Hawaiian Holdings Inc (HA) 2012 Q1 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings' first quarter 2012 earnings conference call. (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.

Thank you, Operator. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings first quarter 2012 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 four o'clock Eastern Time today. If you have not received the release, it is available on the Investor Relations page of Hawaiian's website.

Before we begin, we'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, 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. As you will have seen from the financial results we've just released we were pleased to report a modest net profit for the first quarter of 2012. At a high level these results were better than we had expected at the beginning of the year. They compare to operating and net losses posted in the same period last year after adjusting for the vagaries of fuel hedge accounting.

We are also pleased to grow yield at a time of brisk capacity growth. Our unit costs were lower than we had expected, mostly due to the early delivery of an aircraft, which bumped up capacity, and the timing of a number of maintenance events, which ended up falling out of period. We could also have done a little bit better job of forecasting the timing of certain expenditures hitting the budget.

We continue to execute our strategy of diversifying our revenue base by growing into international markets, which have not been a traditional mainstay of the business. All the while we've managed our important domestic business to ensure we're maintaining and leveraging our strength in these markets.

We had an awful lot going on in the quarter. In January we implemented coach sharing and frequent flyer agreements with ANA. We announced the introduction of a Maui Hub, offering improved connections between Maui and neighbor island destinations, as well as flights to and from the West Coast.

As we mentioned in our January call, we also announced a broad set of commercial agreements with JetBlue. The agreements provide for immediate interline connections between the carriers. And we expect that in the near term the relationship will also encompass a [code] sharing and reciprocal frequent flyer partnership. In addition, Hawaiian's new daily nonstop to JFK from Honolulu will operate from JetBlue's terminal five in New York, beginning in June.

In March we reached an agreement with our Flight Attendant Union. The agreement was ratified last week and has an almost five-year duration.

In February we became the first airline to receive aviation carbon credits for reducing carbon emissions by nearly 22,000 metric tons over the past six years. This came as a result of our implementing eco-friendly engine washing technology.

We took delivery of our sixth A330, the first of four wide bodies to be delivered this year. And, lastly, last week we launched daily service from Fukuoka, Japan to Honolulu, our third Japanese route.

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 first quarter we reported GAAP net income of $7.3 million or $0.14 per diluted share. This compares to $0.9 million or $0.02 per diluted share in the same period last year. Reflecting economic fuel expense, the Company reported adjusted net income of $3.3 million or $0.06 per diluted share. This compares with an adjusted net loss of $3.2 million or $0.06 per diluted share for the same period last year.

Operating revenue was $435.5 million, up $69.9 million or 19.1% year-over-year. This was on a 12.8% increase in capacity. Passenger revenue increased 20.2% compared to the first quarter of last year.

Load factor for the quarter decreased 0.4 percentage points to 83.8, while yield improved 7%. Combined this produces PRASM improvement of 6.5%.

As expected other revenue grew at a slower pace than capacity and certain sources of revenue was significantly charges for checked bags are not collected on our international services. On the other hand, cargo revenues continued to gain strength, reflecting superior cargo capabilities of the A330. As I mentioned, capacity increased 12.8% for the quarter, which was slightly higher than the guidance we issued due to the early introduction of our March A330 deliveries, allowed us to fly extra sections.

Moving now to the expense side, fuel remains the biggest year-over-year variance. On the operating line we saw an increase of $31 million in fuel expense. About half of the increase was driven by growth, while the other half was driven by higher cost per gallon. Our fuel consumption was 43.1 million gallons, up 12.7% from the same period last year, and our average price per gallon of $3.25 was 13.8% higher.

During the quarter economic fuel cost per gallon, which includes the portion of our hedging gains, losses, and expenses related to contract settling during the period was $3.27 per gallon. This compares to $2.82 per gallon in the same period last year. We continue to maintain a consistent and disciplined approach to fuel hedging, with 64% of our consumption hedged for the second quarter, 59% for the third quarter, and 36% hedged in the fourth quarter. We also have modest positions in place for the first half of 2013. Details are available in the press release.

