Hawaiian Holdings Inc (HA) 2012 Q3 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings third-quarter 2012 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. You may begin.

Thank you. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' third-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 4 o'clock Eastern Time today. If you have not received the release, it is available on the Investor Relations page of Hawaiian's website.

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

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

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

Thank you, Susan and thank you all for joining us today.

We were pleased to report another profitable quarter, with expanding margins. To have done this at a time when we have grown capacity 28% is particularly noteworthy, as it is unusual for an airline to both grow substantially and to improve its margins at the same time. Our strategy of diversifying the sources of our revenue by growing into markets that have not been a traditional mainstay of our business continues to generate good results.

As I hope I never fail to mention, the hard work and diligence of my colleagues at Hawaiian are chiefly responsible for the Company's achievements. As unusual as it is for a rapidly growing airline to remain profitable, it is equally challenging for a growing airline to keep its hard won reputation for excellence in customer service. But our employees have, as always, risen to this challenge. Thanks to their hard work, Hawaiian remains the preferred carrier in all of the markets we serve. My colleagues have my deep thanks.

Turning to the financial results, at a high level both revenues and costs came in lower than we had forecasted at the beginning of the quarter. The revenue gap was largely a result of some substantial capacity growth in a number of select markets colliding with one of the seasonally weakest months of the year in September. The improvements in costs against our prior guidance were the result of carrying fewer passengers and incurring lower maintenance expenses than anticipated.

We had a lot going on in the quarter. In July we increased our Seoul flights to daily from 4 times a week. This is partly to accommodate some of the growing demand for Korea-to-Hawaii seats, and partly to provide good connections between China and Hawaii. To those of you who have not yet been, Incheon Airport is the best airport for connections in that part of the world.

We made progress towards acquiring a small number of turboprop aircraft. The new turboprop operation will provide service to communities which we don't serve and which are too small to warrant service with larger aircraft. Our target date for an entry into service is in the back half of 2013. These communities are both a source of traffic for our other services, as well as being a destination for visitors to the Islands. The new turboprop operation will complete our Hawaii product offering and cement our position as the flag carrier of our island home.

We also implemented the first comprehensive redesign of our domestic on-board service in more than a decade. While continuing to offer the most comfortable cabins on our wide-body aircraft serving Hawaii, our on-board service has been completely redesigned to provide more of what our guests say they value most -- delicious complimentary meals and cocktails, local products, and our friendly, attentive service. The feedback has been extremely good. Along with our leadership in punctuality and in the avoidance of cancellations, the redesign of our domestic on-board service no doubt helped in our being named recently the best US airline amongst those that serve Hawaii by the readers of Conde Nast Traveler.

In just over a week we'll be inaugurating service to our fourth Japanese city, with 3 weekly flights to Sapporo. Next month Brisbane will become our second gateway in Australia. And in March we will begin flying to Auckland, New Zealand. Looking backwards from the start of the Auckland service, we will have started flights to 8 new cities, 7 of them overseas, in less than 3 years. Notably, we will be the only US carrier serving Sapporo, Brisbane, and Auckland.

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

Thank you, Mark.

For the third quarter, the Company reported adjusted net income, reflecting economic fuel expense, of $40.6 million, or $0.77 per share, which exceeded the consensus estimate of $0.71. This compared to adjusted net income of $30 million, or $0.59 per share in the same period last year. The Company reported GAAP net income of $45.5 million, or $0.86 per share, compared to $25.6 million, or $0.50 per share, in the third quarter of 2011.

Both operating and net margins expanded year over year, and trailing-12-month ROIC was 17.2% before tax and 10.7% on an after-tax basis.

Operating revenue was $549 million, up $93 million or 20.5% year over year on a 28% increase in capacity. Passenger revenue increased 20.5% compared to the third quarter of last year.

Load factor for the quarter decreased 1.9 percentage points to 83.3%, while yield decreased 3.6%. Combined, this produced a decrease in revenue of 5.8% and a decrease in PRASM of 5.7%.

There are substantial impacts on our unit revenues from mix. In a moment Mark will delve into the revenue picture in greater detail. Despite the headline fall in unit revenues, we would describe the demand environment for the Hawaii vacation as remaining strong.

As expected, other revenues grew at a slower pace than capacity. However, cargo revenue continues to strengthen, improving 34%, boosted by the expansion of our fleet and network. With more A330s flying in the system and a higher proportion of international flights, we are seeing positive trends for cargo revenue despite a weak global environment for cargo.

On the expense lines, aircraft fuel costs increased $29.8 million, or 21.9%, driven primarily by an increase in volume. We consumed 54.5 million gallons of jet fuel, up 27.1% from the same period last year. The increase in consumption was partially offset by lower fuel prices year over year. Our economic fuel cost per gallon, including hedging gains, losses and expenses related to contract settling during the third quarter was $3.07 compared to $3.22 in last year's quarter. Our GAAP fuel cost was $3.04 per gallon compared to $3.17 last year.

