neighbor island flying with three additional 717s that have recently entered the fleet.

These are the three leased aircraft that we announced last July. Our North American operations should see a modest capacity decrease year-over-year. We expect first quarter load factor to be within a range of down 1% to up 1 percentage points. Yield, meanwhile is expected to improve by 5.5% to 8.5%.

Combining these numbers, we also expect PRASM to increase by the same amount. This rate of increase is a little lower than we saw in the fourth quarter. And this is largely explained by significant seasonality differences between the quarters and the fact that our new international services will tend to amplify some of our seasonality.

Other revenue will again grow at a slower rate than passenger revenue. As we've discussed before, certain categories of other revenue are unique to domestic operations. As our growth is focused internationally during this period, it's natural that non passenger revenue will grow at a slower rate.

Cargo revenue, notably, is expected to grow at a good pace for the quarter reflecting the fact that our new international routes have meaningful cargo potential. Additionally, A330s introduced domestically will further enhance growth in our cargo business.

The net result is that operating revenue per ASM is forecasted between 4% to 7% to the first quarter of 2011.

Let me take a moment to talk about CASM ex-fuel trends throughout the year. We expect to incur substantial start-up costs during the first half of the year for our new Fukuoka and New York flying. This includes a hiring and training bubble along with other related start-up costs that will be more pronounced in the second quarter. We would then expect improving CASM trends from this new flying as we begin producing more ASMs in the second half of the year.

We also expect to have a $15 million increase in pension and other post retirement benefits costs spread evenly throughout the year, which while stable from quarter to quarter will provide a challenge for year-over-year comparisons. To quantify these amounts, our CASM ex-fuel would be 1.5% lower in first quarter if we didn't have the start-up costs, and 2% lower in the second quarter.

On the pension and benefits side, our CASM ex-fuel would be 1% lower in each of the first and second quarters if we excluded these costs.

With that as background, I'll now go over our cost expectations. We expect CASM ex-fuel to be relatively stable year-over-year in the first quarter within a range of down 1% to up 1%. During the second quarter, unit costs, ex-fuel will most likely rise year-over-year before following steadily in the back half of the year. Ironing out this unevenness for the full year, we expect CASM ex-fuel to be in the zero to down 2% range. ASM growth for the year is expected to be in the 20% to 23% range.

Reflective of our recent financings, we would also expect interest expense to increase by about $0.4 million sequentially from the fourth quarter of 2011 to the first quarter of 2012. Fuel prices remain a substantial cost challenge. But sticking to our normal practice, we are not going to give guidance at this time.

We expect our fuel consumption to be 8.5% to 10.5% higher year-over-year in the first quarter as a result of our capacity increases. With that said, we've reached the conclusion of our prepared remarks. I'd like to thank all of you for being with us today and for your continued interest in Hawaiian Airlines. I'll turn the call back over to the operator now to open the line for questions.

Thank you. We would now be conducting your question-and-answer session. (Operator Instructions). Thank you, our first question comes from the line of Bill Greene with Morgan Stanley Smith Barney. Please proceed with your question.

Yes, hi there. Good afternoon. Hey, Mark, given the success that you've had in Japan. If you wanted to increase further service there, what are the gating items? Is it simply aircraft? Or is it landing slots? Or what would stop you from growing there faster?

Well, let's see.

Or do you even want to grow there faster? Is actually probably the first question to that I had.

Well, then let me answer the first question first. I think we are interested in maturing the routes. They've started extremely well for us. I think we remain very bullish on Fukuoka, our latest one. I think it remains our plan to seek additional opportunities obviously bounded by commercial feasibility.

The US-Japan bi-lateral is an open skies bilateral with the exception of certain limitations on Haneda. So there are no kind of bilateral rights constraints. And then as the slot constraints, it's airport by airport. But in general terms that would not be a constraint for us.

So it may be a little early to ask this. But can you tell from early indications if New York is going to spool a lot faster than the Japan experience? I assume probably, but maybe that's wrong.

