Hawaiian Holdings Inc (HA) 2012 Q4 法說會逐字稿

Greetings and welcome to the Hawaiian Holdings fourth-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, Director of Investor Relations for Hawaiian Holdings. Thank you, please begin.

Great, thank you. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings fourth-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 4.00 Eastern time today. If you have not received the release, it is available on the Investor Relations page of Hawaiian's website.

During the course of our call today, we will refer to adjusted or non-GAAP numbers and metrics. A detailed reconciliation of GAAP to non GAAP numbers and metrics can be found in our press release posted on hawaiianholdings.com.

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. As you can see from the press release that we issued earlier, we were able to report what amounted to a breakeven fourth quarter after adjusting for the effects of our fuel hedging program.

The period was characterized by a number of unhelpful items, which drove down our financial performance, most prominently including sizable competitive capacity in several of our markets, the strengthening of the dollar to the yen, and the year-end accounting adjustment related to our frequent flyer program. We'll cover each of them in more detail later in the call.

Despite ending the year with an unsatisfactory quarter, we were able to generate a decent result for the full year, evidenced by an improvement in both our adjusted operating and net income margins. We also boosted adjusted earnings per share by 25% and finished the year with a stronger balance sheet than that with which we started, despite having taken delivery of four A-330s.

Looking at little ahead into 2003 (sic - see press release "2013") we see the difficult conditions persisting through the first quarter before coming more benign for the balance of the year. Against this backdrop, we anticipate 2013 being another year of improving financial performance earned predominately after the first quarter. It will be a year of growth, as we take delivery of additional aircraft and inaugurate new services to Auckland and Taipei.

My colleagues throughout the business have continued their near faultless performance for which they have my lasting gratitude. It's a great comfort to know that the whole team delivers a better traveler and shipper experience, while we take on the challenge of developing our Business.

We had a lot going on in the quarter. In October, we launched new service to Sapporo, now our fourth city served in Japan. In November, we launched our first non-stop flight to Brisbane, Australia, with service three times each week. We also announced a number of changes to our upcoming schedules. We announced a further expansion of our Asian network this summer with the inauguration of three weekly flights to Taipei in July. We will also make changes to our upcoming spring/summer schedule in order to take advantage of counter-seasonal demand.

In the spring, we will add three weekly flights to our existing daily flight to Sydney for the months of April and May. On our Brisbane route, we will add 18 round trips in the months of March and April. Both of these increases were funded by drawing down West Coast flights, where demand is weaker at that time of year.

For the summer peak, we will double the daily nonstop service we offer between Los Angeles and Maui. These seasonal adjustments are the consequence of having a broader network featuring routes with offsetting seasonality giving us the flexibility to shift capacity around.

During the fourth quarter, we also announced the Frequent Flyer and Code Share partnership with Virgin America. This relationship helps us expand our network to markets where we have had limited or no presence. We also took delivery of two ATR 42 turboprop aircraft to inaugurate new service to Molokai and Lanai in 2013.

Looking ahead to our future aircraft needs, we recently announced the signing of a memorandum of understanding with Airbus to acquire 16 new A321neo aircraft between 2017 and 2020 with rights to purchase an additional 9. These fuel-efficient, long-range, single-aisle aircraft will complement Hawaiian's existing fleet of wide-body, twin-aisle aircraft used for long-haul flying between Hawaii and the US West Coast.

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

Thank you, Mark, and hello, everybody. For the fourth quarter, the Company reported breakeven results, reflecting economic fuel expense, below the consensus estimate of $0.10. This compared to an adjusted net income of $16.3 million or $0.31 per diluted share in the same period last year.

As Mark alluded to a bit ago, the gap between our most recent guidance and actual results is primarily driven by an accounting adjustment related to our frequent flyer program. The adjustment affected the timing of revenue recognized for mileage credits sold to partners in prior periods.

As a result, passenger revenue decreased $7.9 million, which after a small related expense offset produced and $0.08 decrease in earnings per share and a decrease in PRASM and RASM of $0.002 for the fourth quarter. And, it didn't help that our revenue performance, while within guidance, moved towards the lower end of the range.

For the full year, adjusted for economic fuel costs and excluding the effect of 2011 lease termination charges, we recorded net income of $55.6 million or $1.06 per diluted share in 2012, compared to $43.2 million or $0.85 per share in 2011. Our return on invested capital for 2012 was 14.9% before-tax and 9% on an after-tax basis. Our operating revenue for the fourth quarter was $493 million, up $59 million or 13.6% year over year.

Passenger revenue increased 13.2% compared to the fourth quarter of last year. Load factor for the quarter decreased 2.2 percentage points to 81.9%, while yield decreased 10%. Combined, this produced a decrease in RASM of 12%, and a decrease in PRASM of 12.4%. Of the 12% reduction in RASM, about half is the result of deterioration on existing flying and the rest is the result of performance on our new flying. In a moment Mark will address other components impacting passenger revenue in greater detail.