We continue to maintain a disciplined approach to fuel hedging. We've hedged 67% of our consumption in the current quarter. In 2013 we've hedged 55% in the first quarter, 43% in the second quarter, 34% in the third quarter, and 21% in the fourth quarter. In 2014 we've hedged 10% in the first quarter. More details can be found in the press release.

Aircraft rent expense was relatively flat compared to the prior year quarter, as we've lapped the refinancing of our 717 fleet in June of last year and we terminated leases on 15 717s and refinanced them with debt. Additionally, while we have two new leased aircraft this year, a 717 and an A330, the costs associated with these aircraft are offset by cost savings from the return of a 767 in the fourth quarter of 2011.

Depreciation and amortization expense increased 31.4% year over year to $23 million, reflecting the addition of 3 debt-financed A330s.

Our effective tax rate in the third quarter was 38.4% and we expect a similar rate going forward.

Below the operating line we reported nonoperating expense of $1.1 million in the quarter compared to $13.6 million in the prior quarter. The most significant difference year over year relates to unrealized gains on future hedge positions compared to unrealized losses in the prior period. Our hedge positions are marked to fair value under our accounting policies and changes are recognized [as] nonoperating expense. The unrealized gains on fuel hedges were partially offset by higher interest and debt amortization expense in the quarter.

Our balance sheet remains strong in this period of (inaudible) and growth. We ended the quarter with $433 million in unrestricted cash and another $5 million in restricted cash. Our revolving credit facility remained undrawn at the end of the third quarter, providing additional liquidity of $67 million, which is net of letters of credit. At the end of the quarter our cash and equivalents plus capacity under the revolver was 26% of trailing-12-month revenues.

Financial leverage as measured by adjusted debt to total capital was 83% at the end of the quarter. This is down from a peak of 85.4% at last year's end and we expect this metric to trend lower.

CapEx in the quarter was $41 million, which includes pre-delivery payments of $31 million related to future aircraft and engine deliveries, and $10 million related to other nonaircraft items.

Also in the quarter we made an accelerated contribution to our pension plan of $12 million, satisfying our required 2012 plan year contribution. This brings the year-to-date total contributions to our pension and other benefit plans to $19 million.

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

Thank you, Scott.

Our third-quarter revenue results were mixed in every sense of the word. For the first time since I've been at Hawaiian, we had both good and bad route results in each segment of our business, with no correlation between new routes and established routes. Instead, the individual route results correlated inversely with industry capacity growth. This mixed bag of individual route results vindicates our strategy of diversifying our business, since in doing so we have less at risk whenever market-specific issues dominate individual results.

I'll start with North America, which now accounts for 47% of our passenger revenue. That's down from 63% three years ago. Overall industry capacity was up 13% for the quarter, of which our contribution was 5 percentage points. Leaving out our new JFK service -- which, by the way, is doing just fine -- and United's new DC service, to get closer to the picture of what was happening on the West Coast, the numbers become 10% for the industry and 2 percentage points for us.

Even here the overall picture obscures a tremendous concentration of that capacity increase in the Bay area and Southern California. Bay Area industry capacity was up 25% and Southern California capacity was up 15%. Demand during the summer peak was sufficient to fill all of these seats, but we knew that, with the seasonal decline of demand from a peak in August into a trough in September, yields and loads were going to suffer. We didn't know by how much and, as you saw in our revised guidance, the falling away of revenues in September was deeper than we initially estimated. With all that said and done, the overall result for our North America routes was a PRASM decrease of less than 1% in the face of some substantial capacity increases.

Despite the pricing weakness in a few markets, we continue to describe the demand conditions throughout our North American business as good, because wherever capacity increases have been more moderate we've been able to fill planes and raise yields. And even where capacity has grown rapidly, there's been growth in the number of people visiting Hawaii, albeit not enough to fill all of the additional seats.

Looking ahead to the fourth quarter, while the supply increases from the West Coast are decelerating when compared to the third quarter, overall capacity remains high. As was the case in the third quarter, the capacity increases are concentrated in the Bay Area and Southern California. As a result, on these select routes we anticipate the continuation of a competitive pricing environment.

It's a little bit of the same story in our international segment, which contributed 31% of our passenger revenues in the quarter. That's a growth of 36% in one year. Capacity increased 46%, with the largest contribution coming from the inauguration of our Fukuoka route. Our capacity on existing routes increased by 23%. This came mainly from increased frequencies to Sydney and Incheon and an [up-gauge] in equipment from a 767 to an A330 on our Osaka route. Load factor declined 3.8 percentage points, while PRASM decreased 6.8%. Just like our North America segment, the overall result is a combination of some vastly different individual route performance numbers.