Excluding fuel, cost per ASM decreased 4.2% in the quarter, which was better than anticipated by our recent guidance. The largest contributor to this cost performance was the generation of additional ASMs made possible by the early introduction of our March A330 delivery. As Mark noted in his comments earlier, other factors that drove unit costs lower were primarily centered around maintenance activities, most of which was due to a shift in certain maintenance events from the first quarter into the second and third quarters. There were also a few discrete items resulting from revised estimates that lowered the supplemental rent on our 767s and costs related to prior period maintenance events.

As we look at maintenance expenses, be reminded that 2011 was an unusually difficult year. We experienced a heavy concentration of heavy maintenance checks on the 717 fleet, significant engine overhaul cost, and the last round of material rate increases in certain power-by-the-hour agreements.

In contrast, 2012 maintenance expense generally reflects volume related increases associated with our growth. For the quarter maintenance expenses were relatively flat from the prior year. This reflects power-by-the-hour expenses for two A330s that were not in the fleet during the same period last year, offset by the benefit of lower year-over-year heavy maintenance activity that I just mentioned.

Aircraft rent expense decreased 31.9% year-over-year to $23.2 million. This is a function of the refinancing of our 717 fleet at the end of the second quarter of 2011 and the return of two leased 767s, replaced with two debt financed A330s.

Depreciation and amortization expense increased 30.3% year-over-year to $19.2 million, again, a function of the transitioning of our 717 fleet from lease financing to ownership in the second quarter of last year. Since that time we have added three debt financed A330s. This expense line will become fairly steady after incorporating ownership costs for an A330 delivery coming this month.

Below the operating line we reported non-operating expense of $1 million in the quarter. This compares to non-operating income of $6.4 million in the prior year period. The most significant difference year-over-year relates to increased interest expense associated with aircraft purchases in 2011 and a decrease in gains recognized on fuel hedges.

Turning now to the balance sheet, we ended the quarter with $376 million in unrestricted cash and another $5.2 million in restricted cash, a $46 million increase in total cash as compared to December 31st, 2011. As discussed in our call at the beginning of the year, during the first quarter our primary credit card processor returned a 25% cash holdback, reclassifying approximately $30 million from restricted to unrestricted cash. Our revolving credit facility remained undrawn at the end of the quarter, providing available liquidity of $56.6 million. This reflects the available borrowing base net of certain letters of credit.

CapEx in the quarter was $125 million, which included $65 million related to the final payment to acquire our sixth A330 in March, along with the purchase of a spare engine. $21 million related to bank payments for other upcoming aircraft and engine deliveries. The balance of first quarter CapEx is associated with the capitalization of two 717 leases, buyer furnished equipment, and other miscellaneous items, including non-aircraft spending. For the remainder of the year we expect approximately $175 million to $185 million in CapEx, primarily related to future aircraft deliveries.

Wrapping up comments on the first quarter, we contributed approximately $2 million to our pension and benefit plans. We expect to contribute a minimum of $8 million more during the remainder of the year.

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

Well, thank you, Scott.

With a lot going on in the period we are pleased to be able to reduce our unit cost and enjoy strong demand across our long haul business. Our North American routes between the Western United States and Hawaii remain the largest source of our passenger revenue at just under 50%. The RASM and PRASM in this part of our business improved in line with the overall performance of the Company.

In the second quarter we're looking forward to the introduction of our Honolulu to New York service. Amongst some there's an undercurrent of concern about this route. I can report that today this route is booked to a higher load factor for the upcoming summer than any of our other U.S. routes. And though it's still early the route is also tracking ahead of our internal revenue projection.

More subtle capacity increases are in the form of new nonstop service from our Maui Hub to Los Angeles and Oakland on a daily basis and to San Jose five times a week. There are a couple of minor capacity reductions elsewhere netting out these increases.

For the summer demand remains quite robust and bookings are ahead of last year in terms of volume and average fare. There's quite a bit of variability among our North American routes, however. With total industry capacity growing in some markets and shrinking in others it's unsurprising that not all North America routes are performing equally well. Total industry capacity between North America and Hawaii is set to grow by 5% to 6%, with the largest increase in capacity coming in the Bay area.

Revenues from our international routes have posted significant gains this quarter and accounted for 27.3% of our passenger revenue. Our international routes are now solidly the second largest part of our business, moving ahead of the intra-Hawaii segment. RASM improvement in our international segment was well ahead of that for the Company as a whole.