Other revenue grew at a slower pace than fourth-quarter capacity primarily because certain elements of it, most notably baggage fees, relate primarily to our domestic business while much of our growth has been on the international side. Our cargo business continues to grow at an impressive pace, both domestically and internationally, with cargo revenue up over 40% on the quarter. With more A330s flying in the system and our network expansion, we have increased our focus on our cargo business and it has produced positive results for cargo revenue, despite a sluggish global environment.

On the expense lines, fourth-quarter CASM, excluding aircraft fuel and 2011 lease termination charges, decreased 11.3% on a year-over-year basis, and excluding the frequent flyer adjustment decreased 11.2%. Aircraft fuel costs increased $42.7 million or 32.2%, driven primarily by an increase in volume. We consumed 54.5 million gallons of jet fuel, up 28.8% from the same period last year. This was essentially in line with the growth in ASMs.

Higher prices also contributed to higher fuel costs. Our economic fuel cost per gallon, including hedging gains, losses and expenses related to contract settling during the fourth quarter, was $3.27 per gallon compared to $3.20 in last year's quarter. Are GAAP fuel cost was $3.22 per gallon, compared to $3.13 last year.

We continue to maintain a disciplined approach to fuel hedging. We've hedged 63% of our consumption in the current quarter. For the rest of 2013, we've hedged 56% in the second quarter, 47% in the third quarter, and 34% in the fourth quarter. In 2014, we've hedged 22% in the first quarter and 10% in the second quarter. You can find more details in the press release.

As we've expanded internationally, our foreign currency receipts have become material. Just over half our foreign receipts are in yen. Roughly one-third are in Australian dollars, and the Korean won is nearly 10%, with a small remainder coming from various other currencies. The yen weighting will decline as we increase flying to Australia this year and start service to New Zealand and Taiwan.

While the yen has weakened recently, other currencies we are exposed to have actually strengthened, providing a partial offset to yen effects. To manage foreign exchange risk, we have embarked on a program to hedge the volatility related to foreign exchange and are initially focused on the yen/dollar relationship.

Aircraft rent expense increased 12.3% compared to the prior-year quarter, as we have two additional aircraft under operating leases in this year's quarter, one A330 and one 717. The cost associated with these aircraft were partially offset by cost savings from the return of a 767 in the fourth quarter of 2011. Depreciation and amortization expense increased 18.7% year over year to $21.9 million, with his significant portion of this change reflecting the addition of two debt-financed A330s and three aircraft under capital leases.

Below the operating line, we reported non-operating expense of $18.4 million in the quarter, compared to $1.8 million in the prior-year period, the most significant difference, year over year, relates to unrealized losses on future hedge positions, compared to significant unrealized gains in the prior-year period driven by the run-up of fuel prices at the end of 2011. Our hedge positions are mark-to-market, mark-to-fair value under our accounting policies, and changes are recognized through non-operating expense. Higher interest and debt amortization expense also added to the difference in the non-operating lines relative to a year ago.

Our balance sheet remains strong in this period of rapid growth. We ended the quarter with $406 million in unrestricted cash and $5 million in restricted cash. Our revolving credit facility remained undrawn at the end of the year, providing additional liquidity of $69 million which is net of letters of credit. At the end of the quarter, our cash and equivalents, plus capacity under the revolver, was 24.2% of trailing 12-month revenues.

CapEx in the quarter was $75 million, which includes pre-delivery payments of $27 million related to future aircraft and engine deliveries, and $48 million related to other aircraft items. This was above the $55 million to $60 million that we had mentioned on our previous call. The main drivers of this variance were the acceleration of a spare engine purchase that had favorable economics and payment for buyer-furnished equipment for 2013 deliveries that were not included in our forecast.

Full-year CapEx was $406 million, $380 million of which was related to current and future aircraft and engine deliveries. Looking ahead this year, we are anticipating first-quarter CapEx in the range of $105 million to $115 million, and for the full year we are expecting CapEx in the range of $340 million to $350 million, primarily related to our future aircraft deliveries. Financing commitments are currently in place to fund the majority of these expenditures. With respect to interest expense, we expect a similar level as we move sequentially from fourth quarter to first quarter.

Turning now to our pension plans, we made no contributions to our plans in the fourth quarter as we met our minimum required contribution for the 2012 plan year during the third quarter. Full-year contributions to our pension plan and post-retirement plans totaled $19 million. Looking ahead, we expect to contribute $15 million to $20 million to our plans and see a slight decrease in expense year over year. With that, I'll turn the call back over to Mark for further commentary on the business.