First of all, mix accounted for almost the entire decline in PRASM, with the same-store comparisons generating about flat PRASM year over year. The new international flying has been on slightly longer stage lengths which, all things being equal, will tend to depress unit revenues, while lowering unit costs similarly.

Within our route portfolio we continue to see good results for Tokyo, Osaka, and Sydney. In the last year we inaugurated Fukuoka service and this new route is ramping up more slowly than prior Japan startups. It's still a good route for us; it's just ramping up at a more normal pace than had our other Japan services.

Our decision to increase capacity to Seoul was immediately followed by the decision of a competitor to do likewise. So there currently exists excess capacity on this route, which has had the predictable effects on yield. However, demand on this route is growing rapidly, not least from the flow of Chinese visitors using Seoul as a connection point to Hawaii. So we don't expect the excess capacity to last long.

Looking ahead to the fourth quarter, the nature of distribution in these markets reduces our forward visibility when compared to that in our domestic markets. With that appropriate caveat said, we would anticipate the same kind of mixed bag of route performance in this segment of our business, with little impact coming from the early days of our two new routes.

Turning to our neighbor-island business, we saw higher traffic throughout the quarter, but demand fell short of our capacity increases later in the period. The result was a third-quarter PRASM decline of 7%, with load factor declining 3.2 percentage points on capacity growth of 11.3%. There was no effect from mix, and so these results are pretty much directly comparable on a year-over-year basis.

As with the long-haul geographies, our results were mixed by route. Performance on certain routes suggest that we have struck a good balance of supply to demand. On one route in particular, however, we didn't see the traffic we anticipated materialize in September. There are a couple of reasons for this. Part of our neighbor-island business is from other airlines. In September, with some airlines clearly having difficulty filling their own seats, we saw a reduction in the number of passengers transferring to our inter-island business from other airlines. If you've got empty seats to fill on your nonstop flights to some of the smaller destinations, it's likely that you're going to incentivize your customer to go on that flight, rather than to make a connection. So, to a degree, the falloff in neighbor-island demand is partially a result of the North America competitive dynamic at play.

In addition, during the summer we changed our fare structure to give us more control over managing our revenues. One of the objectives was to encourage this traditionally very late booking market to book a little earlier. This succeeded to a greater degree than we anticipated, giving us what turned out to be a slightly misleading indication of the level of traffic we could expect when the aircraft doors finally closed. We're happy with the new fare structure and we're happy to see that it is having the desired effect of shifting the booking curve, so we're not second-guessing our approach.

So what are we going to do going forward? Well, on our North America routes we're fine tuning how we rotate capacity into and out of certain markets according to the time of year and the natural seasonality of demand.

What we're not doing is drawing back from any of the routes in our portfolio. Our routes are profitable. We believe we have the best products. We attract the highest fares on costs which are equal to or lower than those of any of our main competitors. And we also believe that our distribution of capacity between the various routes to North America aligns with demand. Taken together, we like our position in the overall market and we are comfortable that this will continue to be a segment of the business that will contribute to our results.

In our international segment, we're pleased with the business and are, as you know, inaugurating new services to new destinations in the coming few months. The early bookings for these new services look strong.

Closer to home, we've already cut capacity 4% to 5% over what had been in the inter-island schedule to better align the number of seats to demand on each route. We expect this to improve our neighbor-island results, although it may take a quarter or so to judge the effect of these changes.

So looking at the quarter as a whole, we were pleased to have our margins improve over last year, while being able to grow capacity by 28%. We had some unusual competitor and capacity dynamics in a couple of markets on the US mainland, in Asia, and also in Hawaii. But all in all, demand for the Hawaii vacation remains strong and we feel we are well positioned to take advantage of visitor growth with our existing services and those which we look forward to inaugurating in the next few months.

Let me turn it back over to Scott to give us a window into next quarter.

Thank you, Mark.

Looking at the quarter in front of us, our growth will continue and we expect capacity to increase between 28.5% and 30.5% compared to the same period in 2011. For the full year of 2012 we expect year-over-year capacity to increase 20.5% to 23.5%.

With no additional A330s joining our fleet until March, there is little sequential capacity growth over the next two quarters, though the year-over-year growth remains high. In addition, our new deliveries in 2013 are, for the most part, offset by planned retirements.

Load factor for the quarter is expected to be in the range of down 1 to up 1 percentage point. Yield is expected to be in the range of down 7.5% to down 4.5%. Combining these numbers, we expect PRASM to be in the range of down 8% to down 5%. On a mix-adjusted basis, PRASM would be 4 to 5 percentage points better.

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. The net result is that RASM is expected to be down 8.5% to down 5.5% compared to the fourth quarter of 2011.