As those of you who have followed our progress these last few years will know, the growth of our international business is the cornerstone of our strategy to diversify our revenue base. In just 18 months we have introduced service to Honolulu from three Japanese cities and from Seoul. In addition, we've increased the frequency of our flights from Sydney.

The share of our revenues from international markets has increased from just 9% in the third quarter of 2010 to the over 27% figure I shared moments ago. Fukuoka is the latest city to join our network, and we've been encouraged by the reception our new flights have received. We continue to believe that our visitors from abroad will grow, and we continue to focus on developing international destinations in the years ahead.

In contrast with the strength of our long haul business, our intra-Hawaii results have been disappointing. The 3.5% increase in revenue during the quarter was nowhere near sufficient to keep pace with the 10% increase in capacity year-over-year. During the quarter we introduced three additional 717s into the schedule and we started the Maui Hub. This represents a substantial change in the pattern of service between the Islands, and we did not do a good enough job of adapting to these changes. This is an area that we are looking at and we will be making further refinements to schedule and fares necessary to improve our short haul flying results. Some improvements are already taking hold for the second quarter, and the gap between the increase in capacity and revenue growth will narrow.

As we have previously discussed, we were slated to add four A330s to our fleets in 2012, with no planned Boeing 767 aircraft retirements or lease returns. One of these four A330s was delivered in the first quarter, and the remaining three aircraft are to be delivered in the second quarter. This makes the second quarter appear to be an enormous transition for our business. We will absorb a variety of costs associated with our growth, including the training bubble associated with adding pilots, flight attendants, and other employees to our ranks. At the same time, we'll be participating in a number of markets which are new to us. This affects the amplitude of the variability in our forward view of revenues.

Nonetheless, our strategy is bearing fruit. We are ahead of plan in essentially every dimension of growth and financial performance. So long as the current environment of strong demand persists and so long as the price of fuel does not surprise all of us, we anticipate staying there.

To give you a closer look at the second quarter I'll now turn the call back to Scott.

Thank you, Mark.

Let's look at the specifics of the second quarter. Our growth will continue and we expect our capacity to increase between 15.5% and 17.5% compared to the same period in 2011. As mentioned, capacity increases will be driven by the addition of three 717s and five A330s since October of last year.

To break it down a bit, for Hawaiian, total North American flying, including slightly less than a month of New York, will be flat. International flying is up by almost 70%, and neighbor island flying will be up again by about 10%. For the full year we continue to expect capacity to increase from 20% to 23%, as announced at the beginning of the year.

Load factor for the quarter is expected to decrease between 0.5 to 2.5 percentage points. Yield is expected to improve by 4% to 7%. Combining these numbers we expect PRASM to increase by 2% to 5%. This [rate] increase is a bit lower than what we saw in the first quarter, as the new routes that launched during the quarter will take some time to mature.

Other revenue will again grow at a slower rate in passenger revenue, diluting the growth in operating revenue per ASM compared to passenger revenue per ASM. As we've discussed before, certain categories of other revenue are unique to domestic operations.

On the flip side of the coin, cargo revenue is expected to continue to grow at a strong pace for the quarter, reflecting the fact that our new international routes have meaningful cargo potential. In addition, A330s introduced domestically will further enhance growth in the cargo business. The net result is that operating revenue per ASM is expected to grow in the 1% to 4% range, compared to the second quarter of last year.

Let's now look at costs. First, I'd like to remind everyone of some of the detail we shared in our last earnings call to frame expectations around 2012. First, we noted that startup costs would add approximately 1.5 points to CASM ex items in the first quarter and 2 points in the second quarter. In addition, we noted that pension and post-retirement benefit expenses for the year would add about 1 point to all periods of 2012.

The takeaway is that the first half of the year will bear a disproportionate share of startup costs related to new routes, with a greater concentration in the second quarter. In contrast, during the second half of the year all four new A330s will be in the fleet, producing revenue and seat miles that should drive a notable improvement in unit cost performance. Also be mindful that our year-over-year comparisons exclude a $70 million charge taken in the second quarter last year related to the refinancing of our 717 fleet.

With that as background, we expect CASM ex items to be relatively stable year-over-year in the second quarter, within a range of down 1% to up 1%. This is a modest improvement over what we had anticipated at the beginning of the year. Similar to the first quarter, some maintenance events shift from the second quarter to the third quarter. For the full year we now expect CASM ex items, which is ex-fuel and ex-lease termination fees, to decrease between 1.5% and 3.5%.