Thank you, Scott. The operating environment unfolded much is we had forecast in last quarter's earnings call. We faced market-specific circumstances of excess capacity, which drove down results on the affected routes and in turn on the business segments as a whole. As was the case at the end of the third quarter, no one segment of our business had universally good or bad route results. Neither was there are correlation between individual route results and whether the route was a new addition to our network or a long-standing feature.

As far as individual business segments, I'll start with North America, which now accounts for 45% of our passenger revenue. Overall industry capacity was up 13% for the quarter, of which our contribution was 3 percentage points.

For the West Coast only, the numbers became 12% for the industry and 2 percentage points for us. While this capacity growth was similar to that of the third quarter, the fourth quarter has proportionately fewer high season dates which can absorb high levels of capacity.

North America PRASM declined almost 10% on a year-over-year basis for the quarter, while load factor remained relatively flat. The capacity growth was spread across the large majority of our origin markets, creating a very poor pricing environment. This required us to discount air fares to maintain our volumes.

Looking ahead, total published industry seat capacity from the Continental United States to Hawaii is forecast to increase 11% and 4% in the first two quarters, before declining by 4% in the third quarter. We pull capacity on a seasonal basis in the spring for deployment in international markets helping this trend along. The moderating industry growth followed by an actual decline in capacity in the third quarter, has already had the effect of creating conditions in which Hawaiian has been able to lead an increase in some fares.

Since bookings for the first quarter are already well advanced, these positive fare initiatives will not have a substantial bearing on our first-quarter outlook, but they're already helping our second-quarter picture. Our new Code Share partnerships have also proven successful in giving us good connecting volumes. This traffic from interior North America allows us to diversify our onboard traffic.

We will continue to add new itineraries by combining our network with those of our partners to drive incremental business. Our International business represents 32% of our passenger revenue. That's up 26% from last year. Capacity increased 57%, the combination of one new route each in Japan and Australia, and a 24% year-over-year increase in capacity on existing routes. The existing route increase is primarily attributable to Sydney and Incheon.

International market PRASM declined by 11.8% on a year-over-year basis for the quarter while load factor declined 4.6 percentage points. Performance on our new routes accounted for 7.7 percentage points of this decline. There were different dynamics at play within the international entities, so I'll go over some detail by sub-region.

In Japan, our revenue result was affected by a weaker yen, lower fuel surcharges and some route-specific averse capacity. The sharp move in the dollar/yen exchange rate had the effect of reducing our dollar receipts from flying to Japan by about $6 million. The impact of the lower fuel surcharge was approximately another $3 million. Despite these unfavorable developments, our Japanese routes contribute positively to Hawaiian's overall results.

Our Oceania services, currently Sydney and Brisbane in Australia but soon to include Auckland, New Zealand, performed well in the fourth quarter. The capacity we've added to Sydney was PRASM-positive, and we've added more for the northern spring, as mentioned a few moments earlier. Brisbane services, which began at the end of November, are off to a profitable start and we've added seasonal capacity there as well.

Our New Zealand service, which starts in mid-March, is entering its prime booking window and the early demand trends are encouraging. The results for our other routes in our International segment were mixed, some very good, some not so good.

Having recognized that we added too much capacity to our Neighbor Island flying from our Honolulu hub in particular, we cut capacity over 4 percentage points over the course of the fourth quarter. It takes a little time to cut capacity, but frankly we didn't cut soon enough or deeply enough, so our Neighbor Island results were utterly unsatisfactory for the quarter. PRASM declined 9.6% on a 2.1% reduction in load factor. Capacity was up 10.6% year over year.

We actually saw strong local demand for trips between the islands of the state, but the demand for seats from other airlines for their connecting passengers fell off during the period pulling down the overall result. All of the capacity added to the Neighbor Island schedule early in 2012 has now been taken out and indeed we will be down in year-over-year capacity for the first quarter.

The recent reductions in capacity are already having a beneficial impact as we've applied targeted fare increases on four separate occasions in December and early January. Though it is early in the quarter, for this very late-booking market, the capacity reductions have allowed these price increases to be absorbed without an impact on load factor.

The Maui hub has worked well for us in the midst of this disappointing performance for the route group as a whole, and it is retained after our capacity realignment. The contribution of the Maui hub reinforces our confidence in our overall Neighbor Island strategy, while at the same time we fully acknowledge that we simply added too many seats into the market as a whole, damaging the results for this segment. We will do better in 2013.

Earlier this month, we announced the signing of an MOU with Airbus, covering the acquisition of 16 A321neo aircraft and 9 purchase rights for delivery from 2017. As we were so close to announcing our year-end results, we haven't briefed you on our thinking behind the decision. So, I'll take a few moments to cover this news, now.