Turning to costs, all year we've noted that the first half of this year would contain a disproportionate amount of start-up costs, as well as unusually high pension expense relative to prior periods.

We've also noted that in the second half of the year capacity added in the first half would drive unit costs lower. This was reflected in the third-quarter results and should continue through the fourth quarter, where we expect CASM ex fuel to be down 8.5 to down 5.5 percentage points. For the full year, we expect CASM ex fuel and ex lease-termination costs to improve from the guidance we previously issued to be down 6% to down 3%.

Since last quarter we've made good progress with our financing plans. We recently agreed to terms with a bank to finance an A330, delivering in June 2013. With this finalized, financing will be in place to cover 4 of the 5 A330s scheduled to deliver next year. We are also in the process of evaluating funding alternatives for our 5th 2013 delivery and early 2014 deliveries. We are confident in our ability to fund our growth as the A330 remains a favorite of lenders and lessors.

In the fourth quarter, we expect CapEx to be in the $55 million to $60 million range. For the year we estimate total spending between $380 million and $390 million, versus our prior expectation of $365 million to $375 million. The difference is due to the purchase of 2 turboprop aircraft.

With respect to interest expense, we expect a similar level as we move sequentially from third quarter to fourth quarter.

Regarding fuel, and staying with our normal practice, we are not going to give price guidance at this time. We expect our fuel consumption to be up 26% to 28% year over year in the fourth 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. We will now be conducting a question-and-answer session. (Operator Instructions) John Godyn; Morgan Stanley.

First, I was just hoping to kind of clarify some of the commentary around PRASM. It sounds like, Mark, a lot of the issues that you're talking about are capacity related. What we had heard from some other companies is that there was this period of demand softness in September that had since stabilized. It sounds like you didn't experience either the softness or the subsequent firming and everything that's driving PRASM primarily is capacity. Is that a fair characterization?

Yes. I think the capacity issues sort of dominated the picture. So it may be that there was some kind of finer granularity that other people saw. I think when we've seen such enormous capacity increases in a couple of route segments it gets a little hard to parse out the bits and pieces. But, again, demand for the Hawaii vacation remains strong. We've filled most of the additional seats even in these markets that have seen capacity increases of 25-odd percent. So I think the bigger picture is capacity. Demand still looks pretty healthy.

Okay, that's helpful. And then, when we think about the RASM guidance in the fourth quarter, it's not in any way strange to sort of get a 3-point range out of you guys. But I was just hoping to kind of understand what's driving the range, just because we have seen some volatility in PRASM lately. Of course, the economy and macro is always a big factor, but is there anything in that range that kind of drives your thought process on what gets us to the high end versus the low end that's noneconomic, that's kind of really on your mind?

Well, I think a couple of things that I would mention on that. First of all, our international segment has grown to be a much more significant part of our total picture. Just a couple of years ago it was less than 10% of our total business and now it's pushing on a third. And with that we get less visibility just because we've got many intermediaries in terms of the way in which we distribute tickets. We distribute tickets in the ways that are traditional to those marketplaces. So we tend to see things revealed relatively late in the day. And that is, in large part, that is one of the big elements that's driving quite a broad spread.

It's also the case, of course, that with a bunch of new markets our level of recognition about seasonality and the puts and takes that happen almost on a weekly basis market by market is just less astute than it will be the case a couple of years in, once we've experienced it a little bit. So on the international side that's driving that.

On the neighbor-islands side, we found ourselves a little bit surprised in September. Two reasons -- one was the falloff in terms of business we're getting from other airlines. But the second is we've incentivized people to book earlier, to shift the booking curve. And it's had an effect. Now, because it's been traditionally so late booking, when we see early bookings come in, it's not entirely clear to us whether what we're doing is we're moving people earlier along the booking curve, or whether we are actually shifting the booking curve.

So for those reasons principally we are being a little less precise in terms of the range. So it's got more to do with our ability to measure stuff than it has to do with any underlying kind of macro concerns.

Okay. Great. And then, just one last question on costs. As we think about the possibility of a pension expense headwind in 2013, is there anything that you can sort of just help us with in terms of bounding what it could look like? Just understanding the headwind a bit more would be helpful.

Scott?

Yes, John, probably can't give you right now a range, but last year was largely driven by the change in rates and the change in the underlying value of the plan assets, which drove high expenses. But rates don't seem to have moved as much so far this year. There's less room to go. The portfolio is performing as you'd expect; it's okay. So just kind of sitting here thinking about it, I would say it should not be nearly as dramatic as this year.

Okay, that's really helpful. Thanks, guys.

Hunter Keay; Wolfe Trahan.

Hey, Mark, let's talk big picture for a second here. Looks like you're going to grow your earnings, like, 75% this year. You're growing your top line by 20%. You're executing your strategy exactly like you laid out for us at the last Analysts Day, two Analysts Days ago. Your stock is down 7% and your forward multiple has compressed by more than anyone in the group, by about 30%.

