Hawaiian Holdings Inc (HA) 2013 Q2 法說會逐字稿

Greetings and welcome to the Hawaiian Holdings second 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.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ashlee Kishimoto, Director of Investor Relations for Hawaiian Holdings. Thank you Miss Kishimoto, you may begin.

Welcome everyone, and thank you for joining us today to discuss Hawaiian Holdings' second quarter 2013 financial results. On the call with me today are Mark Dunkerley, President and Chief Executive Officer, and Scott Topping, Chief Financial Officer. We also have Peter Ingram, our Chief Commercial Officer in the room for the question-and-answer session.

To get in as many questions as possible during the Q&A, please limit yourself to one question and a brief follow-up. By now, everyone should have access to the press release, which went out at 4.00 Eastern time today. If you have not received the release, it is available on the investor relations page of our website, www.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'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, 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.

With that, I would like to turn the call over to Mark.

Thanks, Ashlee. Thank you for joining us on the call today.

As I hope, you have seen the results we issued earlier today. I say hope because we understand there is some faculty with PR Newswire getting the results out on time. They were posted with the SEC and of course on our website. We understand they are now out and about, getting the thumbs-up from PR Newswire that they went out.

For the second quarter, we recorded adjusted net income of $0.24 per share. The overall results for the quarter were better than expected as a consequence of our operating costs having been lower than anticipated. Meanwhile, we met our revenue expectations.

It was a good quarter during which we continued to implement our strategy -- growing into new markets to diversify and strengthen our franchise. With so much going on in our business, you will not be surprised to hear that there have been a number of cross-currents pushing and pulling our results in different directions, which we are going to endeavor to explain during this call.

Before we get into the numbers, let me highlight some of the significant developments in our business since our last earnings call. We secured funding for our next six A330 aircraft which deliver through the end of 2014 at very favorable interest rates under $445 million EETC financing. This was the first time we have used EETC.

In June, we launched three times weekly service to Sendai, which is our fifth destination in Japan. Just two weeks ago, we launched three times weekly service to Taipei in Taiwan. With the launch of service to Taiwan, we also announced new codeshare and interline arrangements with China Airlines.

China Airlines' complementary route network gives us the opportunity to sell Hawaii as a destination in all of the significant Asian countries on a one-stop basis. This represents a substantial enlargement of a catchment area for our services.

In May, we also implemented a major change to our revenue management system. That this is the first time you are hearing of it is an accomplishment in and of itself since these sorts of major systems cutovers can badly disrupt operations if they go wrong. This cutover went almost without a hitch. The new revenue management system gives us increased flexibility in allocating inventory across different booking classes which in turn should enable us to increase PRASM at the margins. Since all of these systems using prior booking history with which to make forward projections, it will take time for the benefits to be realized.

With that introduction, let me turn the call back over to Scott to review the results in more detail.

Thank you, Mark. As mentioned earlier, for the second quarter, the Company recorded adjusted net income of $12.6 million or $0.24 per share. This compares with adjusted net income of $11.7 million or $0.22 for the same period last year.

Our return on invested capital for the trailing 12 months was 12.3% pre-tax and 7.4% on an after-tax basis. Operating revenue for the second quarter was $534 million, a 10.2% increase year-over-year while passenger revenue increased 9.9%. Load factor for the quarter decreased 3.1 percentage points to 80.9%, while yield decreased 5.6%. Combined, this produced decreases in RASM and PRASM of 8.9% and 9.2% respectively.

Similar to last quarter, please note that there are substantial impacts on our unit revenues from the changing mix of international flying and currency headwinds. Looking at the same-store comparison and assuming that in the second quarter, we flew the same routes we had in the second quarter of last year, mix reduced PRASM by about 5.5 percentage points. Currency headwinds contributed another 2.5 percentage points to the decline. Looking at this on a same-store basis and removing the effect of exchange rates, our overall PRASM would've been down just 1%.

