Hawaiian Holdings Inc (HA) 2012 Q2 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings second 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.

Yes, thank you. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' second 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, recent quarterly reports filed on Form 10-Q, as well as reports filed on Form 8-K.

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

Thank you, Susan, and thank you all for joining us today. We are pleased to report a solid net profit for the second quarter. At a high level, these results were slightly better than we had originally expected, driven largely by strong revenue performance at the tail end of June and, of course, a period of slightly lower fuel prices. This performance compares to break-even results posted in the same period last year after adjusting for the vagaries of fuel hedge accounting as well as one-time lease termination charge for the refinancing of our 717 fleet.

Our strategy of going into markets which have not been the traditional mainstay of our business has gone well, with the results continuing to beat our internal plan. Our existing business has also delivered good results. Overall, the Company's improved performance has been based on a combination of strong demand and the industry-leading value-for-money product that my peerless colleagues work so hard to deliver every day.

We had a great deal going on in the quarter. We took delivery of three Airbus A330s, bringing out fleet of Airbus wide bodies to nine. In April we launched daily service from Honolulu to Fukuoka, our third route in Japan. In addition, we announced plans to launch service to our fourth Japanese city, Sapporo, with service commencing in early November. In June we launched our daily nonstop JFK-Honolulu service, which operates from JetBlue's Terminal Five. In conjunction with this, we are pleased to have expanded our commercial agreement with JetBlue to include reciprocal cochairing and frequent flyer agreements between points on the East Coast and Hawaii.

We're also looking forward to further expanding our reach. Last month we announced our plans to serve Brisbane, our second Australian city. This three-times-weekly service will begin in late November. Earlier this month we announced new flights between Auckland, New Zealand and Honolulu three times weekly beginning in March of next year. This will be the eighth new destination, seven of which are overseas, that we will have added to our network in less than 30 months. And just last week we announced a new fare structure for neighbor island travel as well as plans to acquire turboprop aircraft. Both are part of our overall strategy to build out our intra-Hawaii operation.

With that heady list of recent developments mentioned, let me turn the call back over to Scott to review the results of the quarter in greater detail.

Thank you, Mark. For the second quarter we reported GAAP net income of $3.9 million, or $0.07 per diluted share, compared to a net loss of $50 million, or $0.99 per diluted share, during the same period last year. Reflecting economic fuel expense, the Company reported adjusted net income of $11.7 million, or $0.22 per diluted share. This compares with a net income of $0.1 million, or $0.00 per share, in 2011, adjusted to excluded nonrecurring lease termination charges and reflecting economic fuel expense.

Operating revenue was $485 million, up $90 million, or 22.7% year over year, on a 16.8% increase in capacity. Passenger revenue increased 24% compared to the second quarter of last year. Load factor for the quarter increased 0.1%, to 84%, while yield improved 6.1%. Combined, this produced a RASM improvement of 5.1% and PRASM improvement of 6.2% due to strong demand throughout our network.

These revenue results are a shade better than the guidance we issued previously on our North American -- as our North American business finished with strong close-in bookings leading up to the fourth of July holiday. As expected other revenue grew at a slower pace than capacity as certain sorts of revenue such as charges for first and second checked bags are unique to our domestic operations. Continuing to strengthen, cargo revenue improved about 14%, boosted by the expansion of our fleet and network.

Turning to costs, at a high level our adjusted cost per ASM was higher by 0.5%, at the better end of the guidance we previously issued. There were a number of smaller items which, unusually, all settled in our favor as we closed the quarter. On the expense lines we saw a $15 million increase in fuel cost driven by volume. This was partially muted by a lower cost per gallon of $3.18 in the second quarter, compared to $3.34 in the prior year period. We consumed 47.3 million gallons of jet fuel, up 16.7% from the same period last year. Our economic fuel cost per gallon, including hedging gains, losses and expenses related to contracts settling during the second quarter was $3.22, compared to $3.26 in the same period last year.