So I'm sure you're frustrated. And I don't blame you, because you're executing. So I mean, what isn't working here? I mean, you're obviously trying to reach out to the investors and we appreciate that. But what isn't working? And you've got to ask yourself at a certain point -- at what point does it even make sense to even be public anymore and even deal with this anymore?

Well, Hunter, first of all, I can't comment on your last comment, obviously. But, yes, you're absolutely right. We're extremely frustrated. I think we have -- as you rightly pointed out, we laid out a strategy. At the time that we laid out that strategy, what I had projected that we would be able to do was actually more modestly good than we've actually been able to execute. So I think over the course of the last couple of years I'm very pleased with the direction this company has taken. And it is a source of tremendous frustration.

Frankly, I'd almost turn the question back to you and to many of the people who follow our stock. I think we're very open for ideas as to how we can get investors, existing investors, potential investors, to understand the value of what we're doing, because clearly we are quite frustrated.

Yes, I mean, I would just say the benefit of being public at this point, it really begs questions. You guys in your ROIC calc have told me that you're basically carrying something in the neighborhood of $270 million in excess cash on your balance sheet, which is basically a market cap. Even if half of that is excess cash, money is free. I mean, an LBO, some LBO cash hybrid of a takeout of your stock, I mean, it just seems to be begging for it at this point. I mean, is there like a marketing component to being public that you guys think about? Because I'm (multiple speakers) myself.

Yes, well, I can't really, again, talk very directly to the issue of whether it makes sense or not to go private. And I won't go there. I think we are -- our first concern is for our shareholders and we are absolutely internally trying to figure out ways in which we can get our message to resonate better. Because we do believe that there is more innate value in this business than is reflected in our market cap.

Yes. I wish I could help you out. All right. I'll leave it at that. That's [what I] wanted to follow up. Thank you, Mark, appreciate it.

Helane Becker; Dahlman Rose.

So my first question was just something that I missed. And what did you say fourth-quarter capacity growth would be? Did you say 20.5 to 30.5? Is that right?

Scott's looking up the numbers.

Yes; scrambled my pages.

Sorry about that.

That's all right.

These are the sorts of numbers we obviously know off the top of our heads.

Yes, 28.5 to 31.5.

28 to 31? Is that what it is?

28.5 to 30.5.

Got you. Okay, sorry for that. That was my brain not working. Okay. And then the other question I had for you, Mark, and this is really more a tourism issue, I guess. I saw that the Hawaii Tourism Authority signed a joint marketing agreement with the Japan Tourism Authority to kind of bring more passengers from Japan to Hawaii, which would have to obviously benefit you. So the question is really, do you benefit in those instances? Have they talked to you about what they're trying to do? What kind of tours -- and obviously, when you stayed in the market during the earthquake and the tsunami, that probably did very good for you. But can you just kind of talk about what they're trying to do here and whether they consult you with that or not?

Well, first of all, let me just say we've got an excellent relationship with the Hawaii Tourism Authority and with all of their marketing partners. So we are absolutely participants with them. We've made no secret of the fact that we see the future of our business as being very closely tied to Hawaii as a destination.

I would also point out that I think Hawaii does a very, very, very good job of marketing itself, notwithstanding the fact that the resources available to Hawaii in doing so pale in comparison to those of other major tourism destinations. Again, speaking well of the organizations that promote Hawaii as a destination and to the existing brand that we enjoy.

Absolutely -- clearly, as we've expanded into Asia we have really encouraged HTA to get a focus on Asia. I think we're singing largely from the same hymn sheet, and our working relationship with them is very good. We do think it makes a difference.

Okay, great. Thank you. Those were really my questions. Everything else was pretty well covered during the call. Thank you.

Glenn Engel; Bank of America Merrill Lynch.

Is it fair to characterize the PRASM during the quarter as being down low-single digits in July, down mid-single digits in August and down double digits in September? And do you expect to have the fourth-quarter reverse of that because of seasonality?

Let's see. I haven't looked at it, Glenn, on a risk -- on a mix-adjusted basis month by month. I think it is fair to say that we had -- most of this falloff was in September. I think looking forward -- and [hence-wise] you'll recall, we revised our guidance, which brought down both costs and our unit revenues. I don't think it's quite as extreme a difference between the months of July and August and September as you've laid out.

Turning to the fourth quarter, October is a better month than September, though still a fairly weak month. November is always a better month than October. And then December is a good month, though not as strong as August.

Second one -- your costs was about $15 million lower ex fuel from your initial forecast. And I know you had some maintenance and I know you had some fewer passengers, but $15 million is a lot. Is part of it just that the extra flights you're doing just are longer haul and are having a bigger PRASM/CASM impact than you had expected? And is that something that's likely to continue with the new routes you're adding, which are longer haul as well?

