Hawaiian Holdings Inc (HA) 2013 Q1 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings first quarter 2013 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. Due to time constraints, we kindly ask that you limit yourself to one question and one follow-up.

(Operator Instructions) As reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Susan Donofrio, Senior Director of Investor Relations for Hawaiian Holdings. Thank you, Ms. Donofrio, you may begin.

Thank you. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings first quarter 2013 financial results. On the call with me today are Mark Dunkerley, President and Chief Executive Officer; and Scott Topping, Chief Financial Officer. I would also like to welcome Ashlee Kishimoto to the Investor Relations team.

Ashley has been with the Company for about four years as the director of SEC reporting and is based in Honolulu, and I know many of you are already familiar with her. 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, hawaiianairlines.com. 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.

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

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

Thank you, Susan. And I too welcome Ashlee to her new role in Investor Relations. As you can see from the press release we issued a little earlier, for the quarter we recorded a net loss of $0.29 per share, adjusted for the effects of fuel hedge accounting. Our results were disappointing but unsurprising.

Our performance was undermined by an extraordinary increase in total industry capacity between Hawaii and the US West Coast and in certain international markets during what is traditionally the weakest quarter of the year. A further unhelpful development has been the weakening of the yen. However, in the plus column, good cost control and an improvement in our Neighbor Island business helped offset some of the impact during the period.

We are looking forward to the summer when market conditions are set to gradually improve as a result of some recently announced reductions in capacity. When this happens, we would anticipate results that reflect what we should be earning in a more normal environment of supply and demand. More about this later. As always, we had a lot going on in the quarter. In March, we launched our first nonstop flight from Honolulu to Auckland with service three times each week and increasing to four times per week during peak periods.

We're the only US airline serving this city. In February, we announced our fifth destination to Japan with service three times per week to Sendai beginning in June. We also announced the branding of our turboprop operations as 'Ohana by Hawaiian and executed an LOI for a third ATR 42. Since the quarter ended, we announced a couple of other changes to our international network.

First, we announced our intention to launch nonstop service three times per week between Honolulu and Beijing beginning in April of 2014. And second, we announced that we will terminate our four-times-per-week service to Manila effective August 1 of this year. With that list of recent developments mentioned, let me turn the call over to Scott to review the results for the quarter in greater detail.

Thank you, Mark. As mentioned earlier, for the first quarter, the Company reported an adjusted net loss of $14.8 million, or $0.29 per share, reflecting economic fuel expense. This compares with an adjusted net income of $3.3 million, or $0.06 per share, for the same period last year. Our return on invested capital for the trailing 12 months was 12.1% before tax and 7.2% on an after tax basis. Operating revenue for the first quarter was $491 million, a 12.7% increase year-over-year while passenger revenue increased 12.5%.

Load factor for the quarter decreased 2.9 percentage points to 80.9% while yield decreased 7.7%. Combined, this produced decreases in RASM and PRASM of 10.8%. Please note there are substantial impacts on our unit revenues from the changing mix of international flying. Looking at a same-store comparison, and assuming that in the first quarter we flew the same routes as we had in the first quarter of last year, PRASM would be down only 2%.

Other revenue increased 14% year-over-year this quarter. One of the highlights on this line is our cargo business. It continues to grow both domestically and internationally with cargo revenue up 53.5% year-over-year further building on the strong improvements we posted in the back half of 2012.

Turning to expenses, aircraft fuel costs increased $34 million, or 24.4%, driven primarily by an increase in consumption. Here are the quarter-over-quarter comparisons. We consumed 54 million gallons of jet fuel, up 25.1%. Our GAAP fuel cost was $3.24 per gallon compared to $3.25. And our economic fuel cost per gallon, including hedging gains, losses and expenses related to contracts settling during the first quarter was $3.29 as compared to $3.27 last year.

Our fuel hedging program remains consistent with our usual practices. As of April 17, we had 55% of our consumption hedged for the remainder of this year. We also have positions in 2014 with 47% hedged in the first quarter, 34% in the second quarter, 16% in the third quarter, and modest positions in the fourth. More details can be found in the press release.

As you all know, about one-third of our passenger revenue relates to our international services. To further break this down, in the first quarter, Japan and Australia constitutes about 80%. For the remainder, Korea accounts for about 10% with the balance coming from various other currencies. While year-over-year, the yen was weekend and the Australian dollar was flat.