In terms of financing, we feel very good about our ability to fund our growth as the A330 remains a favorite of lenders and lessors. We are pleased to have commitments in place for all of our 2012 deliveries. For 2013 we have commitments for two of our three first-half deliveries, and we are in the final stages of securing financing for the third. In addition, we are looking at our options to finance late 2013 and early 2014 deliveries.

In the second quarter our CapEx should be in the $105 million to $110 million range, with close to $100 million being related to aircraft. Reflective of our recent financings, we would expect interest expense to increase by about $1.8 million sequentially from the first quarter to the second quarter. This increase is due to the additional debt incurred for the financing of March and April deliveries and a full quarter of expense related to the two Boeing 717s under capital leases delivered at the beginning of this year.

Regarding fuel and sticking with our normal practice, we are not going to give guidance at this time. We expect our fuel consumption to be 16% to 18% higher year-over-year in the second quarter as a result of 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 will now be conducting a question and answer session. (Operator Instructions)

Our first question comes from the line of William Greene with Morgan Stanley Smith Barney. Please proceed with your question.

Hey, thanks. It's actually John Godin filling in for Bill.

Hi, John.

Okay, Mark, I couldn't help but be struck by sort of your comments about all of the costs and uncertainty around taking a bunch of aircraft in the second quarter, and I was hoping that you could just help us understand to what extent you've baked in, and it wouldn't be unreasonable, but to what extent you've baked in a little extra conservatism maybe in your CASM ex-fuel guidance or your PRASM guidance to take into account some of this uncertainty that you spoke of?

Okay, well, let me break it down some for you. The issue, the largest issue around CASM is the day of the month that the aircraft, that a new delivery gets delivered to us. And it made a meaningful difference, indeed, over a percentage point of CASM in the first quarter that we received one of our airbuses, the one airbus that we received slated for March which we assumed would come mid-March, we actually received it at the beginning of March, and that has that degree of leverage around that.

If we look at the second quarter, we have dates certain at the moment for the April airplane and we have dates certain for the May airplane, and we don't have dates certain for the June airplane. It is the custom that they tell you 30 days out when you're going to get the airplane. So there is some -- it's not the same degree of variability associated with that, and that's the big item, that's the big single item. All of the other things that caused a little change in the CASM we actually reported versus what we guided to I would sort of generally describe as sort of cats and dogs that I don't anticipate continuing going forward. But that, the delivery of the aircraft still has some leverage on the potential numbers that we would see.

Turning on the revenue side, the issue for us here is sort of, is relatively straightforward. This is, for all intents and purposes, the first real second quarter of some of this expanded career and Japan flying. This time last year we were dealing with the impact of the terrible earthquake and Tsunami, and it's just simply not, it's not representative, we don't believe it'll be representative of things like the usual seasonality and so forth.

We have not, we believe, baked in any particular conservatism to our numbers. We've, in the guidance we've given you what we think will actually happen based on our forward-looking projections. We've just highlighted the fact that a relatively meaningful piece of our business now is new to us and there'll be some variability associated with that.

Okay, and --

Does that answer your question?

-- yes, that's helpful, but if you don't mind could you give us, just because of the sensitivity clearly to the dates and the month like you described, the April and May are those aircraft slated to be first thing in the month, in the middle of the month, at the end of the month, how do we think about that just so we can kind of pay attention to it?

Okay, April and May are baked into our CASM guidance as they are, and they're certain, I think there's no variability associated with that and the CASM guidance that we've given for April, May are already in. The only issue that is open is the June delivery. We assume for want of any particular [arrogance] that it'll come in the middle of the month, and we wait to see from the manufacturer what the date will actually be.

I see. Okay, and just speaking about the general PRASM trend, the industry broadly saw, seems to have seen a pickup at the end of March in PRASM. Can you just kind of speak to the cadence of PRASM throughout the quarter? Did you see a similar thing at the end of the month?

Yes, I think when we look at the North American business that we have, you know, the cadence is broadly similar. We've got the Asian business, which has got very substantial sort of RASM improvements over last year, but then it's just a very curious last year so I wouldn't want to put any particular weight on that.