We continue to maintain a consistent and disciplined approach to fuel hedging, with 66% of our consumption hedged for the third quarter and 55% hedged for the fourth quarter. Next year we've hedged 41% for the first quarter, 30% in the second quarter, 21% in the third quarter, and we have modest positions in the fourth quarter. Our coverage extends a few months further than we have typically hedged in the past. With our current level of growth, we are focused on managing the overall risk of the enterprise and believe it is sensible to size the hedge portfolio accordingly. More details are available in the press release.

Maintenance expenses of $49.4 million were in line with our expectations for the quarter, increasing $6.7 million over the prior period. The increase was primarily driven by volume-rated activity associated with our growth. Aircraft rent expense decreased 20.2%, or $6.3 million, compared to the prior-year quarter. The primary driver of this decrease was the refinancing of our 717 fleet in June of last year as we terminated leases on 15 717s and financed them with debt.

Depreciation and amortization expense increased 38.1% year over year, to $21.6 million, reflecting the addition of three debt-financed A330s and the refinancing of our 717 fleet.

Below the operating line, we reported nonoperating expense of $23 million in the quarter, compared to $12.4 million in the same period last year. The most significant difference year over year relates to higher interest and debt amortization expense. In addition, unrealized losses on future hedge positions also contributed to the increase. As most of you know, our hedge positions are marked to fair value under our accounting policies, and any changes are recognized through nonoperating expense.

Turning now to the balance sheet, we ended the quarter with $447 million in unrestricted cash and another $5 million in restricted cash. Our revolving credit facility remained undrawn at the end of the second quarter, providing additional liquidity of $66 million. At the end of the quarter, our cash and equivalents plus capacity under the revolver was 28.3% of trailing 12-month revenues. In the first half of this year, we generated free cash flow of $33 million and have increased the borrowing base under our credit facility by $9 million. We remain mindful of our objective to manage our balance sheet as we grow.

CapEx in the quarter was $165 million. This exceed our guidance, primarily due to accounting adjustments related to A330 aircraft leased in the quarter. CapEx for the quarter also included $56 million related to the final payment to acquire our seventh A330 in April, $46 million related to payments for other upcoming aircraft and engine deliveries, and $7 million of other CapEx unrelated to aircraft purchases.

Wrapping up comments on the second quarter, we contributed approximately $3 million into our pension plan, and we expect to contribute a minimum of $5 million more during the remainder of the year.

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

Thanks, Scott. The second quarter was a busy period right across our business. We took delivery of three A330s and put them to work on New York and on increasing frequency on a number of other routes. We hired and trained flight attendants, pilots and ground personnel to handle our expanded operation, and in doing so we absorbed a heavy burden of transition costs. We refined our schedule in Maui to improve the performance of our newly established Maui hub, and we made plans for a turboprop feeder operation to cover the smaller markets in Hawaii. Lastly, we continued the process of maturing our relatively new international operations. All in all, we're pleased with the progress being made.

Our North American routes remain the largest source of our passenger revenue, representing 47% of the total. This is down from an almost 70% concentration just five years ago. In the quarter, robust demand for travel to Hawaii kept pace with faster increases in overall industry capacity. For our part, we enjoyed strong year-over-year PRASM growth in our North America operation of 6.9% on a 1% increase in capacity. Within this geography, performance did vary by route. Some routes saw substantial increases in capacity that put pressure on yields, while others saw flat to declining levels of industry capacity, leading to better yield environments.

Taking the new JFK route out of the picture for a second, we will be facing a further increase in overall industry capacity off the west coast in the third quarter. Published schedules show industry capacity from the west coast of Hawaii rising by 14.8% in the quarter. For comparison, we are growing 9%, with our growth being split between the annualized effect of new routes commenced less than a year ago, the effects of having larger A330s replace smaller 767s, and the addition of new routes bolstering our Maui Transpacific operations in support of our Maui hub strategy. With that said, demand remains strong for the peak summer period, and we expect to generate a reasonable year-on-year PRASM improvement in spite of these challenges.