The Korean won strengthened providing a partial offset to the effects of the yen. To update you on our foreign exchange hedging activities, as of April 17 we had 60% of expected yen receipts hedged in the second quarter, 49% hedged in the third quarter, and 35% in the fourth quarter. In 2014, we've hedged 22% in the first quarter and 20% in the second quarter.

In addition, we have recently started hedging our receipts in Australian dollars. This year, we have 51% of our expected Australian sales hedged in the second quarter, 34% in the third order, and 21% in the fourth quarter. Next year, we have 21% in the first quarter and 19% in the second quarter. Again, more details can be found in the press release.

Under our accounting policies, our foreign currency hedges are designated for effective hedge accounting treatments and are recognized at fair value with changes running through the balance sheet. These mark-to-market changes are then reclassified to the P&L through the revenue line during the period that the related sales are recognized. Our fuel hedge positions are marked to fair value under our accounting policies and are not designated for hedge accounting.

So the mark-to-market changes are recognized on the P&L through non-operating expense. Continuing with cost, maintenance expense increased 26% year-over-year. The increase was lower than anticipated due to the timing of several maintenance checks with approximately $2 million rolling into the second quarter. Other than that, maintenance costs for the quarter reflected volume-related increases in line with our growth including power-by-the-hour costs and planned heavy maintenance checks.

D&A was flat year-over-year. The increases in additional owned aircraft and aircraft under capital leases in our fleet were offset by a decrease in expense related to an intangible asset that was fully amortized in the fourth quarter of 2012. Aircraft rent expense increased 12% year-over-year due to two new A330 aircraft leases since the first quarter of last year, one this quarter and one from the second quarter of 2012.

Below the operating line, we reported a non-operating expense of $15.5 million in the quarter compared to $1 million in the prior year period. The most significant difference year-over-year relates to unrealized losses on our future fuel hedge positions compared to unrealized gains from the prior-year period. We also had higher interest and debt amortization expense due to the additional A330 financings relative to a year ago. Our balance sheet remains strong in this period of growth.

We ended the quarter with $438 million in unrestricted cash and $5 million in restricted cash. Our revolving credit facility remained undrawn at the end of the quarter providing additional liquidity of $69 million which is net of letters of credit. CapEx in the quarter was $36 million, which included $27 million related to payments for upcoming aircraft and engine deliveries and $9 million related to aircraft purchases.

This amount is below what we anticipated in our last call, primarily due to the slip in the delivery of our 11th A330 from March to the beginning of April. Wrapping up the quarter, we contributed $3 million to our Other Postretirement plans and we expect to contribute a minimum of $12 million more to our plans during the remainder of the year. With that, I'll turn the call back over to Mark for further commentary on the business.

Thanks, Scott. Our first quarter results reflect the difficult environment we have been operating in. At the margin, there are some elements of execution where I think we should have done a better job. But even flawless execution wasn't going to overcome the headwinds of the double-digit capacity growth out of North America.

To be clear, this commentary doesn't apply to our Neighbor Island business where I think we did a good job of addressing a number of challenges from last year. Let me go into a bit more detail, starting with our North America routes which during the quarter accounted for 44% of our passenger revenue. As a result of the challenging competitive environment, our PRASM decline 6% on relatively flat load factor year-over-year. On the same-store comparison, PRASM would've declined 2%. Hawaiian has, we believe, the lowest unit cost of any carrier in this segment by [our legion.]

We have the best service and an excellent reputation for providing value-for-money transportation to the traveler. We also enjoy a strong competitive position in the largest routes between the US mainland and Hawaii. So our results are more reflective of environmental challenges than they are of any underlying weakness in our formula. We only have to look at the capacity numbers to see this. The year-over-year increases in capacity have been 13% for both the third and fourth quarters of 2012, and now 11% for the first quarter of this year.

Our contribution to the11% increase was 2 percentage points due entirely to the addition of our daily New York to Honolulu service. In the past few months, we have started to see the unraveling of some of these additions, with United, Alaska, and Allegiant all announcing reductions in their schedules. For our part, we have kept our flying between Hawaii and the US West Coast essentially steady for the past several years, growing the number of flights by just 2% per annum since the bottom of the market in 2009.

Our seat growth has been a bit higher as we substitute A330s for 767s and, of course, the new service to the East Coast drives a lot of [air sends] in our North America statistics. Looking ahead, our flights between Hawaii and the US West Coast are set to decline by 1% in the third quarter, and 2% to 3% in the fourth quarter. As a consequence of all these scheduled draw downs, the picture brightens ahead. Capacity for the second quarter, while still growing year-over-year, is nonetheless set to rise at a slower 5% rate.