And then, as I mentioned in our prepared remarks, we've got some work to do neighbor island to adapt the way in which we distribute and sell tickets to the new Maui Hub and the extra capacity. And there what we've said is that in the first quarter our RASM was down about 6.5%, we grew by, if you recall my prepared remarks, 10% more capacity, 3.5% more revenue. What we've -- are forecasting is that that gap, that adverse gap will narrow in the second quarter. We're not saying that it will disappear.

Okay, and just following up on that last point that you made, has there been any change in the competitive dynamic in intra-Hawaii flying or would you just sort of look at your comments there and the performance in the first quarter and say, look, that was just kind of a blip and that was sort of Hawaiian's issue more than any change in the competitive dynamic? If you could just help us think about that?

Yes, absolutely. Great question and I'm glad you raised it. There was no change in the competitive dynamic. It was absolutely -- it's a Hawaiian issue that we've got to and we are working through.

Okay, and then just a last question, speaking of competitive dynamics, of course, it's been long forecasted that Allegiant Air is going to start service to Hawaii. Now that it's closer can you just kind of give us your thoughts or an update on your thoughts, if anything has changed, if you've heard anything from any potential partners in Hawaii that Allegiant might be using for some of their ancillaries, can you just give us an update on your thoughts there?

Sure. You know, Allegiant is a terrific business in its own right, and they're going to add some capacity into the North American to Hawaii route. Again, as I've said before, as we look at who we compete against, which is broadly speaking pretty much everybody, we look at the market in terms of the number of seats coming at us because over the years we've seen really a very close relationship between the [class] in the marketplace and the performance of the routes in question.

So I think when we look at Allegiant what we're really doing is we're counting the seats and the impact that that will have when we -- I don't think, well, I know that we don't think that Allegiant, per se, is going to alter the competitive dynamic beyond the impact of the seats they're bringing to the marketplace.

Okay, thanks a lot, guys.

You bet.

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

Thank you. How are you guys?

Very good. Thanks, Hunter.

Good. I'll try to keep it to one and a follow-up. I'd like to follow-up, actually, on the Allegiant commentary. I'm kind of curious to know what you expect in terms of point of sale mix? Allegiant's got a good brand in Vegas, they have a lot of customers that are familiar with it. You obviously have a dominant brand and good presence in Honolulu. I'm kind of curious to know, you said it wasn't going to disrupt the competitive dynamic. What are you expecting -- first of all, how do you have your bookings book-up from Honolulu to Vegas, and what are you expecting from Allegiant in that market just from a point of sale perspective?

Well, I think we're very pleased with our forward bookings from -- principally from Hawaii to Las Vegas. It's one of the very few routes that we operate where the majority of the traffic sitting on the airplanes is actually Hawaii point of sale. So I think we're very pleased with bookings going forward. We are, you know, we sell the majority of those bookings online, mainly through our own website. We would anticipate that Allegiant does the same.

We've got a strong loyalty base, of course, here in the Islands. And while we're the only scheduled carrier, by the way, operating today between Honolulu and Las Vegas, we're not the only carrier. There are -- there's a substantial charter presence there, and it'll be interesting to see how much of Allegiant's draw is going to be naturally customers who today fly on us and how much of it is actually from the charter carriers that are perhaps in a more similar business to Allegiant than we are. However, you know, this is going to be new. I'm speaking with some confidence, but we obviously have to wait and see how the markets unfold.

Okay, yes. No, I understand that, Mark. Thanks. And on the -- maybe you could flesh out a little more color on the intra-Island, what went wrong there? Because, again, when -- you were talking to, I guess, Peter, when you guys bought these planes from Boeing, and there was some assurance that it wasn't going to be disruptive to capacity, which I understood and accepted and obviously that wasn't the case. So what specifically did you sort of misgauge? I mean was it the demand levels, was it fuel prices? I mean what specifically went wrong according to the original plan, at least based off that?

Okay, good question. First of all, it allows me to kind of reiterate that I think we remain absolutely confident that the strategy that we adopted was fundamentally the right strategy. So this is -- there are a number of reasons we think, we're not trying to put the genie back in the bottle. I think what we anticipated is that traffic, that when you introduce a new hub the traffic would relatively easily flow over that new hub versus the one that we have in Honolulu. And I think what we're finding is that people are kind of more set somewhat in their ways than we initially anticipated. So we've got some promotion to do on that score. We've also just got to tweak some of our schedule to kind of better connect with some long haul services and the like.