We've never been under any illusion that the West Coast markets to Hawaii will ever cease being intensely price sensitive. With this as a given, we understand that we must always have a unit cost advantage, or at worst parity, with the airlines against which we compete. Given that we are a legacy carrier with many elements of legacy cost, we must rely on operating the most efficient aircraft for the West Coast-to-Hawaii sector link.

Up to now this has meant operating wide-body aircraft even if in doing so we forgo the opportunity to fully participate in some of the smaller markets. Today, there is no single-aisle aircraft that can match the operating economics of the wide-bodies that we fly. With the arrival of the new engine technology, the inherent seat-mile cost gap between wide-bodies and the very largest of the new single-aisle aircraft diminishes perhaps to the point of disappearing.

As a consequence, we have both a competitive opportunity to vie for markets we have thus far had to bypass. And that's principally between the Neighbor Islands and points on the US West Coast and in defense against carriers who will operate the new-generation single-aisle aircraft. As is our practice, we held a competition between the manufacturers, spanning much of last year, before awarding the contract to Airbus.

The A321neo will be the largest of the single-aisle aircraft capable of crossing between the United States West Coast and Hawaii with a full load in adverse wind conditions. And as such, it will be the most cost-effective aircraft of the genre. Our last A330 delivery is slated for 2015. Our first A321neo is due to arrive in 2017. Blending in our six A358 hundreds delivering towards the back half of the decade, gives us a long-term growth rate of between 4% and 5% measured in seats.

We have flexibility in the delivery terms and in our ability to manage the retirements of our existing fleet to allow us to modulate that rate of growth by several percentage points either up or down. Importantly, we believe that our balance sheet will continue to strengthen throughout the decade and that the new aircraft will not, therefore, put us under undue stress.

In the last week, our pilots have ratified the changes to our collective bargaining agreement with them to allow these aircraft to be operated. And we are in negotiations with our flight attendants to do the same. If we can reach agreement with our flight attendants, we will be selecting an engine for the aircraft and then completing the full purchase agreement.

It's frustrating to close out a decent year of financial performance with a dip in our results at year end. It's been a challenging quarter with a number of things working against us, including changes to exchange rates, the high level of industry capacity in some of our markets, and an accounting issue.

While we're still seeing many of the same environmental conditions persisting into the first quarter the outlook for the balance of 2013 is brightening. At the same time, we're also taking steps to further improve our performance. With that, let me turn it back over to Scott to give you a window into the next quarter.

Thank you, Mark. Looking at the first quarter, our growth will continue and we expect capacity to increase between 25.5% and 27.5%, compared to the same period in 2012. The vast majority of this is the full impact of last year's growth.

Looking at this year's additions to the fleet, we have five A330 deliveries scheduled in the months of February, March, April, June, and November. Our retirement plan calls for four 767s to leave the fleet. The expected timing of these retirements is one in the second quarter, one in the third quarter, and two in the fourth quarter. On a net basis, we will grow by one wide-body.

We are, however, growing our ASMs at about 17% over the year. This is due to full-year effects, the long-haul nature of our expansion, and the larger capacity of the A330 with 13% more seats than the 767 it replaces. Load factor for the first quarter is expected to be in the range of down 2 percentage points to flat. Yield is expected to be in the range of down 5% to down 8%.

Combining these numbers we expect PRASM to be in the range of down 6% to down 9%. This decline is driven entirely by our new flying. Other revenue is expected to lag passenger revenue as the majority of our growth is international. The net result is that RASM is expected to be down 7% to down 10%, compared to the first quarter of last year.

Turning to costs, for the first quarter we expect CASM, ex fuel, to range from down 6% to down 3 percentage points. For the full year, we expect CASM, ex fuel, to be down in the low single-digit range. It is worth mentioning here that our D&A expense will benefit this year from certain intangible assets that became fully amortized as of November last year. This expense was running at about $4 million per quarter since June of 2005. Our tax rate is expected to be in the 39% to 41% range, and we do not expect to pay cash taxes until 2015 at the earliest.

As we look at our plans to fund aircraft deliveries, financing is now in place to cover four of the five A330s we have coming this year. Two aircraft have committed bank financing and the other two will be under sale give-back agreements. We are now choosing among various options to finance our final 2013 delivery and deliveries coming in 2014. The A330 remains a popular aircraft to finance, providing us with a number of attractive alternatives. I would also note here that are ATR 42's were purchased with cash.

Regarding fuel, and staying with our normal practice, we're not going to give price guidance at this time. We expect our fuel consumption to be up 22% to 24% year over year in the first 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 up the line for questions.

(Operator Instructions)

Michael Linenberg, Deutsche Bank.

Two questions here, Scott, you went through the breakout of your foreign currency receipts, and I'm just curious, what percent of your revenue do you receive in foreign currency?