The tide turns in the third quarter, with capacities declining by 2% before properly taking hold in the fourth quarter when published schedules show a 6% fall. Our commercial look for North America follows these capacity trends. Of course, we haven't just sat on our hands as the market conditions have changed. Our growing international network, with its slightly counts as seasonal demand pattern, has enabled us to draw down North America capacity during the weaker demand periods and redeploy assets overseas.

We have added seasonal flying to Australia and New Zealand in the spring and the fall. These increases were made possible by drawing down frequencies in San Jose, Las Vegas and New York during the weaker demand periods for these markets. Our international business represented 32% of our passenger revenue in the first quarter, up from 27% from the prior year period. Excess capacity and competitive pressures on a number of routes, as well as the continued devaluation of the yen weighed on our results.

PRASM declined 16.8% year-over-year for the quarter on a 6.1-percentage-point decline in load factor. Our capacity increased 59.7% which included new services launched since the first quarter of last year from Honolulu to Fukuoka, Sapporo, Brisbane and most recently, Auckland. In addition, we increased service to daily between Honolulu and Incheon.

The changing mix of international flying and the declining yen contributed 12 percentage points to the overall decline in PRASM. There are different dynamics at play within the international entities so I will go over the details by subregion. In Japan, our results obviously suffered from the weakening of the yen. If the exchange rates had been the same as it was in the first quarter of last year, our yen-denominated revenue would have been $5.5 million higher. As Scott mentioned earlier, we have a foreign currency hedging program in place to mitigate some of the volatility that we are seeing in our international sales.

Besides the currency headwinds, our Japan routes also saw substantial increases in capacity to which, of course, Hawaiian was a contributor. In addition to these macro factors, we don't think we have performed as well as we should have. Our sales presence is not fully matured in a market which only two-and-a-half years ago we didn't serve at all. The good news is that we believe we have the lowest unit costs of any of the operators in the Japan market, and consumer research suggests that we are getting good awareness of our brand and that our service is held in high regard by the Japanese traveler.

In June, we will add Sendai as our fifth destination in Japan. This service will be a triangle route with a nonstop leg from Honolulu to Sendai and a return via Sapporo. Sapporo and Sendai have offsetting seasonality, so while we are adding a new origin point, we are at the same time effectively derisking our existing Sapporo route. This is an example of our commitment to make necessary adjustments to deal with changing conditions in the operating environment.

Australia remains strong, with all of our adding capacity to Sydney, that is an increase in both frequency and gauge, having been absorbed by the market. Brisbane is only a few months old but is developing nicely. Auckland, New Zealand started in mid-March, so it's still very much in its infancy. As a group, we have been sufficiently encouraged to add seasonal capacity, which as I mentioned earlier, we have drawn down from North America operations.

Earlier this month we announced the cancellation of our service to Manila from August 1. We didn't see light at the end of that tunnel and so made a straightforward decision to stop flying there. As we continue to grow into this still relatively new part of the world for us, we expect that not every assumption will prove to be correct and that we will, on a market-by-market basis, have to learn the curiosities of competing effectively.

This is built into our expectations for the future and we will make adjustments along the way to make sure that over the long term, each part of our network continues to contribute to the whole of our financial performance. It's been a much better picture for our Neighbor Island business in the first quarter. This segment now represents 24% of our passenger revenue and we are pleased to say that this part of our business has turned the corner and is improving nicely.

PRASM increased 4.5% year-over-year on a 5.2-percentage-point increase in load factor. The first quarter results reflect the strong demand for local travel resulting in a better than expected load factor. Industry capacity in the first quarter decreased approximately 4%, of which our contribution was about 3 percentage points. The overall year-over-year industry capacity picture is expected to see a decrease of 1.5% in the second quarter and somewhere up in the low-single-digit range in the third and fourth quarters of 2013.

This was a challenging quarter with a number of items working against us in North America and in Japan. While we did well in our Neighbor Island business, I think there are things we could have done better both in North America and in our international network. Our strategy of diversifying away from a dominant reliance on the US West Coast by flying in markets most likely to generate growing demand for the Hawaii vacation is sound.

As market conditions improve in the second half of this year, and as we continue to apply the experience we have gained in new markets we look forward to our results improving. With that, let me turn the call back over to Scott to give us a window into the next quarter.