As you all know, about 30% of our passenger revenue relates to international services. To further break this down, about half of our international sales are in yen, a third in the Australian dollar, 10% in the Korean won with the balance coming from various other currencies.

To update you on our foreign exchange hedging activities, in addition to the yen and Australian dollar, we've added hedges for the Korean won and the New Zealand dollar. Details on announced hedge in pricing can be found in the press release.

Turning to expenses, aircraft fuel cost increased $18.8 million or 12.5% driven by increased consumption. Here are the year-over-year comparisons.

We consumed 57 million gallons of jet fuel, up 19.6%. Our GAAP fuel cost was $2.99 per gallon compared to $3.18. Our economic fuel cost was $3.07 as compared to $3.22 last year. Our fuel hedging program remains consistent with our usual practices. Again, more details can be found in the press release.

Excluding aircraft fuel, our operating expenses were better than expected with CASM ex-fuel decreasing 11.2% year-over-year. The larger variances were primarily on the maintenance line, other expenses, and commissions and other selling expenses. About $4 million is due to the timing of certain maintenance events and other project-related costs, the majority of which are expected to roll into the third quarter.

The balance reflects reduce costs for sales-driven expenses due to a lower than expected load factor on our international routes, several maintenance items and a number of miscellaneous adjustments. All of these items should be viewed as permanent reductions for the current quarter.

Depreciation and amortization went down year-over-year. The increases in additional owned aircraft and aircraft under capital leases in our fleet were more than completely offset by a decrease in amortization expense related to an intangible asset that was fully amortized in the fourth quarter of last year.

During the quarter, we took delivery of three A330s and returned one Boeing 767 at the end of its lease term. Two A330s were financed through bank debt, and the other was financed through a sale leaseback transaction that is accounted for as an operating lease.

Below the operating line, recorded non-operating expense of $19.2 million in the quarter compared to $23 million in the prior-year period. The most significant difference year-over-year relates to lower unrealized losses on our fuel hedge positions compared to last year. This was partially offset by higher interest and debt amortization expense due to the additional A330 financings relative to year ago.

Let me also take a moment to discuss our recent $445 million EETC financing that presigns our next six A330 deliveries. This transaction will provide financing for all of our plane deliveries through the end of 2014. Under our Airbus agreement, our next unfunded A330 is not scheduled until the first quarter of 2015.

As a result of strong investor demand and fortuitous timing, we were able to lock in a low fixed interest rate with a Class A coupon at 3.9%, and a Class B at 4.95% for a weighted-average of 4.13%. We are very pleased with this result as the EETC opens a new source of capital and further diversifies our funding base.

To facilitate the transaction, we established our corporate ratings with all three rating agencies. Our ratings are B3 with Moody's and single B with S&P and Fitch. The ratings and the successful bond offering are important steps in our evolution as a global carrier.

Our balance sheet remains strong in this period of growth. We ended the quarter with $478 million in unrestricted cash and $21 million in restricted cash. The increases in restricted cash is due to deposits related to future interest payments for the EETC.

I should mention here that the six pre-funded deliveries under the EETC will require a substantial contribution of equity. Because we have historically used a mix of debt and lease financing, the equity funding of these assets for the EETC will increase at a rate -- will increase the rate of investment in the business. Anticipating this, we have earmarked $130 million in cash to fund the deliveries over the 12 months beginning this November and ending with the sixth A330 to be delivered in October of next year. This will lower our cash to revenue metrics, all else being equal. We expect liquidity to remain at a comfortable level.

Our revolving credit facility remains undrawn at the end of the quarter, providing additional liquidity of $70 million, which is net of letters of credit. CapEx in the quarter was what we anticipated at $153 million. This included $142 million of payments for aircraft and aircraft-related items.