We started our JFK service in June, so it remains early days for this new route. However, as we mentioned in our last call, forward bookings for this flight continue to be ahead of bookings for our other North American services, and we continue to track ahead of our internal plan for the route.

Our international routes posted significant revenue gains in the second quarter of 89.3%, and they now account for 29% of our total passenger revenue. PRASM on these routes increased 17.6% year over year, and that's on a 61% capacity growth. Looking ahead, demand remains strong, and we expect our international operations to continue as a major contributor to our company's financial performance.

At the same time, it's worth noting that we expect PRASM in our international operation to be either side of flat year on year in the third quarter. This is because we are now lapping the introduction of some of our successful international routes last year, our stage length is increasing a little, we anticipate the fuel surcharge portion of our Japanese revenues to decline, and in some markets we've had increases in competitor capacity.

An interesting side note to our international expansion is that of the next three new international routes, Hawaiian will be the only operator to the US in two of them and the only US operator in the other one. As those of you who have followed us a while already know, our business model is fundamentally different from those of our competitors. We sell Hawaii as a destination, and the scope of our opportunities is bounded by the sources of visitor arrivals to Hawaii. It should not be a surprise, therefore, that we see opportunities in markets which other carriers do not.

Last quarter we reported that our neighbor island flying result was unsatisfactory. We added flying in the course of establishing a Maui hub but had not seen a commensurate increase in revenues. In numbers, our first quarter revenues increased just 3.5% on a 10% increase in capacity. At the time, we said that we would close this gap in the second quarter, and I'm pleased to report that this gap is all but eradicated. For the second quarter, revenue grew at 10.7% on an 11.5% increase in capacity, resulting in a small PRASM decline of 0.7%. Improvement is set to continue in the third quarter.

Summing up, we're making good progress in the building and strengthening of our franchise. Despite growing at a fast clip, carrying the burden of startup costs and moving down the learning curve of a number of new markets, our financial performance is improving. So long as the current demand environment persists and so long as the price of fuel doesn't move significantly against us we're looking forward to further strengthening our business in the third quarter.

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

Thank you, Mark. Looking at the quarter in front of us, our growth will continue, and we expect capacity to increase between 27.5% and 29.5%, compared to the same period in 2011. The increase is driven by the full impact of adding five A330s and three 717s since October of last year. For the full year, we now expect capacity to increase 21% to 24%, a slight increase from the guidance previously announced last quarter. This is due to Brisbane and Sapporo being slightly longer haul destinations than those initially in our plans. Load factor for the quarter is expected to be in the range of up 1% to down 1%. Yield is expected to be in the range of up 1.5% to down 1.5%. Combining these numbers we expect PRASM to be in the range of up 1.5% to down 1.5%.

As Mark alluded to in his earlier comments, a number of factors will serve to limit year-over-year gains in PRASM relative to those posted in recent periods. These include more normalized comparisons from our strong-performing Haneda and Osaka routes, as we are lapping our summer flying from a year ago. We also have greater competition on our West Coast routes as well as from Japan this summer. None of this should be interpreted as dampening our enthusiasm about our international expansion. Rather, improvements in revenue metrics will now become more incremental as we move into a period where we have lapped the calendar since the introduction of several routes.

Other revenue will again grow at a slower rate than passenger revenue, diluting the growth in operating revenue per ASM compared to passenger revenue per ASM. As we've noted before, certain categories of other revenue are unique to domestic operations. The net result is that the operating revenue per ASM range is expected to be up 0.5% to down 2.5%, compared to the third quarter of last year.

Now let's look at costs. In our recent earnings call we noted that the first half of the year would contain a disproportionate amount of startup costs as well as unusually high pension expense relative to prior periods. Pension costs alone represent a 1-point headwind for each quarter of 2011 -- of 2012. We also noted that in the second half of the year capacity added in the first half would drive unit costs lower. This will begin to take shape as we move through the third quarter, where we expect CASM ex fuel to be down 0.5% to down 3.5%.