Our international revenues are just around one-third of our total revenues.

Yes.

Breaking that down, the yen is again between 50% and 60%, the Australian dollar about one-third, and then the won is 10% and the remaining currencies are small single-digit range.

Okay, but that's -- when I think of the third of inter -- your revenues are international, there's obviously some portion that's sold in US, although I guess --

Yes, it's tiny. Absolutely tiny.

That makes sense when I think about the point of sale strength, there seemed to be a lot more Japanese on those flights than Americans. Come to think of it.

Absolutely.

That brings me to my second question, Mark, I think you said what was it? The yen impact, did you say it was $6 million in the quarter? Did I -- ?

Yes, you got that right. $6 million and then the fuel surcharge was an additional roughly $3 million.

Okay. When I think about the $6 million, and I know, Scott, you talked about the yen hedge, I think about the deterioration of the yen versus the dollar during the quarter and it really picked up late in the quarter, and so when I think about the purchase habits, a lot of these tickets are purchased in advance, they were probably purchased when the yen was stronger.

What I'm getting to is that the average yen for the quarter was probably a bit stronger than where it is now? It may have actually depreciated another 10% or so. So, can you just walk us through how you think about that and then the yen hedge position I think you have in place, Scott? Can you I'm not sure you have one are you going to put one on, can you give us any details on that?

Absolutely.

Before, sorry, just before on that, Mike, one of the really important things to remember about our Japanese business is the bookings are made very early, but under the terms of Japanese domestic law, doesn't have to be ticketed until 28 days before departure.

Okay.

So in terms of our recognizing -- I mean we recognize the revenue when planned, but in terms of our ability to get our hands on the cash, it doesn't come until quite close in to the date of travel, just for your information.

Okay good.

Sorry, back to you, Scott.

Mike, if you look at the quarter, the fourth quarter, as you said, the yen was deteriorating more later in the quarter. So, if you look at the average for the quarter, our exposure was about between 4% and 5% of the devaluation of the yen. Obviously, as you go forward, more has happened, as you said. And so as you look into the first quarter, we should experience a little bit more change in potential deterioration.

Our -- moving to the hedge, it is fairly recent that we put it on. I'd like to say we put it on when the yen was 80, but we did not. It's closer to the current market. But, we've built up a position in March that's about -- covering about 35%. As we look out to the second, third, and fourth quarters we're building up to 30%, 20%, and 10%.

But, we've got its start here and so that's not where we'll end up. These positions are simply forwards, so we're not spending any premium on the hedge at this point. So, it is pretty plain vanilla, but importantly getting out in front of the yen a bit more in case it continues to fall.

Okay good, yes, thank you. That's a -- thank you very much.

John Godyn, Morgan Stanley.

Thanks for taking my question. Mark, and maybe, Scott, just a question on some of the aircraft purchases that you've done recently, but also historically. We've definitely seen, I think, with some of these larger orders a bias towards new aircrafts. On the other hand, in the secondary market, we've seen some very interesting values lately, and we've also seen some other airlines take advantage of those values. Of course, there's a new entrant into Hawaii, whose bread-and-butter strategy is using older aircraft to reduce costs.

When we think about your approach, Mark, you did mention a lot of the efficiencies. You mentioned maybe that some of the aircraft orders are very specific to the nature of the routes, because they can fly unique pairs, but I was hoping that maybe you could elaborate on this idea? Are secondary market value just not low enough to make the math work there? Are you getting a great deal on some of these new aircraft, or are they just the only aircraft that can fly this mission?

It's a great question. A couple things I'd point out to you. First of all, we have operated many old airplanes. We've got today, I think in our fleet, seven 767s which came from the pre owned lots. So, we have quite a bit of experience of operating older airplanes. For the kind of flying that we do, they present a number of real challenges.

Particularly in the wide-body space, they all have different configurations. So for example, we have 16 767s with five different fleet configurations. It has real impact in terms of our ability to deliver decent customer service and financially. Because, for example, it limits the number of common premium seats for which we can charge a premium seat fee. That just a small window into some of the issues associated with operating older aircraft.

The second thing that I would point out is that we don't -- being a legacy carrier, we will never be a low-cost carrier. We have costs that demand that we provide a superior quality of service and that we get paid for providing that superior quality of service. That becomes extremely difficult with used aircraft, partly as a result of some of these consistency issues that I've just mentioned to you.

And then the third point that I would make to you is that we also see new aircraft as partly an approach to hedging fuel. I think we'd be happier operating expensive capital cost airplanes in a low fuel environment than we would be opening low capital cost airplanes in a high fuel environment because of a fuel burn. The latter scenario, I think, really potentially undermines the foundation of our entire enterprise and franchise. I think the former scenario represents some periods, would represent some periods of unfavorable comparisons, but it wouldn't be damaging our franchise.