Wrapping up the second quarter, we contributed $4 million to our pension plans, and we expect to contribute a minimum of $8 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. During the quarter, we experienced a range of influences, some positive and some not so, which are obscured in our summary statement, but the revenues came in as expected. Broadly speaking, our Neighbor Island business continues to perform well, and our North America business is on an improving trend as capacity headwinds are waning. Internationally, factors affecting route performance are too diverse to allow a simple broad characterization. They sum to largely understandable but, nonetheless, disappointing results.

Let me address each of the market geographies individually. Our North America routes accounted for 47% of our passenger revenue. In this segment, PRASM declined 2.1% on a flat load factor.

This is a creditable result in the context of our having faced a 5% increase in overall industry capacity. The level of industry capacity growth matters a great deal in this part of the business. Last year's fourth quarter saw industry capacity growing 13% while we saw our unit revenues decline by 10% as a consequence. In the first quarter, these numbers were 11% and 6%.

So, a 2.1% decline in unit revenue in the face of a 5% industry capacity growth is a good result. I can also report that our North America PRASM continued to strengthen throughout the period to finish with a year-over-year PRASM increase of 2.7% in June.

We are looking forward to the coming quarters when industry capacity is set to decline by 1% in the third quarter and 5% in the fourth quarter. Some speculative capacity that came into the market in the last year is being withdrawn.

Bookings for the third quarter have been strong to date, with relatively minimal need for us to discount from our structured fares. We are on track to registers strong year-over-year revenue performance in this geography for the back half of the year.

The North America therefore has been a 12-month period where we have seen extraordinary capacity additions from competitors. Through the struggle that has ensued, we have demonstrated the superiority of our product, the competitiveness of our cost base, and the value of having a better understanding of the market.

Neighbor Island routes account for 23% of our passenger revenue in the second quarter, and we saw much improved results in this area of our business. We did a good job of tailoring capacity by market and by date to the demand for travel. As a consequence, PRASM increased 10.4% on a 4.9 percentage point increase in load factor.

Supply and demand are now in good balance. Load travel is healthy, and the Neighbor Island routes remain an important aspect of our business.

Let me move on to our international routes, which accounted for 30% of our revenues in the second quarter. The big developments in this part of our business have been the strengthening of the US dollar against most of the foreign currencies in which we trade, some market-specific industry capacity pressures, and the natural process of new routes maturing over time. These big three impacts mean that the 20.1% year-over-year decline in international PRASM, which mirrored our expectations at the beginning of the quarter, needs some closer analysis. I'm going to go market-by-market.

Japan is the largest of our country markets, making up roughly half of our international revenues. Japan has been, and we are confident will continue to be a great success for our business. We are firmly established in the market and have built our reputation and our brand more quickly than others might have expected was possible. We believe we have the best cost structure of any competitor in the market.

The yen has naturally weakened our US dollar denominated revenue. But absent this important effect, which amounted for $12 million in the quarter, Japan's overall contribution to our results remained constant year-over-year. This is despite our having started flights to three new cities since the beginning of last year's second quarter.

Perhaps anticipating a question, let me say we never build our Japanese business on the expectation of 80JPY to the dollar. It was nice while it lasted, but the change hasn't shaken our underlying contentment with having made Japan, which remains a Hawaii's single largest source of international visitors, an integral part of our business. It is also the case that despite the weakening yen, we have not seen any market impact that looks or feels like a softening of demand for the Hawaii vacation.

Sydney was a different story. Over the past three years, Hawaiian and the other market participants have been throwing 20% plus capacity increases at the route which, until this last quarter, had been easily absorbed by the burgeoning demand. We all discovered that the 19% year-over-year industry capacity increase in the second quarter was a bridge too far. The long booking curve for Australia and frankly our being a little slow to sense the moment when the capacity would not be absorbed by the market, combined to undermine our results for this route.

Repairs have been underway for some time, and we anticipate good Australian dollar denominated revenues for this route in the third quarter. It will be offset by the growing impact to the strengthening US currency to leave us still better off than we managed in the second quarter. I am pleased to say that Brisbane is maturing faster than our expectations. Our service to Auckland launched in March is on track.