I think some of that is in there. We've got some other issues in there. So, for example, as shareholders like to hear, our performance incentive payments are tied very directly to performance. And so when we see ourselves revising our estimates for the year downwards, there's some money that is essentially returned to the pot from a P&L perspective, in anticipation of lower annual incentive compensation. So there's a bunch of little bits and pieces.

I will grant you that I think we were not quite as good at calculating what our CASM ex fuel was going to be as we should have been because of the mix element.

Thank you.

Michael Linenberg; Deutsche Bank.

Hey, Mark, just two questions here. You talked about some of the competition in some of the markets, good and bad. And it was interesting, because you didn't mention anything really on Fukuoka. You talked about it maybe ramping up not as quickly as Narita -- or Haneda, excuse me, and the Osaka market. But then we did see a lot of new -- we saw new service and a decent amount of capacity come into that market from another competitor. So is it just your presence in Japan is strong and you didn't see that type of impact that you saw in Seoul and in some of these other markets?

I think it's not quite that. I think it's -- you know, a lot of these routes we're talking about a flight a day or in some cases less than daily flights. And so relatively small adjustments in schedule can generate outsize changes to the amount of capacity coming into route. In Fukuoka we had a competitor go from 5 a week to daily, for example, which by itself doesn't sound like a tremendous change. But once you do the math on what is essentially 2, now 2 daily flights, going from 12 flights a week to 14 flights a week, that's quite a bit of incremental additional capacity. So I think it's more that than it is us kind of waking up to finding a world that we hadn't fully anticipated.

You mentioned Seoul, for example. Seoul it was about a competitor that hadn't been in the market, Asiana, deciding to get into the market. Korean Airlines was operating twice a day. We were a daily. Asiana came in with the daily offering. Again, a big [slug] to capacity because of a single carrier decision to come in and compete.

Okay, good.

I would point out that when we look at the 3 markets that we're about to go into, in Chitose, which is the airport for Sapporo, we're the only carrier of either country providing service in that market. Brisbane, which we start in a month's time, that is likewise the case. And in Auckland, we will be the only US carrier providing service. And our entry into the market comes about a year after Qantas, which provided the competition to Air New Zealand, vacated the market. So these are markets which, at least on current viewpoints, are quite a bit different than sort of the Fukuokas and the Seouls of the world.

Okay, good. And then, just my second question, and this has to go to the small carrier, the regional operation. I appreciate the fact that we're starting to see some details here. You talked about the CapEx going up by $20 million or $25 million. And it sounds like that that's -- I believe that's for two airplanes. How big does that operation get? And what's compelling about it? What has compelled you to divert some resources and some CapEx?

And maybe to go back to you and Hunter had the conversation about the $275 million of market cap. I feel like that this small operation, maybe it ties up $50 million or $100 million of capital. Is there a point at where maybe it makes more sense to buy back stock and maybe do a cochair with a regional carrier or a de novo operation in Hawaii, operated by a high-quality regional carrier like a SkyWest or Republic or whatever? I mean, what -- I realize it's a multi-pronged question here, but it does seem like it's a decent amount of capital that's ultimately going to be diverted to this small operation. And I just -- there's got to be a compelling piece. Maybe the returns will be high, you know, et cetera.

First of all, let me answer the first part of your question. I think ultimately this feels like a 4-to-6 aircraft fleet. So it's pretty small. I think in some respects that also answers, at least in part, some of your second question, which is, it is a very small operation. The aircraft that are appropriate for this operation are the 42-seat size of aircraft. Today in production there's only one manufacturer of those aircraft, which is ATR. Hence we are going with the ATR 42s.

It's an aircraft type that's not broadly represented amongst some of the very carriers that you were talking about. And given the small nature of the operation and the fact that ATR 42s aren't actually thick on the ground in the US, that kind of leads us into acquiring the use of those aircraft. We've chosen to purchase the first two. We've obviously got other options for the remaining aircraft as we bring them on.

As to why we think it's important, we really believe that there are a number of small communities in the State that generate a fair amount of traffic, again, enough to fill this scale of aircraft, that we currently don't touch. This is an important part of our franchise. I think we feel that without that presence in that part of the franchise, we leave ourselves missing an opportunity. Over time I think we think this will be a profitable part of our business. We think we can do a good job of serving this marketplace without, importantly, sucking up either a great deal of capital, which you pointed out, or also, one of the things I'm always concerned about, an enormous amount of management attention distraction.