So as we look at it we've got some small kind of relatively finesse things to do that should, we believe have a substantial impact. We said second quarter we're going to narrow that gap, not address it entirely, looking to the third quarter, which is our peak I think we feel that we'll have the right level of capacity and schedule for the marketplace. And then as we look at the back end of the third quarter and into the fourth quarter that's when I think we're going to be making some schedule adjustments to sort of more completely address the issue.

Okay, thank you, Mark.

You bet.

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

Thanks, Operator. Hi, everybody. Thanks for the question, taking the question.

Hi, welcome, Helene.

Thank you. Just one point of clarification, salaries, wages and benefits up 16.2%, is that -- can you say how much is related to scheduled wage increases, how much is related to pension, and how much is related to training costs ahead of these extra A330s or just the delivery schedule on the A330s?

Yes, I don't have that right off the top of my head, Helene. We can certainly get you those numbers. I think it's going to be a mixture of both, but of all of those I don't think the wage increases is a particularly large chunk of it, however, because so for example a flight attendant deal that was just ratified didn't fall into the first quarter.

Helene, I can give you just one piece of that and then, as Mark said, we can follow-up with some more detail. The pension expense for 2012 will be about $31.6 million, which is a heavy year. And, as I mentioned earlier in the call, that's worth about 1 point in CASM across all quarters.

Right, right, and I think you said the $2 million in the first quarter, also, right, earlier on the call?

Right, yes, $2 million was -- so the $31.6 million is the expense, $2 million is part of the required minimum payment, so it's kind of a different calculation and a different concept. We have to pay a minimum of I think $10.2 million this year.

Right.

But the expense is $31.6 million, and that's what you need to think about.

Okay, and then my other question is just with respect to where you are now with respect to Japan point of sale. I noticed from the data coming out of the Japanese [MLIP], as well as Japan Air and All Nippon, their traffic is back up something in the order of 40%, 50% a month in international service. I'm assuming that you're back to normal and seeing growth. Have you looked on it on a year and two-year basis? I mean I guess you can't, right, because you didn't start service?

Yes. No, that -- in fact, that's why I made that comment in the prepared remarks around variability because against two years ago, we weren't in the marketplace. So what we're doing now is we're going off expectations that we've been led to based on months, over the last six months what we are, and everything by the way I think is meeting and exceeding general expectations. I think we're very pleased with that, that's why we've introduced three in 18 months. Where the variability comes is the sort of week-in and week-out seasonality that we're getting used to. There's a big holiday in the second quarter called Golden Week.

Yes, that's coming up, right? I think it starts Thursday, actually.

Absolutely, absolutely. What's interesting about Golden Week is that it tends to starve a little bit of traffic immediately before it, you know, as people kind of save-up to go on vacation Golden Week. So in particular, some nuances that we're working our way through in Japan, but that's against the backdrop of Japan being a great success for us.

Right, okay. All right, good. Those -- I think that does it for us. Thank you.

Thanks a lot.

Thank you.

Thank you. Our next question comes from the line of Ray Neidl with Maxim Group. Please proceed with your questions.

Yes, I just wanted to verify a couple of things on the expense line. The maintenance expense you said some maintenance expenses switched from the second quarter to the first quarter, so I guess going forward on a percentage basis we'll see some moderation of maintenance expenses? And the other thing is the aircraft rentals, now that you're going to have more ownership should we expect to see that number go down or increase at a very slightly type of rate?

Good questions, Ray. We don't really guide at the expense line level, but in terms of maintenance I think we could expect to see a little growth year-over-year on the whole but that rate will be much less than our capacity growth rate. On the rent side, that will level out in the second half. After we incorporate two leases, as Mark mentioned earlier, that will be the May and June deliveries, so that will pop up, and then for the second half the rent line should be relatively flat.

Okay, good. Those are the two lines that were giving me the most guesswork. And on a more macro type of question, Asia, Korea, with some of the potential problems going on there, and China down the road, how do those sectors look? And by Korea I mean with some of the [inaudible] that's going on now by North Korea, will that have any affect on your route there do you think?