Okay, got it. That's very helpful, thank you. And, Mark, on your comments about the supply demand balance improving later in the year, you gave some capacity numbers which were very helpful. It sort of implies that all of the issues that we're seeing right now are on the capacity side and you've seen no real weakness in demand incrementally or anything like that. Is that a fair characterization of the situation?

Yes, thank you for raising it. I would absolutely endorse that view. I would say that we are not seeing any weakness in demand whatsoever. It's a question of there simply being too many seats in the market place.

Okay. You may have noticed, I'm not sure, but United has been putting out some advanced book factor numbers in particular with Asia-Pacific reaccelerating. I know that their overlaps are not a great read across for you guys, but are you seeing anything change in those markets just in the last month or so?

No, no not at all. Of course, I split it a little bit by subregion. We talked about Japan. We've got some market specific over capacity there. The much bigger issue, of course, is the yen and the fuel surcharge that we mentioned.

Elsewhere, we're having positively good results out of Australia and New Zealand. And, our other markets I think are doing fine. So, we are seeing no change. Again, I think our International operation as a whole is contributing, and even Japan continues to contribute positively to our overall results.

Okay great, and just last question. Just a follow-up on Mike's question on yen exposure and other things. Scott, I think you mentioned that you are at 35% hedge exposure, but that's not where you're going to end up. Is the goal here 100% and to the extent that you might be able to provide a target rule of thumb that we can use for changes in yen to changes in revenue, and the same thing for the fuel surcharge effect? I don't know if you think that way, but any elaboration there would be helpful? Thanks.

Sure, we are -- our program is really just in its infancy. I think we could take the hedge up to 100%. I don't think you will see that. We'll start out a little more modestly, and again, depending on where the currency is, we'll factor in to the equation. So, I think you'll see it go a little bit higher, but probably not any race to get everything hedged here. The sensitivity, if you looked at the coming quarter and you had a 10% immediate shock to all of the currencies we're exposed to, you'd see about a probably a $5 million to $6 million after-tax impact.

The reality is, if you looked at the last quarter, we did, as we mentioned, have some offsets. We had a number of currencies going the right way, but the volume of the yen over powered that. We had an offset of probably close to one-third, kind of watering down the effects of the yen with the other currencies. So, I'm not sure that relationship stays, but it is just kind of a natural hedge, if you will, just being in a number of different currencies.

That's really helpful, thank you. And just on the fuel surcharge, is there a rule of thumb there for the Japan fuel surcharges.

No, not really.

That one is pretty mysterious and we're learning more about it on the finance side. If you look at the current period, the fourth quarter, the fuel surcharge is set in June and July for the fourth quarter, basically. So, you have quite an opportunity for the Singapore Kero index to disconnect from what's going on in your on-the-run fuel prices. So, I think that one is a bit more of a wild card. We will certainly track that and try to understand how those two correlate. But it is -- as we just learned in the last quarter, it can be negatively correlated and pretty tough to forecast.

Thanks a lot, guys. It's really helpful.

Helane Becker, Dahlman Rose & Co.

So, this is my question. When we think about the 2013 full-year guidance, are we thinking about it with or without these year-end adjustments?

I think we were thinking about it with the accounting charge in the numbers and a fuel adjusted out in the ordinary cost. When we say that we think the results are going to be better, I don't think it materially hinges on the accounting charge, however. I would hope that the rate of improvement would be greater than a $7.9 million charge.

Okay. And then my other question is with respect to the some of the newer services that you've added. How are they relative to your expectations? I know that sometimes it takes a while for a route to develop, but are they in line with where you thought they would be? Or, have you been disappointed at all with what you're seeing? Could you just maybe address that a little bit?

Sure, I would describe it, and I don't want to get into route-specific comments, but I would describe it as being three-quarters very encouraging, one-quarter slightly disappointing, with the net of the encouragement versus disappointing being strongly positive.

Okay. All right. Well, thanks very much. I appreciate your help on that.

Hunter Keay, Wolfe Trahan.

Mark, can you give a little more color on some of the commentary you gave us about the other airline connecting passengers on the interisland business? I'm wondering what happened? Is it temporary? Or is this more of a permanent function of some of your competitors offering more flights to the outer islands? And if it's not temporary, what are you going to do with the 717s?

Okay, I think we've -- time will tell if it's temporary or not. I think it is a feature of the over capacity coming off the US mainland to Hawaii. Unsurprisingly, I think carriers want to keep as much of their traffic online as they can, and they use our interisland network to smooth out demand imbalances between flights. And so, when there's excess capacity, I think there's less need for them to do that. So, I think that part of it will naturally resolve itself. How long that will take, I think remains to be seen.