In Korea, demand is building, but not as fast as we would like to see. Capacity year over year is up 21%, to which we contributed to a third as both Hawaiian and one of our competitors established daily operations last year in this growing market. The excess capacity is beginning to be absorbed, but not as fast as we would like. We continue to look for improvements in this market. The US dollar was close to flat against the won, so there wasn't much exchange effect on these results.

With our new service to Taiwan just inaugurated, we have reached a hiatus in new international route launches. Our international flights have grown fivefold since 2010, and over the past nine months, we have launched flights to five new cities. This has been according to our plans as is now the pause of nine months without a new city coming online until Beijing starts in April of next year. Our near-term agenda in our international segment is to mature this clutch of new routes, a process for which we have always planned.

In the next 12 months, we will take delivery of five new A330-200s and see four Boeing 767s leave our schedule, which substantially slows our rate of growth. Looking ahead in our international business, the strengthening of the US dollar will take a bite out of the progress we will make on other fronts, namely the maturing of the recently launched services and the rebalancing of market-specific over-capacity.

With that canter through the geography of the Pacific, let me turn the call back over to Scott to give us a window into the upcoming quarter.

Thank you, Mark. Looking at the third quarter as Mark mentioned, our growth will slow, and we expect capacity on ASM basis to increase between 7.5% and 10.5% year-over-year. As we have previously discussed, the slowing growth in the second half of the year is due to the delivery schedule of our A330s that was front-loaded in the first half of both 2012 and 2013. By the end of this year, we will have grown by one net wide body aircraft for the year. In the back half of the year, we will be adding one A330 while returning and retiring three 767s.

Load factor for the quarter is expected in the range of up 1 to up 3 percentage points. Yield is expected to be down 2.5% to up 0.5%. Combining these numbers, we expect PRASM and RASM to be in the range of down 0.5% to up 2.5% year-over-year.

Turning to costs for the third quarter, we expect CASM ex-fuel to range from up 2.5% to up 5.5% year-over-year. This is somewhat elevated due to some unevenness quarter-over-quarter. In last year's third quarter, we had large favorable items on the maintenance and the compensation lines totaling $7 million. This tough year-over-year comp, combined with costs rolling from the second quarter to the third quarter, inflated our CASM ex-fuel guidance by about 3.5 points.

For the full-year, our ASMs are expected to increase 12.5% to 15.5% year-over-year. This is a slight decrease from the prior guidance we provided due to scheduling changes. Also, for the full-year, we continue to expect CASM ex-fuel to be down in the low-single-digit range.

In the third quarter, our CapEx should decrease to the $55 million to $65 million range as we take a break from aircraft deliveries. Our full-year CapEx is expected to be within the $355 million to $365 million range.

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, sticking with our normal practice, we are not going to give guidance at this time, but we expect our fuel consumption to be up 7% to 10% in the third quarter as a result to capacity increases.

With that said, we have reached the completion 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 to the operator now to open the lines for questions.

(Operator Instructions)

Mike Linenberg, Deutsche Bank.

Hey, Mark. Couple questions here.

I want to go back when you mentioned about the demand to and from Japan. Despite the weakness in the yen, you said there was no indication of any sort of demand softness. As the currency has weakened against the dollar in effect, a lot of those tickets are priced in Japanese yen, how does that fare change?

Do you end up getting lower revenue over time? Or rather quickly, does it adjust with the exchange rate such that you price it in a higher yen total? How quickly can that be made up?

Well, a couple of questions in there. Good ones. Let me parse them out a little bit.

The impact of exchange on us varies according to the booking curve market-by-market. Japan -- it actually books early, but it tickets very late because as I think we have explained on this call before, there is some domestic law that allows customers to wait until 28 days before departure before they book -- before they actually part with their money, rather. So it is relatively immediate that we see changes to exchange rate reflected on our dollar numbers.