So all in all, I think we can provide that service and it will be good for the Company. And coming back again to our market cap and our share price, one of the things that we are very, very conscious of is that from a management perspective, at least one -- and arguably our principal job -- is to run a really good business for the long term. The short-term stock performance has been incredibly frustrating to us. We do still hold onto the notion that by running a good business, getting the blocking and the tackling right, posting good numbers, that we will see improvements in the way our stock is traded.

Okay, very good. Thanks, Mark.

Steve O'Hara; Sidoti & Company.

I was hoping you could talk a little bit about the neighbor-island business. It seems like a lot of the capacity that's been added into that market recently is more on the hitting direct islands as opposed to stopping in Honolulu. Can you tell me how to change the efficacy of the neighbor-island business long term, in your opinion?

Yes, Steve. That's a good question and you really hit on a good point. We, and more particularly, I'm not satisfied that we've done a really good job in our neighbor-island business this year. And I think we need to do better. I think we can do better. I do, at the same time, believe that this is a good business for us. I think it is within our ability to improve our financial results on this business. And so I don't think that what's at play here is somehow a change in the macro dynamics of the business. I just don't think we've done as good a job as we should have done and it's going to be very much a source for some improvement this next coming year.

Okay. And then, just hitting on kind of ancillary revenue and that source of revenue, in terms of the cargo, are you moving -- do you see the new iPad or the iPhone -- is that a beneficiary for you coming into Honolulu from Japan, or no?

Well, first of all, in terms of cargo one of the really important things I think we'd highlight is the fact that our trend is dramatically different from that of our competitors in this business. They're all suffering tremendously. Of course they've got a big cargo infrastructure that they're having difficulty feeding. We, by contrast, are growing into the space thanks to a couple of things -- the 330, which is a better cargo aircraft than the 767, and the fact that we're serving Asia.

As to iPads and that kind of stuff, we've actually traditionally not carried much of that stuff because you've got to get through some regulatory requirements around handling lithium ion batteries and stuff like that. That work is ongoing at the moment. I still think that most of our business is going to come from perishables coming out to Hawaii westbound, and industrial components going eastbound out of Asia to North America.

Okay. And then, just moving on to ancillary revenue kind of on a passenger basis, where is that per passenger now? Do you think you've done enough to kind of unbundle that relative to the industry? And is there more kind of fruit there to harvest?

We certainly think there's more fruit there to harvest. It's proving a little harder to get at than we'd initially hoped for. But we're doing some good things as we, for example, standardized our fleet. It allows us to have a better premium seat product and the ability to sell exit rows and things like that. In terms of things like car rentals, packages, and insurance, we're doing a better job of that. But I think there's more to be had.

I don't think we're looking at doubling or tripling this business overnight. I think we're going to grow it organically over the next couple of years.

And do you have a number for what it is on a passenger basis now?

I'm looking at Scott. Do we have a number to hand? I do not.

Steve, we don't right now, but we can certainly follow up on it.

We'll get it to you.

Okay, great. And then in terms of cash taxes, are you guys a federal cash taxpayer? And when do you see becoming one if you're not?

We are not now. Our best estimate of that is early 2015.

Okay. Thank you very much.

John Reardon; Crowell, Weedon.

Mark, you touched briefly on the new New York nonstop run. And, not to beat an old horse, but has that run generated any through traffic from, say, Manila or Sydney to New York via Honolulu? I'm just curious. And could you touch on how the New York -- some of the things that have developed in the last couple of quarters on the New York run?

Okay. First of all, yes, Johnny, I can confirm. We are seeing some connecting passengers going via Honolulu on to across the Pacific, including some kind of multi-stop itineraries that have been relatively attractive for us.

In terms of developments, well, it's really very early days yet. I mean, we obviously kicked off our new route in the summer period. We sort of calibrated ourselves a little bit to what we can expect there. We've had September and now into October, which is traditionally a very lean period for this kind of travel. And beyond kind of looking at what's coming in, I don't think we're yet in a position to sort of characterize how what's happened is sort of unusual or different. I think we're just pretty much assuming that everything at the moment is usual because we're seeing it for the first time.

Thank you.

Follow-up question. Hunter Keay; Wolfe Trahan.

Mark, I do think that part of the reason why the stock hasn't worked is because of fears of competitive capacity. I think people have seen Allegiant growing into this market for awhile. Alaska has been in this for a couple of years. And on the earnings call last week Southwest mentioned Hawaii as a possibility. I think some people are thinking about that as being something that's going to be a perpetual overhang on your stock until they actually announce it -- you know, I mean, right or wrong.

So I guess my question is, is there anything that you've learned from Alaska moving into your markets -- and less so Allegiant, more so Alaska -- that you would do differently in terms of, say, defending your turf aggressively against a Southwest incursion that might sort of mitigate, at least on a longer-term basis, the probability of them having a negative impact on you guys?