We've had some comments about our rate of growth and the rate of unit cost improvement. In order to better illuminate why our rapid growth rate is not having a more significant impact on unit costs, it's important to understand the role of our neighbor island growth and how it is affecting the numbers. If all else remained the same but we were not to have increased our neighbor island flying at all, our CASM ex fuel performance would be better by more than 2% in the coming quarter. But we have increased our neighbor island flying, and though it is growing by less than the rate of growth in our long-haul business, it does have a unit cost that is four times higher than our system average. For the full year, we now expect CASM ex fuel and ex lease termination fees to be down 1.5% to down 4.5% versus our prior forecast of down 1.5% to down 3.5%. This is due to the slightly higher capacity growth for the year.

In terms of financing, we are confident in our ability to fund our growth, as the A330 remains a favorite of lenders and lessors. We have no additional deliveries to finance this year, and we have financing commitments for three of the five A330s that we will receive next year. For the remaining two deliveries in 2013, we have several funding options to choose from, and we are working through the economics to finalize our decisions. We are also in the process of evaluating funding alternatives for our early 2014 deliveries.

In the third quarter our CapEx should be in the $40 million to $45 million range. For the year, we expect total spending between $365 million and $375 million. Given our recent financings, we would expect interest expense to increase sequentially from second quarter to the third quarter, reflective of additional debt incurred on our April delivery and for the June delivery under a capital lease.

Regarding fuel and sticking with our normal practice, we are not going to give price guidance at this time. We expect our fuel consumption to be 26% to 28% higher year over year in the third quarter as a result of our growth.

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.

(Operator Instructions)

Our first question comes from Michael Linenberg, of Deutsche Bank. Please proceed with your question, sir.

Yes, hey, just a couple of questions here.

(Multiple speakers), Mike.

Hey, Mark. To go back to your take on the New York -- the new service to New York, I mean, you said that it's early, but it seems like it's doing better than -- it's running ahead of your internal plan, it's booking up well relative to the rest of the system. If you could, if you could give us some more color. When I think about one of your most successful route startups I think of the Honolulu to Haneda market, and I think right off the bat that was gangbusters. And when I think of maybe a more gradual ramp-up it was the Honolulu-Seoul market. Where does the New York market fall? Is it -- is the performance -- is it closer to like a Haneda startup? I'm just, I'm trying to get a better feel for how this market's picking up for you.

You bet, Mike, and yes, thanks for the question. First of all, one of the reasons why we do focus a little bit on the New York route is because we've clearly seen quite a lot of comment on it and it seems to to some degree have divided opinion amongst the analytical community. The New York route is -- falls in between -- to use your metric, Mike, it falls in between Haneda and Seoul, probably a little closer to the Haneda end of the range than the Seoul end of the range. It is a route -- we clearly have confidence going into every route that we operate. Some of them we plan for longer gestations because they're based on this notion that markets will grow over time, particularly from countries with rapidly expanding economies. Clearly, that isn't part of our assumption base for the United States.

That said, we -- what that means is that we expect New York to come into maturity much more quickly than a route like Seoul, and everything we're seeing suggests that it is doing so, and with the caveat that it is early days, what I would say is that I think we're very pleased with the results that we've seen so far from New York, and there is no reason for us internally to be concerned about the decision we made to enter the market.

Okay. And then just my second question, you touched on it on some of the comments, the turboprop operation, what's the timing, and what compelled you to look at this? You have a fairly full plate now. You -- we're going to see over the next 12 months several pretty sizable ramp-ups. You had a lot of long haul, lot of new long haul service coming into the marketplace. I think there's -- some of these new markets, I think they're promising, but I would say that the -- it may be that the returns aren't as high as, say, a Haneda. Who knows? We may be pleasantly surprised. So you have a fairly full plate. You're looking at some of these smaller markets. And my sense is that some of these small markets already have current operators in the marketplace. Is there room for two or more? Are these EAS markets? Is there some EAS revenue that maybe you're going after? I mean, what's driving you to do this additional operation, given your full plate?