Contrast that with Australia where one of the things I think we would signal to you is that we have had a fairly big move in the Australian exchange rates. We haven't thought much of it at this point because in Australia, people ticket when they book. There is a quarter and longer lag to the impact of exchange.

The actual local currency denominated pricing has much more to do with the competitive dynamic than it has to do with any -- there is no surcharge -- currency surcharge or what have you. We price in the local currencies, and when the currency moves against us, it affects our revenues, it affects our costs. We have a natural desire to see pricing firm in this case. We can only do so to the extent that the competitive dynamic allows us to do so.

Good. Thank you for that.

My second question, I want to touch on the inter-island market. Sort of two parts. One, how has the turboprop operation, how has that been ramping up? Is it on plan? How do you see that business growing, number one?

Number two, typically, if another player comes into the inter-island market, we normally don't pay too much attention given the fact you have sizable presence. But when the person who buys that airline also buys an island, I always get a little concerned you may be going up against potentially an irrational competitor. I am curious about how the competition has changed possibly since that carrier was acquired by someone else?

Okay. To answer the first of your questions, Ohana is badly behind at this stage to do with the fact that the FAA has told us they are not prepared to resource the certificate activity necessary for us to move forward. It is a pretty hopeless situation.

Okay.

Beyond that, we don't know when it is going to break. It is clearly unsatisfactory.

Okay.

As to what the new owner of Island Air will do, that obviously remains to be seen. One of the things that certainly has changed over the past several years is that while we always felt in years gone by that we had the better competitive situation in a pretty fragmented market, our competitive situation, I think has improved over the last several years. We like our blend of service and costs.

In an environment where people are interested in participating in a market and they have costs and revenues of their own, we are not worried about anybody being able to make money and have us lose money. We think we are in pretty good shape.

Okay. Great. Thank you.

Thanks.

John Godyn, Morgan Stanley.

Thanks a lot for taking my question. Mark, you gave a lot of good color by region on PRASM trends and demand trends.

I was hoping that we could get a little bit of color of what is in the PRASM guidance by regions. I guess what I am really getting at is North America versus international and perhaps any color that you have on what you are baking in for FX impact? So we know how to adjust our numbers and think about how things are trending from here.

Okay. Let me start out and I'll pass it over to Peter, whom you all know to answer a little bit more specifically on this. We do -- candidly, we are a small company, and for competitive reasons, we do keep some level of this competitive information to ourselves. With that understood, let me hand it over to Peter to provide a little more color on what we expect for the third quarter.

Hey, John. I think the way I would characterize it is, I think if you look at -- we don't guide by geography, but generally speaking, what I would say is Neighbor Island, I think we are seeing a continuation of the improving trends. A lot of the actions we put into the market late last year and early this year with adjusting the schedule by day of week and some of the timing of flights, we think those trends are going to continue to accrue some good results in the Neighbor Island.

North America, I would expect the trends we have seen of improvement over the last couple of quarters as the capacity growth is changing to continue into the third quarter as we actually get into a favorable capacity environment on a year-over-year basis. As we look into the booking curve there, we're already the better part of a month into the quarter, we see a positive trend in the North America numbers.

As Mark said when he went through the results on the international, it is a bit more of a mixed bag of developing routes. The currency effects that are on the negative side, although some of those developing routes, we are now starting to lap the calendar, and you are getting into a bit of a different comp environment there. Where we are looking to go with that part of the business is getting into a mode of really with the hiatus and some of our new routes start-ups, being able to mature some of those developing routes, being able to manage the capacity environment, and currency will remain a bit of a wild card.

I can't predict exactly where that will go. As Mark said, there are some lag effects in how that will affect us.

I would summarize by saying pretty much in every geography -- in every country geography to include the domestic, we will see in local currency improvements. The real question is, how much of it is going to be taken away by some of the currency effects we have mentioned?

And the mix effects below --

And mix as well.