Thank you, Mark. Looking at the second quarter, our growth will continue and we expect capacity on an ASM basis to increase between 20% and 23% year-over-year. As we've discussed in the past, we are slated to add five A330s our fleet this year. One was delivered in the first quarter, two more came earlier this month, another is expected at the end of the second quarter, and the last is scheduled in the fourth quarter.

These additions are offset by retirements and lease returns of four 767s in 2013, one of which has already occurred this month. A second 767 will be retired in the third quarter and the final two will leave our fleet in the fourth quarter. Thus, for the full year, we will grow by only one net wide body with our ASMs expected to increase 13.5% to 16.5%. Many of the challenges we have faced in the first quarter will persist into the second quarter, although aided by a slower rate of year-over-year industry capacity growth on our North America routes that we have seen over the last three quarters.

Nonetheless, the revenue environment remains challenging. Load factor for the quarter is expected in the range of down 1.5 to 3.5 percentage points. Yield is expected to decrease 4% to 7%. Combining these numbers, we expect PRASM and RASM to be in the range of down 7% to 10% year-over-year. These ranges are sequentially better over the last two quarters.

Turning to costs, for the second quarter we expect CASM ex-fuel to range from down 4.5% to down 7.5% from the second quarter of last year. For the full year, we continue to expect CASM ex-fuel to be down in the low-single-digit range. In terms of financing, we feel very good about the options available to fund our growth. We have financing commitments for our second quarter delivery and we are working on plans to finance our final 2013 delivery and deliveries into 2014. In the second quarter, our CapEx should be in the $150 million to $160 million range with approximately 80% related to aircraft and aircraft-related items, with three A330s expected to be delivered during the quarter.

We continue to expect full-year CapEx to be within the $340 million to $350 million range. Reflective of our recent financings, we would expect interest expense to increase by about $1 million sequentially from the first quarter to the second quarter. The expected increase is due to debt financing for our A330s, one of the April deliveries, and the expected June delivery. Our full-year effective tax rate is expected to be in the 39% to 41% range and we do not expect to pay federal cash taxes until 2015 at the earliest.

Regarding fuel and sticking with our normal practice, we are not going to give guidance at this time. We expect our fuel consumption to be 17.5% to 20.5% higher year-over-year in the second quarter as a result of our capacity increase. With that said, we have reached the conclusion of our prepared remarks. I would like to thank all of you for being with us today and for your continued interest in Hawaiian Airlines. I will turn the call back over to the operator now to open the line for questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions) Our first question is coming form the line of Mr. John Godyn with Morgan Stanley. Your line is now open, you may proceed with your question.

Hey, thanks a lot for taking my questions here. I was hoping --

You're welcome.

I was hoping, Mark, that you could just sort of speak to some of these strange issues that other airlines have been speaking to in terms of demand, signs of economic sluggishness. I guess you did speak to the yen already, but sequestration, FAA furloughs, falling fuel weighing on revenue, kind of this longer list than usual of different things that are affecting the revenue environment.

Yes, candidly, we are not seeing any sort of systemic shortage of demand. We think demand is actually pretty healthy still out there in the marketplace. We do think that there has been tremendous increase in supply as some of our statistics from our prepared remarks demonstrate.

So I think we would characterize the current situation not being one of a fundamental demand weakness, but instead, being very much one of excess supply. Now, chicken and egg. Obviously, it is out there, but we're just -- we're not seeing anything that correlates with some of the comments that I too have heard from some of the other guys.

And then just in terms of sequestration, direct government impact, and then on a go-forward basis, FAA furloughs. Any comments worthwhile there?

Again, we don't actually carry -- government-related traffic is not a huge portion of our revenue base. Therefore, we haven't seen an enormous slowdown that we can attribute to the government sequestration. As to the FAA, we are a day into it. Yesterday passed without any particular impact. We wait to see what happens down the road.

Okay, that is helpful. And if I could just ask a cost question to close it out here, the guidance assumes that costs, CASM ex-fuel, reaccelerates towards the end of the year. I think that's sort of natural because of what is going on in some of the comps, but I want to make sure that that is a comps issue and nothing in the costs that we should be aware of driving that inflection in the core cost structure?

I think you have said it exactly accurately, I think it's a comp issue. There's no extraordinary item that we are anticipating for the fourth quarter.