I think it would be -- we'd be extremely pleased if New York spooled as quickly or faster than the Japan experience. The Japan experience was exceptional. And so we're hoping that New York will spool, spool quickly. And we believe that our product will be very well received. And we're very pleased to have them -- the marketing relationship announced with Jet Blue, which will certainly help in that respect. But Japan was truly exceptional.

And it's too early to know about New York, I guess, is safe to say?

Yes, it's too early to know about New York. But certainly we're approaching the market with confidence. And everything we've seen so far has -- is indicating that we should be pleased.

That's great. And then just lastly, is there further scope for more US coach shares? Or, is the Jet Blue relationship just more unique to that specific route? Thank you.

In terms of working with Jet Blue, we certainly enjoyed working with them at a professional level. And we will continue to work with them. I think in terms of other potential relationships, we'll be looking at them on a case by case basis.

Thanks for the time.

You bet.

Thank you. Our next question comes from the line of Hunter Keay with Trahan. Please proceed with your question.

Thanks. Hi, everybody.

Hey, Hunter.

Hey, Hunter.

I'd like to touch on JFK again a little bit and follow-ups the last question. I'm trying to figure out why this is going to work. No one really served that route, I think in 10 years since ATA, if I'm not mistaken. New, obviously, with a possible caveat of Continental serving Newark.

But, how do you think you're going to do it successfully? I know you just said it's too early to probably tell how it's been booking. I think it's open for sale. But, I understand you have the Jet Blue feed, but what makes you so confident, Mark? It's a tough route. And there's going to be a lot of redemptions on that too, I would think. What makes you so confident about that?

Well, first of all, Hunter. What I'd say is I think a lot of people serve that market today. I think they -- all of the major carriers serve them one stop over their hubs throughout the continental United States. So we know how much traffic flows in that market.

I think the question therefore from our perspective is what is the ambient fare level? How do our costs match up to that ambient fare level? And can we provide seats and get knowledge of our service out there so that people will be attracted to it? One of the reasons why we didn't serve this market over the course of the last decade, and indeed nobody did, is yields on the continental portion of a connecting itinerary to Hawaii were very low.

That's an experience that you could probably lecture me on much more than I could talk to you about. And as a consequence the trip cost to Hawaii was unattractive. In a world in which domestic continental yields are going up, the yields for Hawaii are firming. We now believe that the fare and cost environment is attractive. Next thing is to get word of our presence out there working with Jet Blue as I mentioned a little bit ago is very important to us.

As it concerns redemption, I think there may well be a fair number of redemptions there. I think the issue around redemption is the rate at which the redemption takes place. I think we're pretty comfortable that we have set up the schedule of redemption in such a way that we won't feel that people redeeming miles travel on this are traveling on cheap fares.

All right, thanks, Mark. That's helpful actually. And I guess I'd be curious to know also Mark your thoughts on this DOT rule, the 24-hour cancelation policy. Sort of the grace period for customers allowed to cancel without penalty. I'm not sure if you do that now already. But I'm curious to know how you think this is going to impact your business, particularly the inner island business. What does that booking curve look like? And is it going to have any kind of impact in your ability to RM that market?

We don't think it'll have a big impact to -- in terms of RM in that marketplace. We know it is a very late booking curve. We will obviously have to watch that closely. But we are in a position where we understand this market candidly better than anybody else does. I think we're not terribly concerned about it.

All right, thanks a lot.

Thank you. Our next question comes from the line of Michael Linenberg with Deutsche Bank. Please proceed with your question.

Yes, hey, I guess the question for Scott. And welcome aboard. On the holdback, I just -- I wanted to -- maybe you said it. What was the holdback before, before it went to zero? And how much cash does that potentially free up for you?

Hi, Mike, thank you. It's close to -- it's between $25 million and $30 million. And that's the amount we'll expect to get back over the quarter.

And it was at the 25% rate.

I'm sorry, yes, it's a 25% rate.

And that was 25%. Great, that's helpful. And then, I guess a question to Mark. Mark, obviously, Allegiant is preparing to ramp up and go into Hawaii. You guys, I'm sure your ear is pretty close to the ground. You serve all the key stations. You know all the airport managers. Anything that -- and of course, you also talk to all the hoteliers.