Sure. First of all, just for the benefit of everybody on the call, let me try and describe the kind of markets we're talking about. First of all, they're markets that we don't currently participate in. Secondly, they are very small, and the total scale of the operation that we're talking about here is somewhere in the region of three to six airplanes, so it is by the standards that we're used to and certainly by you're used to a very small net addition to our operation.

The reason we feel that this is a good thing for our business is because as we look at our neighbor island franchise and we look at our ability to bring people who are not only resident throughout the state of Hawaii but also who live away from the state of Hawaii and want to travel throughout the state in Hawaii there is a gap. We don't -- that we don't really -- that we can't really deliver service to. And, frankly, we're in a situation where we believe that the existing operators don't deliver an adequate level of service, either.

So I think this is going to be a very small operation but nonetheless one which we think, and the word I used I think in my script was build out our neighbor island operation. It allows us to fill what in the Hawaiian language we call a [puka], a hole in our network. It is -- but it is small in the context of everything else that we are doing. That is -- that's the fundamental logic behind it. We don't think in terms of overall result it's going to meaningfully add to revenues, meaningfully add to costs or meaningfully affect our sort of enterprise-wide results.

Okay. Thanks.

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

Thanks very much, operator. Hi, guys.

Hey, Helane.

I heard those comments with respect to industry capacity, I guess, of the U.S. West Coast, so that's quite a lot of new capacity coming in, but have -- I know that one of your initiatives was to kind of build out your third-party sales, so maybe you could talk about how that's going and what impact, if any, you're seeing with Allegiant coming into the market, with their focus on third-party sales.

Yes, certainly, Helane. I think our third-party sales are going well in some areas and not as well in other areas, and this is a trend that we've seen that predates Allegiant's entry into the marketplace. We've seen really no effect one way or the other in our third-party sales that you could tie to Allegiant's entry. Instead, I think the moves that we've seen up in some areas and down in some other areas has more to do with having robust demand for the Hawaii vacation that makes certain packaging activities actually just more difficult because it is less remunerative to the hoteliers. So I think that's having a bigger impact on our third-party revenues than the entrance of Allegiant.

It's actually -- it's one of those areas -- by the way, in some other areas of third-party revenue we're actually having a very great period, so it's -- I describe it as balancing one another out. The fact that certain aspects of package sales are not as robust as we would hope is actually the consequence of a good thing, and that good thing is really very strong demand for the Hawaii vacation at the moment.

Okay. So you're not seeing any impact on your own business for Hawaii. People -- I mean, I see the numbers from HTA. The numbers seem to be very strong for visitor arrivals. So that must be good for you.

Yes, no, it is. I mean, I think we've had a very strong period in terms of demand. I think that demand, from what we can see looking forward, is slated to continue. In my prepared remarks we talked about a rounds to 15% increase in capacity, and at the same time we set an expectation that we would see what we termed a reasonable increase in PRASM on this business. And that really, I think, reveals the fact that demand is quite strong.

Okay. And then could I just ask a question about the Japan markets? I know that you hung in there and stayed with them even after the issues that the Japan markets experienced last year. So, have you been rewarded by the tour operators with increased bookings for your staying power and willingness to stand by them in their -- when they were having their own issues?

We believe that the answer to that is a sort of emphatic yes. As we -- clearly when we look at our markets we measure it [in] any number of different ways. One of it is what's our passenger share to seat share? And we are comfortably in the positive column, I think, in all of our Japan routes on that last metric. So we believe we are getting more than our seat share in terms of passengers. It is absolutely the result of a terrific relationship that we have forged with our important Japanese travel partners. They've been great to work with, and we take a great deal of care to try and foster and build that relationship for the future.

Okay. Great. Thank you so much.

You bet.