Okay, and so bigger picture, we have been in a couple of years here where you're significant capacity growth appropriately is allowing you to manage cost down year-over-year. Big picture, as long as the capacity growth continues at an elevated rate as we look into 2014, that should be the framework that we should be thinking about as opposed to annualizing any fourth quarter CASM ex-fuel going forward or anything like that?

Yes, I think that's right. We've got a bunch of things going on. First of all, I think one of the things we are starting to signal is that we have gone for a period of tremendously rapid growth. Our rate of growth is still going to be, to use your word, elevated going forward. But it's going to be at a lower rate going forward than it has been in the immediate past.

I think what you are going to see out of us is consolidating our presence in some of the markets that we have recently inaugurated, both in my prepared remarks, I've given you quite a laundry list of things we've started in the last 12 months. We, clearly, have to develop some level of mastery of the environment that we are going into. So I think that's going to be a big agenda item.

Quite a bit, I think, of the extra capacity coming in is going to be focused on building frequency in some of these limited frequency routes. All of that should have some beneficial impact on our unit revenues going beyond 2013. Obviously, there comes a point where the comps get progressively more difficult. I think that is part of the picture that we're looking at as we get out of '13 and into '14. It will be a comp issue, but the fundamentals of growth driving -- helping on unit costs will, I think, remain. And then on top of that, we will have, continue to have, as we inaugurate new routes here and modify routes there, some mix issues to do with the stage length of the routes that we are adding and stage length of the routes that from time to time we will be cutting back.

Thank you. Our next question is coming form the line of Ms. Helane Becker with Cowen Securities. Your line is now open, you may proceed with your question.

Thanks very much, operator. Hi, everybody, thanks for the time. Just in terms of the interisland business, I think you started to say that you were seeing improvement and improved results. Maybe you could add a little bit of comments on how that is going compared to where you were, say, six months or a year or so ago?

Yes, thank you, Helane, for asking a question about the (inaudible) of our business that is doing well at the moment. It has really turned the corner. A year ago, about this time, we developed the Maui hub and we increased the amount of capacity we were flying between the islands in the state of Hawaii as well as increasing some services from the US mainland to Maui. As we discovered over these first six months of operating it, some of that capacity increase was warranted, particularly flying off the West Coast to Maui.

Some of those sectors did really quite well for us. Some of the interisland flying did much less well. We didn't fill airplanes to the extent that we had anticipated. So our task over the last six months has been to right size our Neighbor Island network while preserving the very beneficial impacts that we have seen from the Maui hub.

And I think in the first quarter of this year, we have achieved that. And that has come through steadily higher load factors, and we have moved our capacity to where we see demand and we have trimmed our capacity at times of day and on certain routes where we have been carrying too low passenger loads to justify the flight.

Okay. So would you say now that you have right sized it enough so that it is going forward it is stable? Is that how I should think about it?

Yes, subject to the year-on-year comp issues. You heard me say that we're going to be reducing capacity in the second, third and fourth quarters on Neighbor Island flying. And I think that is -- represents steady state now being a year-over-year lower level of capacity than we saw for the second, third and fourth quarters of 2012.

Of last year. Okay, got you. So I understand that, thank you. And then, my other question is really -- and I think you mostly answered it in some of your prior remarks -- but you are seeing increased capacity in markets where you were the only airline.

And that is specifically some of your international flying, where used to be Hawaiian Airlines was the only airline going from Honolulu to Manila. That was a major route. And now you're leaving that route because I guess it is just not meeting your expectations. But is there -- is this a function of the success you are experiencing in the markets? And why other airlines are going into those markets?

Or is it just that the increase in the number of people who are able to travel is increasing, and so, therefore, Hawaii becomes a realistic goal for them? How should we think about that and does it make sense to slow the growth even more or more rapidly than 20% to 23% that we are going to see for at least the next quarter or two?

First of all, if I could correct something, Helane. You mentioned Manila, for example. We weren't the first carrier in that market. Philippine Airlines is in that market, it has been. They have actually, I believe they have actually reduced capacity over the period since we have been in there.

And indeed, I am unaware of any market -- I'm trying to think here -- I don't think there's been a single international market where we have been the only carrier starting in the route and had another carrier subsequently join in. I think the premise of your question isn't actually accurate. But on to the broader question about are we being chased essentially from any of these markets?

I think when we look at Manila, Manila was an interesting situation and each market is different, but in the Manila situation, we have a competitor who has persisted in pricing their product at a rate which cannot possibly be compensatory to them, and for sure isn't to us. They've gone through an ownership change. We would certainly hope that there would be a change in -- to a more rational approach to the marketplace. There wasn't, and we decided to stop beating our head against the wall and withdraw from that marketplace.