It's a funny thing, it's a great question -- it's a funny thing, Ray. I was actually in Korea on the day that the rocket launched and the day preceding it, so you might imagine that there was a great sort of [fulmination] of concern and so forth. Actually, it's not the case. The Koreans seem, the South Koreans, obviously, seem to take these issues better in stride than some of their neighbors do, curiously.

I also just by happenstance happened to be in Korea when, if you recall, the North Koreans shelled an island in South Korea. On that day the Korean stock market actually appreciated by 2%, rather than went down. So either because it's the way people have lived for a long time or it's the difference in their society at a fundamental level, there's just none of that sense of particular concern around North Korea. And it stands in contrast to their headlines on CNN and BBC and elsewhere.

Okay, great. Thank you. Good quarter.

Thank you.

Thanks, Ray.

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

Oh, yes. Hey, I guess two questions. I just -- I want to go back to capacity to and from North America. Mark, I think if I heard you correctly, you said it was going to be somewhat flattish in the June quarter, and I know it includes one month of the New York service. And you've also added some additional Maui service. So what routes are getting cut back to offset for that?

Yes, first of all, let me just kind of reiterate what I said just to confirm that. Yes, we are going to be including part of June's New York service. We're going to be essentially flat in terms of North America capacity. We're adding Los Angeles, Maui, Oakland, Maui and San Jose, Maui. We're making some adjustments elsewhere. One of them has to do with some seasonal flying to Los Angeles out of Honolulu, which will actually come back in the third quarter. Some of it has to do with our leaving Portland, Maui and also rejiggering some of our Seattle flying. So all of that, those bits and pieces, net, net end up leaving us pretty much flat for the North America for the second quarter.

Okay, that's helpful. And then my second question, just back to the intra-island, you know, it looks like I mean you had a good unit revenue performance for the quarter, it looks like the intra-island was down 6%, 7%. You indicated that number would -- I got the sense that it would still be negative in the June quarter, it would be narrowing. You have 80%, 85% of the market, how long will it take you to get back to positive RASM? I mean are these fixes going to take multiple quarters, just what's the timing on that?

No, I don't think it's going to take multiple quarters. I think it's going to be more like a quarter. I think once we go into the summer I think we'll be in pretty good shape and, again, I think some of the kind of offseason flying we'll have to look at more for the back half of the third quarter and the early part of the fourth quarter.

Okay, very good. Very good quarter. Thanks.

Thank you, Mike.

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

Hello, good afternoon. The first question I have is on fuel. It seems like gallons are growing in line with capacity except you have younger planes and newer planes and lower load factors, why is that?

Yes, great question, Glenn. The reason for that is when you fly the longer stage lengths the amount of fuel you have to uplift actually goes up. For the first part of the journey you're in a less fuel efficient state because you're carrying not only the passenger load but also the fuel for the second half of the journey. To be very clear, comparing -- if we were comparing apples to apples we would be burning more fuel operating a 767 300 ER versus an A330 on some of these very long destinations as opposed to the airbus, on a per seat basis, of course.

The second I have is that I'm still a little bit confused on the RASM guidance in terms of, one, you're looking for load factors to be lower in the second than the first, which would be very unusual seasonally and, two, you've got intra-island helping or hurting you less in the second quarter and you've got the easier comparisons from the Tsunami and yet you're looking for RASM gains to decelerate. Is this just all Asia? Is it the North, the West Coast routes showing tougher comparisons? I'm puzzled.

Yes. No, a couple of things are going on there. First of all, there's just a mix of flying issues because our growth is disproportionately high in the long distance flying, longer distance flying generally has lower RASM than shorter distance flying. So there's -- that mix affect has an affect on RASM. Obviously, it has a beneficial affect on CASM on the other side of the ledger. So that's one item.

The second item is our international routes operate at a lower load factor than do our North American routes. And so while we like the fares and we like what we've been able to charge for people coming from Japan to Hawaii, for example, Australia, as well, and some of our other international routes, they tend to fill the airplane less.

The third reason is we believe that the second quarter is less of a seasonally good period for our Asia business than it is traditionally for North America business. So those three reasons I think contribute to what I would agree on the face it looks like it's slightly [inaudible].