Have anything that you've heard or learned to get a sense of where they're going to launch? Is it going to focus -- are they going to focus on Honolulu? Are they going to fly into the smaller markets? What have you heard with their launch, which presumably is going to be later this year?

Yes, I'm sure, Mike. I'm sure Allegiant is going to be delighted for me to pre-announce what they intend to do. But, I think Allegiant has made no secret of their desire to come to Hawaii. It's our belief at this stage that their -- the strategy that they've deployed so successfully with respect to service to and from Las Vegas will also be deployed with respect to the Hawaiian Islands.

If that is the case, on the one hand, the operations will come out of markets that we don't serve directly. On the other hand, they will take some customers that will fly over West Coast gateways to Hawaii today.

I think that is going to be more harmful to our competitors who rely on connecting feed than it will be to us. But, as I've always said, a seat, is a seat, is a seat. And to the extent that seats are entering the market that obviously has an effect on the marketplace as a whole.

Okay, thanks. And then, just one other one on capacity. You gave us what the capacity increase for the first half of 2012, between Hawaii and the West Coast. Do you have any sort of feel for what the competitor capacity will be in your markets from Honolulu to Japan, Australia, Philippines, et cetera. And I'm just sort of thinking about, off the top, Delta is going to start flying to Fukuoka as well. Any numbers on that?

Yes, let's see. We've got. We gave you for the first half. I think the third quarter is slightly ahead of the first half. And I believe the fourth quarter is slightly behind. I'm kind of reaching from memory. And somebody is going to be hopefully sticking a piece of paper in front of my nose here in a second.

That's West Coast-Hawaii, though? That's West Coast-Hawaii, right?

That's West Coast-Hawaii.

Okay.

We're going to see up capacity in Australia, and chiefly as a result of ourselves, increased service. We're going to see up capacity out of Korea. That's a mixture of ourselves and the competition. And we're going to see some modest up capacity on Japan, again, where we represent the lion's share of that.

Okay, yes. And it's a bigger base to and from Japan that you're starting --.

That's right.

Okay, that makes sense. Okay, great. Thank you.

Okay, you bet.

Thank you. Our next question comes from the line of Helane Becker with Dahlman Rose. Please proceed with your question.

Thanks, operator. Hey, everybody.

Hey, Helane.

So these are some of my questions. One is with -- you're calling the agreement with Jet Blue an interline agreement. Do your pilots have to approve a co-chair agreement?

Helane, we're in discussion with our employee groups about that. I think we're pretty confident that this marketing relationship will be as efficient and as effective as a marketing relationship can be between two companies.

Okay, but you're calling it an interline agreement because they have to say okay, or, they don't need to approve? They should call it a co-chair?

Again, we're in discussion with them. I think there has arisen some ambiguity on that subject. I think everybody in the debate would like to see Hawaiian and Jet Blue co-chair. And that's certainly our intention.

Okay, great. Now, my second question is with respect to the Maui hub. Are you concerned at all about it cannibalizing your Honolulu hub?

No, in fact, just the opposite. Honolulu, in common with hub carriers everywhere, during our peak time of operation, it's quite a struggle to bring as many aircraft in as we do. It creates some sort of inefficiencies in our operation as a result. By having some of this connecting activity take place on Maui, we actually reduced some of the pressure on Honolulu.

And at the same time, for our customer base, we provide a range of options and opportunities, particularly given how many visitors to the Hawaiian Islands want to visit multiple islands and may well, for example, spend a bit of time on Oahu and a bit of time in Maui. And it gives them a better range of choices.

Okay, and then my last question is with respect to that convert that's out there. Would you ever consider buying back the convert in the open market so you wouldn't have to issue the shares associated with it?

Yes, I think, we'll think about it. Frankly, it's a question that I haven't turned my attention to recently. So it's a good question for which I don't have a ready answer for you. Other than we would -- we'll have a look at it.

Okay. Thank you, those were exactly all my questions.

Okay, thanks.

Thank you. Our next question comes from the line of Glenn Engel with Bank of America. Please proceed with your question.

Good afternoon, a few questions. One is there any progress in getting more Tokyo slots. And as you grow further in Asia is it likely to be adding more destination Japan? Or, are other areas of Asia more likely to be the ones you'd go for next?