Thank you. Our next question comes from John Godyn, of Morgan Stanley. Please proceed with your question.

Hey, everyone. Thanks for taking my question. Mark, I just wanted to first ask a question on the recent changes to the fare structure. At face value I think it surprised some investors just because we've been under the impression that interisland demand couldn't be price stimulated, and it seems like that was part of the rationale behind some of the changes. I know fare structure changes can be complex, so could you just kind of elaborate on the thought process there and kind of what the upside of that move is intended to be?

Yes, absolutely. It's a great question, John. The logic of that fare structure realignment, which in terms of our sort of consumer message highlighted some lower fares was that it simply gave us more fare levels on which to exercise yield management over the course of any particular booking window. What we had discovered previously was that we had too few steps of too large an incremental level step between each of the steps. And in large part what we've achieved here is in this restructuring is to give us some more incremental opportunities to yield manage to give cheaper value-add, better value for money fares for people who are prepared to plan early, travel at off-peak times, and also the opportunity for us to sell up when seats get scarce.

Okay. So is it fair to say that you're not seeing anything different in the interisland competitive environment?

That's fair.

Okay. And the new fare structure, of course, should be in the PRASM guidance that you guys laid out.

That's correct.

Okay. And if I could just sort of ask another question on just sort of macro and how we should think about macro impacting the business, potentially, in the future, last time the economy turned lower one of the benefits for you guys was the fact that hotels were cutting rates and reducing the total cost of travel, and that stimulated demand for you, and you did really well in that. Can you just give us a sense of how the trend in hotel rates has been influencing the total cost of travel lately?

Yes, I think the robust demand has been good for us, has been good for the hoteliers, as well. So, we -- they have enjoyed a degree of pricing power that they didn't have back in late 2008, 2009. So the price of the overall Hawaii vacation is moving up. At the moment there is very strong demand coming not only from North America but also from growing markets in Asia, so the market as a whole is absorbing that pretty well.

Okay. And if things do get weaker in the future, have there been any notable changes in the Hawaiian hotel market or its structure since the financial crisis that would cause any more resiliency in hotel rates this time around, or would you expect kind of the same dynamic, where hotel rates fall and in part stimulate demand for air travel?

I would expect the same dynamic to be out there. I mean, you know, in our business, which is so sensitive, as we all know, to demand and capacity, their business they have capacity that doesn't move, and so a turndown in demand tends to have an over -- an elasticity on their prices greater than even on the airline ticket prices.

Okay. Great. That's it for me. Thanks a lot.

Thank you.

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

Hey, thanks, everybody.

Hey, Hunter.

How are you, Mark?

Good.

So, hey, in January you guys talked about -- you gave CASM guidance, CASM ex fuel being flat to down 2%, and then you also said that 2013 might be better than 2012 on a year-over-year growth rate basis. So now that the CASM picture is improving a little bit as we move through the year and as you think about some of the changes in the schedule, as you think about the 2013 capacity plan sort of firming up, can you maybe update that comment a little bit in terms of sort of preliminary look at how you expect next year's CASM ex in context of this year's CASM ex?

Well, Hunter, I've got to tell you that I haven't looked at the numbers in any detail in the last month or two. So I can't give you a definitive answer to that. I think it is the case, however, that we believe in the leverage of growth on our cost base. We are managing our costs as closely as we can. In certain areas of our business we do live in an inflationary environment, things like airport costs, taxes and things like that. I can't answer you specifically simply because I don't have numbers and would not wish to inadvertently mislead. But I would certainly hope that we could make progress in '13.

Okay. All right. Thanks, Mark. And, Scott, a little bit on hedging. You alluded to the fact your hedge book is now a little more built out than it has been for Hawaiian in the past, and you referenced some of the growth, but I'm wondering if this is more about (technical difficulty).

Couldn't hear it.

Yes, could you speak up a little bit (multiple speakers)?

I'm sorry. Is that better?

Yes, much better, thanks.