So you would expect the third quarter Asia to help you more than it does in the second quarter?

Yes, absolutely.

Thank you.

Thank you. Our next question comes from the line of [John Reardon] with [Dominick and Dominick]. Please proceed with your questions.

Hi. I was very pleased to hear about the advance bookings from the new JFK nonstop to Honolulu being better than any other North American departure city. And I was wondering if you could talk about your relationship with JetBlue? And that being could you tell us how much of the feeding relationship plays into that strength?

And the second thing is, correct me if I'm wrong, I believe the JetBlue feed is strictly from some selected cities here on the East Coast? Is that relationship possibly going to expand? For example, could a JetBlue passenger, say, going to the West Coast on JetBlue then continue on to Hawaii, having purchased a ticket via JetBlue?

And then, finally, Mark, in closing I'd like to congratulate you on your new acting career. It's good to know you have something to fall back on if this airline thing doesn't work out.

Unfortunately, John, in that less than five-second cameo I exploited 100% of my acting capacity, so I'm afraid I'm used up at this stage, but thank you for that.

With respect to JetBlue, a couple of points. Yes, we do expect to get some connecting traffic from JetBlue. Exactly how much is going to be as a result of the interplay of how much we can fill out of New York and, therefore, and at what fares and, therefore, what feed we need. And there's almost, if you look at it from our perspective, there's a competitive element around do we take a customer from a connecting city over a customer on the nonstop that's available for New York and what do we have to do to get each one. So that has to play out. There will certainly be connecting people, passengers on the flight.

The limited number of cities that you reference has more to do with the code sharing. One of the things we wanted to do and we'd always want to do is to make sure that the proposition that we're selling the customer has a connection in both directions. We wouldn't want to mislead the customer by saying, hey, you can get on a Hawaiian Airlines coach air flight, you've just got to wait 22 hours for the connection in New York, for example. So we have focused the cities that will be on the list of coach air destinations with JetBlue to be those that have convenient connections that we can sell with confidence and in a way that enhances our brand and our reputation.

But the last question you have is, yes, absolutely, we are connecting with JetBlue today over Los Angeles. That's part of what we're looking at, and certainly we hope to further that, our relationship with JetBlue and expand the number of touch points and ways that we can work together.

Thank you.

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

Good afternoon. Thanks for taking the questions. My question is in terms of competitive capacity off West Coast markets, could you just kind of refresh me in terms of where we are versus the peak? And if you kind of annualize the capacity that's in there where does that get you in terms of -- well, you guys announced Alaska and Allegiant? And then what's the growth rate, what is a fair growth rate for that market is going forward?

Well, let's see, I think we're about back to where the peak is, probably within a percentage point or two, maybe slightly higher than the peak in 2007 now than where it was.

The -- in terms of what do we think is the growth rate, I think we would define this as a pretty mature market, a market which will grow sort of with the [GEE], generally, it will have a certain degree of income elasticity but, of course, much lower income elasticity than we would get, for example, in Asia. So we think of this as a market which will grow slowly over time, but not be an area of rapid growth.

One of the really interesting things is that if you look at who the participants are in the market, and when we look internally and we go back and say, okay, well, a few years ago what were the market shares of all the relative players and what are they now? You see some dramatic differences. You've got some players who obviously made a lot of noise about coming into the market, and they have come into the market, and they've grown quite quickly. They have essentially been matched by seats leaving the market, and it's the customer now in our business, of course, not to announce when you're leaving but to make a lot of noise when you're coming in. And so the real change in the marketplace has been more about who the players are and what they represent rather than the total number of seats.

Okay, and then did you mention the -- and I guess I could probably figure out from your comments, but I mean did you specify what the RASM growth was for North America?

It was almost exactly the same. I've got the numbers here somewhere, but it was almost exactly the same as for the Company, as a whole. It was within a percentage point based on RASM and PRASM.

Okay, thank you very much.

You bet.

Thank you. Mr. Dunkerley, I would like to turn the floor back over to you for closing comments.

Okay, very good. Well, thank you, all, for joining us today. Overall, I thought we did a pretty good job in the first quarter, in at least preparing for the growth on tap in the second quarter. The second quarter promises to be an eventful period and we look forward to updating you on our progress. Thank you very much for joining us.

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