Okay. In terms -- hey, Glenn. In terms of the slot question, we're working with the US government. The US government is working with our Japanese counterparts, some discussions are taking place. We are active participants in terms of trying to influence and help set the US agenda for these talks. And things are progressing. I can't tell you that there's anything eminent on that score.

With respect to new routes, I think when we look at the range of possible new routes for future growth and here we are talking about 2013. We're looking at potentially additional Japan as well as other destinations in Asia.

You -- can you talk about the inter-island? You mentioned the first half competitive capacity West Coast. What's the competitive capacity inter-island in the first half?

I think it's flat to slightly -- actually it's slightly up because we're adding the three airplanes. Apart from that it would be slightly down. So it is slightly up. Of importance to note with these three airplanes, Glenn, is that although we have acquired the use of three airplanes, one is going to be used to bolster our spare availability.

A portion of the second airplane is going to make up for the fact that as these airplanes go into their second decade, they spend a little bit more time in the maintenance shed. So when you see the three airplanes, they will not be adding that much capacity on a pro rata basis.

Did you give a 2Q ASM growth for Hawaii. You gave the first quarter. Did you give a 2Q?

I don't think we did. And I think we want to sort of hold off on that, and just generally. And I'll tell you why. Aircraft get delivered within a specified month. We have, during that quarter, three airplanes being delivered. It makes a big difference whether those airplanes end up coming at the beginning of their respective months or the end of their respective months. As we get closer to the second quarter and can give you a number in which we have a greater confidence, we will do so.

Finally, I guess there's one time items. But cost down about 1% ex-fuel when you're growing that fast. It doesn't seem particularly exciting. Should we see a lot better cost outlook in 2013 and 2012 as you anniversary everything?

Yes, I think you should. I think in the back half of 2012, we're going to see some substantial reductions in unit costs as we've absorbed these start-up costs. We still have got that pension issue that Scott mentioned briefly that's worth about 1 percentage point of CASM ex-fuel. And then as we get into the first half of next year, then I think you'll continue substantial (inaudible).

Thank you very much.

All right, no just point out, of course, that we anticipate seeing some revenue offset to all of this mounting costs as we grow our business.

Thank you. Our next question comes from the line of Steve O'hara with Sidoti & Company. Please proceed with your question.

Hi, good afternoon.

Hey, Steve.

Can you just talk about the -- you had mentioned the cargo revenue. And I think in a previous call you'd mention that Haneda wasn't really a cargo hub, is more Narita. And is that -- is this out of Osaka, or something, or other markets?

Yes, and what I mentioned to you. Just for the benefits of others on the call is that Haneda has been the domestic airport for the Tokyo region until relatively recently. And so the international cargo infrastructure, [Fodders], cargo buildings, and so forth are centered around Narita rather than Haneda. But first of all, we are dealing with that issue. We are somewhat overcoming that.

We've got a lot of connecting cargo now in Haneda coming from some other big producing destinations in Asia. At the same time, we would point out that Osaka, [in Shan], and Los Angeles as a destination more than a place for generating cargo, are big destinations. The cargo increases that you're seeing are centered principally around those destinations.

Okay, and then on maintenance. I'm just kind of wondering what the trajectory is there going forward maybe on a unit basis or something. I mean, is this something? Obviously, it's spiked in the quarter. That seems to be fairly well known. But, I mean, what are the -- what is the unit cost growth does it look like going forward?

We will have a substantial reduction in unit maintenance costs going forward as we get out of a year of unusually heavy maintenance costs. We will see maintenance costs rise by something that looks like 50% of the rate of growth of the [ASM].

Okay. And I was just curious, back on your -- at your Investor Day you noted in -- I think some of your West Coast markets, you enjoyed a revenue premium. Is there anything you can kind of update us on that in terms of, you know, where that stands? Do you expect that to expand possibly with the A330s coming into service?

Yes, we continue to see a pretty robust demand environment. There really hasn't been any sort of dramatic changes in the dynamics of the marketplace over the course of the -- what feels like now, last year or thereabouts, so certainly the last eight or nine months. We certainly hope that that will continue into the future. But at the moment we see really no changes.