Okay, sorry. In terms of the CASM ex fuel guidance it seems a lot wider than you guys have given at least recently. I'm just wondering, other than the capacity growth what's driving the top end and the bottom line? I mean, what's -- what do you see as the difference between the two?

I think we've had a practice of some cases showing a 2-point range and some cases showing a 3-point range on this, and as we're growing at nearly 30% here we've just found that it makes more sense for us to have a bit more of a range. And, again, we've been back and forth, I think, historically between 2 and 3, so that's really the only thing driving us here is that it's just with new markets that we're learning about, with costs driven by those, it's just a little bit more comfortable for us to have that range.

Okay. And then, I guess just going back to Mike's question with the investment in the turboprop business or prop business, I mean, it seems like that portion of the business, interisland, is underperforming the rest of the business, and I guess I'm just wondering do you expect that to kind of turn around? I mean, is this something that you think will help improve the overall results of the business, or do you think that'll -- is that something that just improves as maybe the demand environment improves in that business or competition kind of maybe folds up?

Well, I think we look at it in a slightly different way. Our neighbor island business is a core franchise of ours. We've got a very strong position in the marketplace that's been built actually over eight decades in this business. And I think as we look to the future our main concern is around strengthening that franchise and making sure that it's a franchise that we can rely on for the next eight decades. At the same time, we live in a small community that depends on [air] service. We get plenty of interest and calls for making sure that we provide an adequate level of lift to all the state citizens, and I think it's more those two elements coming together. So we don't look at it as a short-term exercise that's either at the margin positive or negative. I think what we do look at it as is a long-term franchise which is good for our business, it's part of the foundation of our airline that in turn allows us to go off and do some of the big growth opportunities in Asia and on the mainland.

Okay. All right. Thanks a lot.

You bet.

Thank you. Our next question comes from John Reardon, of Dominick and Dominick. Please proceed with your question.

Hi, good morning, everyone.

Hi, John.

Hey, John.

Could you give us a little color on how Fukuoka is spooling up, and then, secondly, a couple quarters ago Obama was talking about improving tourism opportunities to the US, and at the time you kind of downplayed any, Mark, any visa relief from China. Have you seen any progress in that regard?

Okay, on the first one, in terms of Fukuoka, Fukuoka is starting up. It is doing well. It's turned into be a relatively competitive route, but, again, I think we are punching above our weight, and I think we're pleased with the progress that we're making on that route.

Turning to the China visa question, I can't remember if on the last call I -- how deeply I went into our overall view of the China -- the US visa issue in China, but, broadly speaking, we think there are three problems out there. We think that the rules that are applied before people get visas are a little goofy. We think the process that people are put through in order to apply to have the goofy rules applied are rather burdensome. And we believe the resources available to process the rather cumbersome paperwork to apply the not-so-great rules are inadequate. Obama's pledge was to improve the last of those three, essentially, which was to increase the amount of resources. Our understanding is that's taken place and visas are indeed -- I think the waiting list is less. By itself it has done nothing to reduce the burden of applying for a visa. It's just made the wait go quicker.

There are several bits of legislation in Congress to try and improve the burden of applying for visas, the fact that you've got to, for example, appear in person in front of a consular officer, and I believe there are only five consulates in the entirety of China, so for many Chinese they actually have to travel just to present themselves for an interview for a tourist visa. So some things like that are being addressed by a number of bills. To the best of my knowledge nothing is yet being done in terms of revisiting the standards that a Chinese national has to meet in order to secure a tourism visa. Things are getting better, but it's incremental improvement as opposed to revolutionary improvement.

Thank you.

(Operator Instructions)

It appears there are no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

Well, thanks, everybody, for joining us today. We've obviously had a lot going on in the second quarter and we've got a pretty full dance card of activity slated for the remainder of this year. We're pleased that in the midst of all of these initiatives our business continues to strengthen, and we're looking forward to updating you on our progress in a quarter's time. Thank you very much.

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