In that marketplace, as indeed in every marketplace that we fly internationally, I think we enjoy a mixture of a product and cost advantage, which means that in a compensatory pricing environment, we ought to be happy, our competitors may be happy or may be unhappy. But we don't believe there is a single market that we can see where our competitor can be happy at the ambient level of pricing and we are unhappy.

Thank you. Our next question is coming from the line of Hunter Keay with Wolfe Trahan. Your line is now open, you may proceed with your question.

Hi, everyone.

Hi, Hunter.

So question, is there a point where the valuation of your stock gets depressed relative to that it appears the point actually makes sense to put some of the growth, bigger picture growth on pause and maybe start buying back some of your stock? I realize that you are running the business for the long run, I fully appreciate that, but as you think about the CapEx and you look at the implied free cash flow in the next couple of years it's going to be pretty difficult to really generate some good financial returns.

Are there any covenants that preclude you from doing something like that first and foremost? And second of all, what would get you to that point where you really start to evaluate whether or not the growth is worth it?

Let me take this in reverse order. I think we are constantly assessing whether we think the growth is worth it. And as you see with the cancellation of Manila, that will have the effect of reducing our overall rate of growth in the next period. I think at the same time, we are looking at our fleet, we are looking at delivery dates, we're looking at when seat checks take place and so forth, determining whether we've got things dialed in just right for the market conditions.

I would say that we are going to be making decisions about things like long-term capacity growth around such issues as six months where we have seen a double-digit increase in West Coast to Hawaii flying, which, again, we have already started to see based on competitor actions, it is just not sustainable. We are not going to keep chasing short-term issues. As to whether if we slow the rate of growth, we would consider a stock buyback.

Clearly, I can't answer that directly on the telephone. I can tell you we are always mindful of looking for ways to improve the long-term value to shareholders. That is one tool in the tool chest, and we do have the ability to -- we don't have any covenants at the Hawaiian Holdings level that would prevent us from doing that.

Okay. Thanks, Mark. And, Scott, what do you guys spent annually on fuel hedge premium costs and how much time of your day, or week, or month, is spent making fuel hedging related decisions?

Last year, we spent about $7 million after-tax on premiums. This year it should be similar on a growth adjusted basis. In terms of time, we have a couple of people putting just a portion of their day into that. Enough to be sure we understand the market and that we are executing. Our program is, as you know, is fairly simplistic and we stick to our practice of dollar cost averaging in and using instruments that are plain vanilla for the most part. So it is not a big drag on our internal resources.

Thank you. (Operator Instructions) Our next question is coming from the line of Mr. Mike Linenberg with Deutsche Bank. Your line is now open, you may proceed with your question.

Okay, great. Just a couple questions. I guess, Mark or Scott, this just goes to the guidance. You talked about RASM being down 7% to 10% in the June quarter and CASM ex-fuel down 4.5% to 7.5%. We're obviously going to make our own call on where we think fuel prices are, but when you plug that in, it's possible, and maybe this is the more aggressive side of the range, but it's possible that your margins are somewhat flattish year-over-year, maybe even up on the more aggressive end of the range.

When I look at your March quarter, your margins year-over-year were down a lot, I want to say 5 percentage points, 5.5 percentage points or so. Mark, you did mention that in the March quarter there were a few things that maybe you didn't do as well. I get the sense that there were better ways to deal with some of the more challenging issues that you faced in the quarter. Maybe you can talk about what some of those are and maybe how you are addressing them in the second quarter, because from the guidance it does seem like that we can get back on track and get back to a point where margins are somewhat flattish year-over-year, which would be a good June quarter performance. Your thoughts on that?

Yes, absolutely. First of all, in terms of the areas where I think we could've done a better job, we did introduce a lot of new services in the last 12 months in several different countries. Each country has its own distribution eccentricities. And I think that in hindsight, we were slow to appreciate how things were changing in each of the marketplaces and react to them.

Some of that comes from just not knowing the markets as well, some of it goes from the level -- just the level -- number of things we had going on in our Company in the last 12 months, both of which I expect to get better over time, and both of which have got a lot of our attention at the moment. As to where do we think -- can we paint a rosy picture? The answer to that is we can for the second quarter. The bit that is sort of difficult to judge is that we have had this dramatic increase in capacity, particularly from the West Coast to Hawaii.