Okay, thank you very much.

Thank you.

You bet.

Our next question comes from the line of Bob McAdoo with Avondale Partners. Please proceed with your question.

Thank you.

Hi, Bob.

Hi, Bob.

Hi. Look, the answer that you gave to O'Hara about the unit maintenance costs going forward, the end of you're answer, your voice kind of was difficult for me to understand. Could you say that again, what you told him, please?

Okay, yes, sure. What we said is that we would expect on a sort of gross basis that the rate of increase of our overall maintenance expenses will be somewhere in the region of about half of our ASM growth for the year. I'm not giving that prediction for the quarter. But that's it for the year.

And the reason mostly for that is that we do have maintenance events. Some of which are unplanned exactly when engines come off the wing. And some of which is planned deliberately in a relatively uneven [bases] throughout the year.

Okay. Then a couple of things, can you give us a little help on what goes on with rent and depreciation because of the new airplanes going forward? And also, just finally, United announced Dulles to Honolulu nonstops effective in June. Wonder how that -- how we should factor that in as to how that might impact the New York-Honolulu operation?

Okay, well, I'll answer your second question first. Then perhaps hand it over to Scott to take care of depreciation and amortization at aircraft rent. Yes, woke up this morning and saw United's announcement of Dulles to Honolulu. Again, there are a bunch of people coming out of the DC metropolitan area to Hawaii everyday.

I suspect they probably did roughly the same sort of calculation that we did with respect to New York. Our connecting pattern of service with Jet Blue does not actually connect to Washington, DC. So it doesn't directly affect our forecast for the New York route.

It would mean that the Jet Blue cities are a different set of routes than what they're likely to be bringing in?

Yes, more or less. Clearly, meaning more precisely that Washington, DC was not a city that has convenient connections over Jet Blue's Terminal 5with Jet Blue to our service.

Okay, good. All right.

Okay, Scott?

Yes, on the income statement to your question. I think, as you might expect, you'll see kind of on a relative basis, aircraft rent going down. Depreciation and amortization going up by about roughly the same kind of percentage change year-over-year. In addition, of course, you'll see a fairly strong increase in interest expense due to the 717 transaction and new debt that's been added from 2011 carried into 2012.

Should we take what we saw in the fourth quarter and roll that forward as a good approximation of what the interest and depreciation might be?

Yes, I think on interest that's more specifically to interest at about $400,000 to the fourth quarter number to get you on a run rate.

Okay, very good. Thank you.

Thank you. Our next question comes from the line of Kevin Crissey with UBS. Please proceed with your question.

Hi, thanks for taking the call.

(Inaudible).

Can you talk about the progress on cross selling hotels? And maybe how your customer differs coming from the West Coast versus maybe from Asia in terms of the percentages of folks that also buy a hotel?

Okay, yes. I think we're pretty pleased with progress in terms of cross selling travel and hotel. You may have seen an announcement, I guess, what, a month, a couple of months ago December. About our teaming up with Orbitz to provide the engine for making that happen. It's relatively small numbers, but we like the rate of growth here. And this will be a major focus for us in 2012. I would characterize it very much as being on track against our expectations.

Turning to the question about the differences in customer behavior between the West Coast and the East Coast, we assume they're going to be very similar. But, of course, we have deep, deep West Coast experience. And we have not so much experience of the East Coast. So some of that -- that's an assumption of ours rather than a proven fact. And part of the challenge of moving to new markets is to figure that stuff out.

Okay, perfect. And could you just talk about Alaska's growth into your markets in general. And what you're seeing there and how it affects you, I should say?

Yes, Alaska has undoubtedly grown into our market. Basically, see this is an important market for them. The same time any of the other carriers have actually pulled back. If you look at total capacity for 2011 in the markets in which we serve, we were essentially flat.

So we've seen Alaska come in and some of the other guys come out and very much in keeping with my belief around this as you heard me say a little earlier on this call. What's of interest to us is the sort of gross number of seats in the market because that's what we see as being the -- that's what generates the competitive pressure, particularly on fare.

Correct. Thank you so much.

Bet.