In terms of the number of 717s, if you recall when we got the additional 717s at the beginning of last year, we -- the main reason for those 717s was to improve our schedule reliability. These aircraft are now halfway through the useful life. They are very hard-working airplanes. They fly, in many instances, 16 cycles in a day. One of the things we're discovering is we need more maintenance time per aircraft across the calendar. Nothing unusual about that, it's just fact of life.

And indeed, the actual flying we did last year was over and above the utilization that we'd done previously in '11 on the smaller fleet. So, we really egged the capacity in 2012, beyond which we had initially anticipated. That was a mistake as I hopefully have fully acknowledged and admitted. And, so as we actually tapped the brakes on capacity, I think we will have essentially the right number of interisland aircraft for the right level of capacity.

Okay, great. Thanks. And on their conference call, United specifically highlighted that they have started charging a second bag fee for flights to Japan. I'm curious to, without commenting on that specifically, get your updated opinion on, again, how the perception of Asian OND passengers, originating passengers to Asia, from Asia to the United States perceive the concept of unbundling, and how that may be evolving?

First of all, we're obviously looking at the decisions that competitors make in the marketplace. We all watch ourselves very -- watch one another very carefully in that regard. But just in general, at the moment, I don't think we believe that there's a huge appetite or willingness or acceptance of unbundling in particular. For example the Japanese market.

Indeed, a lot of our product is sold as part of somebody else's bundle. So, to actually -- a lot of the product that's sold isn't even unbundled to the level of the air travel being separate from the hotel and other elements of the trip. So, to get to a point where we see unbundling air travel per se, I think is some ways off. But, we are still looking and watching what our competitors are doing and seeing what their experience is.

Great, thanks a lot.

Bob McAdoo, Imperial Capital.

I have a simple question about the way you presented things on the front of the press release. You talk about adjusted net income of $100,000 more or less, and a GAAP net loss of $3.4 million and that difference tends to be, it looks to me if I'm reading this thing right, is tied to your fuel and unrealized hedges? Then you've got this frequent flyer adjustment and I'm wondering why that isn't excluded as well? Or is that something we should expect every quarter, every fourth quarter, is that an ongoing set of adjustments that we're going to see from time to time? How should we be thinking about?

Thanks for raising that, Bob. There was consideration of putting that frequent flyer adjustment, out of period adjustment, as an adjusted item. And we went around and around with our friendly auditors and at the end of the day, concluded that it wasn't worth doing. It was a close call, but it may have invited some other looks into the accounting that just would be time-consuming and really just not worthwhile.

So, we chose to keep it in GAAP and continue to just educate as to what it's about and why it's there. We can spend some time off line on that if you want the full story. But, at the end of the day, we chose to keep it in GAAP and not to break it out.

Yes, Bob, to state the same thing a little bit differently, I think the accounting rules are pretty clear that we can't treat it as an adjustment. It's for a prior period. It's not deemed to be material. It's a small amount, that goes over a number periods. We don't expect it to roll forward. Leave it up to you as to how you treat it in terms of your analysis. But, we've obviously are obeying the scriptures of the accounting rules, and that's why it's not an adjusted item in the same way that fuel is.

Okay, but does that mean, are we saying that this is a one-time thing and we don't really expect to see it like at the fourth quarter next year, or whatever?

That is correct.

That's right, Bob.

So, if I'm trying to assess how you're doing, or what's likely to be your costs or revenues going forward, for me to exclude that, from the base at which I project, seems to me to be a reasonable thing to do. Is that correct?

We would not be jumping up and down. We would not be objecting to you're treating it that way. We're saying that from an accounting perspective, we have to treat it the way that we do.

Okay, what you're really saying is that the guys that sign off on the books have their way of doing business, but if we're truly trying to analyze your company and what your company is doing, that is kind of a one time, out of period thing that is not something we should have to deal with going forward?

I wouldn't criticize that statement from you.

Thank you. That's all I've got.

Steve O'Hara, Sidoti & Company.

Hi, good afternoon. Can you just talk about the unit revenue, I'm sorry the ex fuel unit cost decline for full-year 2013? Given what is a $60 million improvement, or there abouts, in depreciation and amortization, some 767s leaving the fleet and a further slate of A330s, I would've expected something, a full-year decline of more than that. And then if you can talk about what targets you have for the long-term?

Yes, Steve, we would hope that we can over achieve there, low single digits. This year we were down 6%. One thing that, a couple of things actually, in 2013 that will be a bit more challenging. And one is, it is going to be a maintenance year that's a little heavier than 2012. It is not going to be quite as heavy as 2011, so somewhere in between there on a growth adjusted basis. But, there will be some additional maintenance pressure.