We know that during the summer seasons, the peak seasons, that that capacity can be absorbed. Perhaps not at the same yield as we would all like to see in a strong seasonal environment, but nonetheless, the seats can get filled at fares that make sense for the business. What has happened over the last six months is that we have discovered -- everybody has discovered that in the weak months there just simply aren't enough passengers out there who can be induced to fly to Hawaii when you've got that much capacity during the weak period.

What we've got in the second quarter, of course, is largely a weak-ish period of the year trending into a solid piece of the year. And the real question, I think, whether or not the second quarter ends up being at or above the margins that we saw last year will really depend on the last month of that quarter and how well we can transition into the seasonally strong environment. Of course, that is the month of the quarter that we have the least good visibility into as I'm speaking to you at the moment.

Okay, great. And then, just my second question, the hedge for the Japanese yen will certainly help with respect to the translation. But other carriers like yourselves, with the weak yen, there is a demand effect and when you look at your market composition, a large portion, a very high portion is discretionary.

What are you seeing with respect to bookings from Japan for Hawaii out over the next few months? With the backdrop that for a Japanese leisure passenger the trip to Hawaii may now be 20% more expensive and yet the beaches of Okinawa are still attractive. And maybe it is a market-by-market differential. And maybe you are not seeing as much of an impact now because I do know that a lot of these vacations do get booked up sometime in advance. I realize there is a lot of different moving pieces here, but we're trying to understand the demand effect of the weak yen on the Japanese leisure passenger in what you are saying?

Okay. Well, again, this period has got a couple of elements to it. First of all, up until the third, fourth week of May is the slowest period annually for Japanese demand for this sort of travel. It is the period leading up to Golden Week which is a massive public holiday for the Japanese. And so demand is low and we expect it to be low and we're not seeing anything to surprise us there.

The Golden Week period, which is a week, but it stretches out 10 days, two weeks, what is a peak week we think things look fine for that. The indications we're getting are that, actually the summer doesn't look bad to us at the moment. I've got to overlay that with the fact that there are still market-by-market and market sort of specific issues. We've got -- I will give you an example. We've got a new entrant flying Narita to Honolulu which is in probably in Korean Airlines.

They have very substantially reduced fares to induce people to travel out of Narita. We fly out of Haneda, so we are enjoying, we enjoy a fare premium, but that's not to say that there is no elasticity at all between what happens in Narita and what happens to Haneda. So we've got some sort of market specific issues that we're dealing with like that one I just mentioned to you.

We've got our eyes out to see if demand is sequentially going down. This summer will really tell. I think right now we're really not in a position to tell a great deal. And just by the way, Japanese travelers by domestic law have the ability to cancel flights up to 28 days before departure. So forward bookings are a less good guide to future performance in Japan than they are, for example, in the United States where, as we know, that doesn't happen.

Thank you. Our next question is coming from the line of Mr. Glenn Engel of Bank of America. Your line is now open, you may proceed with your question.

Thanks, a couple questions. One is, if you are going to start seeing the yen impact Japanese travel to Hawaii, and if less capacity between Hawaii and North America is good for that market, but also means less local Hawaiian customers, could we start seeing some pressure on the interisland routes as the supply from outside of Hawaii starts to flatten out?

Glenn, I think we can. That's one of the things we look at all the time and that this one of the things that informs us as to how many seats we provide flying between the islands of the state of Hawaii. We mentioned we've got some reductions in seat capacity planned. So I think those things can indeed drive a reduction in Neighbor Island flying.

And in your Japanese flying, where are we in terms of getting the slots that you need, in terms of attractive slots that you need to maximize your revenues?

The only place where we have a slight constraint is in Haneda, and we have the slots that we want in Haneda. We've got the desirable slots for our schedule.

Thank you. Our next question is coming from the line of Mr. Bob McAdoo with Imperial Capital. Your line is now open, you may proceed with your question.

I want to talk a little bit about the A321s. Can you tell us what the range of that airplane is likely to be? And given the fact that you've got a bunch of the A330s going into the West Coast, I assume you've got reasonably long ownership obligations there. Where do you put 16 airplanes without it getting to be a problem?

The A321s have the range to fly between the US West Coast and the islands of Hawaii. During the period of times that they would come in, we're going to be seeing a retirement cycle for the remaining 767s. We will -- so from the point of time when the last A330 arrives to -- at that point, we will have six 767s left in the fleet. The 321s over time will naturally replace those six 767s and being a smaller aircraft, just on a capacity perspective, you need about nine of them just to replace the existing flying from the 767s.