Thank you. Our next question comes from the line of John Reardon with Dominick & Dominick. Please proceed with your question.

Hey, good morning.

Hey, John.

Hey, just kind of going back to Bill Greene and talking about some of the places you might expand. Today in The Wall Street Journal. I don't know if you saw it. It talked about the searching Australian travel market, and which has been reflected in your expansion in Sydney.

And I was kind of looking at Melbourne, and Brisbane, and their populations. And correct me if I'm wrong, they have to actually fly to Sydney before they start heading north to the islands. Any thoughts about maybe putting a Melbourne run on with 4 million people down there?

We don't sort of speculate too much about the places we're going to fly to. It's obviously competitively sensitive. But what I would venture to say is that you've seen the increase in our frequencies and the gauge of our airplanes into Australia clearly reflecting the fact that we're seeing demand growth there.

And as you would expect us to do, we are looking for -- we're always looking for other opportunities and the strength of the Australian dollar, the attractiveness of Hawaii as a destination has us focusing pretty carefully on Australia at the moment.

One other thing, visa relief, Obama signed a -- I guess a presidential order saying they should figure out a way to speed that up. And could you comment on that? Secondly, of course, we see that big giant out there called China. Correct me if I'm wrong. Didn't China Eastern start a charter run, or China Southern? And how is that doing so far? And what do you think of visa relief and the rapidity that that may happen?

Well, the visa issue is a very significant one. I think there are three areas where we need to see some change. One is in the rules that are being applied. Second, is the cumbersome nature of the process that we require visitors from China and other non-visa waiver countries to go through in order to apply. And the third is the US government resources available to process applicants.

The Obama's initiative goes principally to the issue of resources that's clearly helpful. As to the making the process itself less cumbersome, there are some bits of legislation, one of them introduced by local Congressman here in Hawaii to try and provide some relief to the process.

And as to the actual rules, I certainly haven't seen any particular development. I think what is true is that the three problems combined is a real impediment to Chinese travel to the United States in general and to Hawaii in particular.

Any steps to make that problem smaller are helpful and we support. And we hope that within the balance of this next year or so we get to see some meaningful improvement in what is today an astonishingly difficult and cumbersome, and burdensome process for visitors to come and spend their money in the United States.

Okay, Mark, thank you. And one other thing, you're scheduled to take deliveries of the new technology plane, the A350XWB and like Boeing and their 787, they've been having some problems getting that thing glued together correctly. Are you still feeling comfortable with the 2017 arrival?

And secondly, even though it has higher costs, might it be something to ponder of maybe or going to either Airbus or some of the [leasers], and picking up say an A34500, which would give you the range on a short-term kind of a patch over lease, if you would. Give you the opportunity to start serving someplace like Singapore?

John, first of all on the A350XWB that we have slated for delivery in 2017, we've not heard of any delivery to that aircraft. We are some way down the production path, somewhat deliberately, frankly. I think we didn't particularly have a desire to be the first customer of this or any aircraft type, precisely because in fairness to both manufactures, introducing new aircraft type is enormously complex.

But at the moment, we're still looking at 2017 for the XWB. As to an A340 in the meantime, I have to tell you that there are many airlines that have tried that strategy. And to the best of my knowledge, every last one of them would very much like to sell us their aircraft for doing that. So it isn't a strategy that we'd be looking to at the moment. I think we'll bide our time and wait for the A350.

Okay. And in closing, I would like to thank you, and Andrew, and [Harvey], and [Vanessa], and [Keoni] for the wonderful reception. It was a lot of fun. But more importantly, I enjoyed talking to all of you about the business in a relaxed atmosphere. And it's something you probably ought to consider doing again.

Absolutely, John. We are certainly starting in June, we'll find it all a lot easier to get to New York. And we intend to take advantage of that and spend more time there.

Thank you very much.

Mr. Dunkerley, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Okay, very good. Well, thank you, everybody for joining us today. As you've seen, we're pleased that the positive momentum, which started mid-year in 2011 continued through year-end. 2012 is going to be an eventful year for our company as we prepare to -- as we prepare and then launch new service to new destinations. We're looking forward to updating you on our progress on our next earnings call. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.