Well, you know, funny enough, when we were sitting down in 2007, 2008 and looking at our long-term strategy, among the alternatives were two relatively binary choices. Either we could expand westwards to Asia -- westwards from where we are, I'd have to get a map (inaudible) Far East, but westwards from where we are to Asia, or to do a lot of the kind of flying that Alaska is now doing. We recognized we couldn't do both. We chose to go westwards to Asia. We thought that the returns would be higher. We thought we were in a better situation to do that. In that sense we would do absolutely nothing different. We're very, very pleased with the decision that we made and the way that it has worked out.

Second thing I would say is that when we look at our side-by-side competitiveness versus all of the other carriers plying their trade between the US mainland and Hawaii, we do not see a deficit in our camp to anybody else. We think we have unit costs that are on a par, or if not actually in the main lower than those of our competitors. We think we have the best product. If you look at average fares, you'll see that we actually command a premium in the marketplace.

So I think clearly it's a market in which you cannot afford to be uncompetitive, given the important role that fares play in how people make decisions. We don't feel we're in a vulnerable position from that perspective now. As we think about the future obviously we have to continue to be mindful of that.

One of the things we don't do, and haven't done, is we are not traditionally a carrier that starts fare wars and the like. We don't -- we try and be responsible, competitor responsible, from the perspective of our shareholders. We, of course, live and work in an environment where we are subject to how other people view the marketplace.

At the end of the day, as I mentioned in my prepared remarks, this is a profitable route segment for us. We like our competitive position. We like our costs. We like the revenues that we get. And we're not intending on going anywhere.

Okay, thank you. And one more -- I just want to ask my first question differently. What benefit do you think you're receiving right now by being a publicly traded company?

I think we have had in the past access to capital. I think it is -- when we've needed it. I think we are in a position where as this world -- as credit markets in general are uncertain -- they happen to be very good at the moment, but who knows how long that remains the case. I think having an equity component that's publicly traded can be extremely useful to have. Again, beyond that I don't feel I can comment particularly.

Okay. Well, thank you for all the time. I really appreciate it.

Final question; a follow-up. John Godyn; Morgan Stanley.

I just wanted to follow up on some of these questions that we've been hearing about the amount of excess cash that you have and how much could be used for buybacks and so on and so forth. Can you just help us think about how do you think about excess cash? And, in particular, is it important to have more cash on the balance sheet than your air traffic liability? I just want to understand how you think about excess cash.

Okay. I'll let Scott handle it. I will say just to kind of introduce the answer, we are -- first of all, we're clearly mindful that in an environment where people are talking -- I mean, people -- where headlines about macroeconomic news are all very sort of uncertain, although we have seen none of that in our marketplaces, we wanted to make sure that in the even that there is a dip that we've really -- everybody has been expecting for the last four years come about, that we have a cash cushion that means that we are in a stronger position in relative terms than our competitors.

At the same time, we've got some additional fleet coming on board and we've had great response from sources of finance for those aircraft. But we are mindful that in the next probably year and a half, two years, we've got quite a load of additional aircraft coming on. We've got some aircraft leaving the fleet, too.

So I think those are some of the things that influence our thinking.

But let me turn it over to Scott.

Yes, John. It's a good question. I think we feel in our position, our growth profile, our size, we want to be a bit heavier than our competitors. And we are running at 26% of trailing-12-month revenues, which is on the higher side. We're not the highest in the industry, but it's on the higher side. But you kind of have to look at that with respect to our growth. And you look at trailing-12-months is 26%, but if you look at the rate we're growing you might argue that we're lower than 26%, just because we're getting bigger quickly.

So I don't think we are really -- I think we're where we want to be. I wouldn't characterize our cash or spending to be heavy. We're not looking around to buy back stock or to do anything dramatic, because as Mark said, we're growing. We can put cash to work as equity in debt-financed airplanes. We can buy the turboprops, at least the first couple of them, with cash. So we're looking for ways to employ that and invest in the business. But generally we're not feeling that we're heavy. We think we're about right.

Is it fair to sort of just, within the context of everything you just said and different uses for cash and macro volatility and so on and so forth, is it fair to say that you would need a significant, a very significant, premium of cash to your air traffic liability to truly feel like you have excess cash to deploy?

That's not a bad way of looking at it. We don't have any financial policy around that and haven't really thought too much through that. But I can't argue too much with your logic there. We're just more focused on the cash and liquidity within the revolver, all that together being in a reasonable range.

Okay. Thanks a lot, guys.

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

Okay. Well, thanks, everybody, for joining us today.

Our third quarter was a period of high growth, of course, and we are pleased to have produced the strong financial results which we announced today. We, as you can tell from our commentary, think that this is further evidence that our growth and diversification strategy is bearing fruit. Going forward of course we're going to focus on costs and getting those revenue improved, both in terms of our existing markets and in our new ones.

So thank you very much for joining us today.

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