And, we just continue to invest in the Business and if you look at the back half of the year, we are slowing down to about a 12% -- 10% to 12% growth rate, as opposed to almost 30% in the half that we just went through in 2012 year. So, that is another dynamic. There are just a number of pieces here and there that lead us to believe it should fall somewhere in the range of where we were this year. I think the slowdown in growth is certainly a part of that and then some expenses that are just higher, such as maintenance, are also driving that.

Okay. And I'm sorry, did you quantify the impact on either first quarter RASM or fourth quarter RASM in terms of the Japanese yen decline, or maybe the currency effects in general that you expect?

Yes, in the fourth quarter, it was about $6 million. And, if you look at the first quarter and you just look at the changes in the currencies that have occurred, that we know will affect the year-over-year comparison when we get through the first quarter, there is going to be a headwind of approximately $6 million to $7 million just due to the exchange rate changes, in the first quarter.

Okay. And I guess last question, in terms of competitive capacity, it sounds like the pressure is going to ease through the year? And correct me if I had that wrong.

No, very much right.

Okay then, how do you judge whether -- are these competitive responses to your actions or are these just normal puts and takes in the market, in terms of the competitive reaction that we're going to see through 2Q?

I think we all, all of the airlines have access to the same sort of data sources. We see the same numbers and I think we all make independent decisions about what we have to do. And I think the rate of capacity growth between the US West Coast and Hawaii was unmistakably too much in the course of the last 12 months.

We're seeing competitors tap on the brakes. We're doing our part, as well. So, I think that's the process by which it unfolds. Again, we're looking at the same information and I think we independently come to very similar decisions.

Okay, thank you.

Glenn Engel, Banc of America Merrill Lynch.

Good afternoon. My first question is on -- you mentioned the frequent flyer hit you took by that $7.9 million, but I thought also there was a change in the fuel assumptions and that was a frequent flyer good guy as well? Can you talk about the magnitude of that and where it showed up?

On the expense line, there was a couple of things going on. But there was a -- I'm looking at, Shannon, I'm thinking it was in the $4 million range. And we can tighten that up for you when we talk.

So, if we look at the fourth quarter, the revenue was, as Bob was saying, understated by a $7 million or $8 million, but the costs were also understated by you're saying $4 million to $5 million, or $4 million or so.

I think the two are entirely separate. One was an in period affect and the other was out of period. The $7.9 million addresses some out of period revenue recognition issues, whereas the impact of the fuel was an in period. So, mathematically, there are puts and takes, but they are not logically connected.

Second question, on the pilot agreement, is there any sweeteners on current rates for reaching this or is it just affects the A320neo rates?

Just the A320neo rates.

And the A321neo's you mentioned the costs were close to the wide-bodies, were you saying close to the A330s, or close to the 767s?

Close to the A330s and it's very -- it's extremely sensitive to the assumptions you put in about load and what kind of winds are there on the day. So, we do talk in general terms, but when we -- that's why I said if I recall, close to and perhaps equaling or words to that extent, it does vary depending on stage length, loads, and wind.

And finally, you mentioned the depreciation of $4 million a quarter good guy, how much of that showed up? You said some of it showed up in the fourth quarter, how much of that showed up in the fourth quarter?

I'm sorry Glenn could you repeat that.

The depreciation-amortization good guy you said, where the -- something is rolling off and that will save you $4 million a quarter, I think you said?

Yes.

And how much of that started to benefit in the fourth quarter?

Just one month.

What?

Yes, it ended November 30, so it was just one month.

One month, okay. Thank you very much.

Kevin Crissey, UBS.

Hello, thanks. You noted employee plans for some hirings, it sounds like. Can you just maybe fill us in on what type of hiring and what percentage management and what types of management maybe you'll be looking to fill?

Kevin, I'm not sure that I got the first part of your question. So, do you mind repeating it?

Yes,I'm sorry. Maybe I'll speak up. I think in your press release you talked about some additional hiring. Can you talk about what areas and maybe as it relates to management? What areas of management you're looking to beef up?

Sure, well first of all, in sheer number terms, the majority of the areas for recruiting are going to be pilots, flight attendants, and customer service agents and in maintenance, also so that we can handle substantial increases in our flying and ground activities. In terms of management, we have been hiring selectively in different areas. I don't think there is one particular area that I would characterize as having a particular emphasis in terms of hiring. I think we're doing some hiring across the board. I think the numbers of management hiring are tiny compared to the math of the hirings for the flying and ground staff.

Okay, thank you.

Thank you. We have no further questions at this time. I would like to turn the floor back over to Management for closing comments.

Okay, well thanks, everyone, for joining us today. As we've stated, it was a difficult quarter and the first quarter also looks challenging. But the outlook is definitely brightening appreciably, and we are optimistic about 2013 as a whole. We're looking forward to spending time with you as the year unfolds. So thank you very much.

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