Also, the A321s will have a better seat mile cost profile than any other aircraft of that type flying in the marketplace. It's a bigger airplane than the other narrow bodies, and, therefore, the cost per seat mile is lower. And as we look around, we can see some other opportunities which over time we think we will enjoy a competitive advantage over. I would say that our long-term growth profile, so if you look at all of the puts and the takes of our 330s, those that remain to come in, 767s leaving, 321s coming in, 350s, it averages out about 4%, 4.5% per year over the long term.

And we have built in to our fleet plan the ability, with some notice, can't change [total] capacity trajectory overnight. But with some lags, we have tremendous flexibility to flex either up or down that rate of growth.

So then when do the A350s come in relative to the A321s?

Contractually, 2017. You may want to ask Airbus.

You mean whether they are going to have the plane built by then you mean?

Yes, that would be a question you could ask them.

Okay. So the point of it is you are going to need some more -- you still got six or seven of these airplanes that are going to be new capabilities or new places you've got to find, or more capacity in existing markets, or something is what it sounds like, is that right?

Yes, but we've also got the opportunity, again, because our last 330 delivers in '15. So we've got the opportunity to put -- so some markets grow, for example. 350 in our configuration has 294 seats in it. The A321 in our configuration will have about 190 seats in it. So there are going to be some markets where we want to operate two 321s and withdraw a wide body from that market in order to apply that wide body to a growth market, for example, in Asia.

Thank you. Our next question is coming from the line of Mr. Steve O'Hara with Sidoti & Company. Your line is now open, you may proceed with your question

Hi, good afternoon.

Hi, Steve.

Quickly, can you, in terms of your -- the middle route. Can you just talk about how long you think that has been an under performing and then in general, to think you react faster to that under performance or slower than other airlines maybe? And is that based on a smaller route structure than, say, a Delta or US Airways?

Well, Manila has had, over the four years it has been with us, some tremendous ups and downs. And looking in hindsight, I think when we saw the ups, we had reason to believe that was on a trajectory toward sustainability only to shortly discover that we, again, faced pricing actions from a competitor that just destroyed the positive momentum. So, clearly, in hindsight, it was a route that I don't think we would've operated as long as we did had we known then what we subsequently came to learn.

As to whether we think we will make decisions as quickly or more slowly than some of our competitors, I think it's going to be about the same. We're looking at the same numbers, we're looking at the same results as our competitors do, and I see no reason why we are not making fundamentally the same sorts of decisions that they are. I would point some things out, though.

So for example, if you look at some markets overseas, you commit through a contract with intermediaries, the big travel agencies that control most of the [letter] traffic in these markets. You commit often six, eight months in advance to a program of flying. You are then truly committed.

There's not much you can do inside that period of time. So with that -- but, frankly, that is the same condition that applies to other airlines flying in the same market under the same conditions. So I don't think we're any, systemically any faster or slower about making decisions to come in or out of markets.

Okay, so I guess maybe the international exposure can maybe limit your ability to make the right decisions from time to time?

Yes, I think it slows it, and curiously enough, sometimes it slows it in a beneficial way. We've certainly had some routes in the past that have had -- gone through some pretty torrid times, where we have looked at the results and we have been thinking that it is -- that if things don't improve, it may not be worth keeping, only to find that we were pleased not to be too quick on the trigger. Because we couldn't be simply because of the nature of the market.

Thank you. At this time, there are no further questions in the queue. I would like to turn the floor back over to management for any closing comments.

Okay, thank you. One of the themes from some of the questions we got, a couple of the themes that I might just address is, one, are we seeing any sort of systemic reduction in demand either from North America or from, in particular Japan because of the yen impacts, and the answer to that is no we are not. I think we've got some supply issues in terms of North America and we've clearly got a yen exchange rate issue in Japan, and I think at the margins and some excess capacity in that market, as well.

We will -- certainly are on the lookout to see if there is any fundamental weakness in demand or not, but as yet, we have not seen any indications of that. Nonetheless, it's been an extremely tough quarter in a tough environment but we are heartened to see the conditions gradually improving. We're looking for to the rest of the year when these conditions do actually improve, and when we've got the opportunity to put some of the things that we have learned over this very difficult six or eight months into practice. And with that, thank you very much for joining us on today's call, and we look for to seeing you in the period of time between now and our next quarterly results.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation, and have a wonderful afternoon.