Great. And I know there are a lot of moving parts that have sort of complicated the modeling. But I think one of the overhangs in the stock over the last year has just been that we have been a year-over-year margin decline kind of environment. If I am interpreting what I'm hearing correctly, a lot of inflecting trends, it sounds like we might soon be in a margin expansion kind of environment.

Of course, ignoring any macro shocks or huge moves in FX, is that the way you guys are thinking about sort of the end of this year and maybe 2014? Is that the right general framework?

I would say absolutely very strongly that -- setting FX aside for one second, and obviously fuel, which will move in whatever way fuel lose. Setting those aside, I think all of our sort of core indicators are moving very strongly in a positive directions. Certainly in local currency terms, they're moving in a positive direction.

The question for us is how some of these big things are going to either help us, we hope, or unstitch some of the positive moves we have made. In kind of route by route, local currency terms, everything is on a very, very much improving trend looking at the back half of this year early into next year.

That is really helpful. One last question, a bit of a random question.

Over the last few months, I've noticed a lot of news releases with different employees being hired or, I guess promoted in some cases into different roles. We saw a director in Japan get hired. Just anecdotally, more than I remember in the past, certainly no sea level changes, but is this just a time of year for that? Or is there some broader changes going on that you can shed some light on? Thanks a lot.

It is a coincidence of when we brought people on board. I don't think -- there is no sort of great managerial reorganization that we have had or anything like that. Clearly, as we've grown, as our businesses become more complex, as we participate in more geographies, it is important for us to get some additional expertise and heads to help us manage this.

That is part of the natural process. We are moving on down that road.

Thanks a lot, guys.

Hunter Keay, Wolfe Research.

I looked over your balance sheet right now, and over the last couple years, two and a half years specifically, your debt has tripled. Your shareholder equity is down and your stock price is down. Looking at the order book right now over the next few years, and there is a lot of debt coming. I guess the real question here is, how do we make sure the next two and a half years are not a repeat of the prior two and a half years?

From a management perspective, it is important we deploy these assets in a way that is sensible, is building the strength of our franchise, is improving our sort of core strength as a business, and we do so profitably. Your implied frustration is our actual frustration in terms of the way the share prices move. At the end of the day, we believe that if we continue to pursue sensible growth, diversifying our business and making us more secure as a franchise, the equity markets will take note.

It is really not for us to be able to determine exactly how the equity markets will move. We try and be very transparent about what we are doing. A number of you guys have written about the kind of long-term sense of what we are doing. Clearly, as a management team, we are running this business for the long term.

Sure -- please.

I would just add to that. We've seen a fairly rapid pace of growth in ASM over the last couple of years. I think one of the things you would have heard in Mark's commentary in this call is that we have had in the last nine months, five new cities added to the map. There is sort of developing routes being stacked on developing rates.

And per se, developing routes are not a bad thing. That is how we build the business and find profitable markets to operate in over time. I think putting them on top of one another creates a little bit of a headwind for us to manage through.

Over the next little bit, I think if you look at the fleet plan, we've actually cuts a more replacement and a slower rate of growth, not just in the back half of the year, but as we head into 2014. I think that some of the challenges that we have taken upon ourselves in the last year are not going to be there to the same extent going forward. You can never predict where the macro headwinds will go, but I think some of those things develop, just the pattern of our growth are going to be a little bit different going forward.

Sure, Peter. To that, as far as I can tell -- correct me if I'm wrong -- I think you're taking five A330s next year as well. Your CapEx this year is bigger than your market cap right now -- that is s pretty mind blowing statistic. I know you can't control the price of your equity, but your CapEx presumably is going to be directionally about the same as it is this year. Please correct me if that is wrong.

At what point do you consider-- and I know you're running this in the long-term, at what point do you consider potentially deferring some of this growth? If the market is clearly not very rewarding you for it, in terms of specifically deferring some of the aircraft orders?

Again, we have contracts for aircraft with which we are happy because we believe we see a market out there for them. We see our business improving and strengthening. Clearly, we've got aircraft retiring as we have talked about.

It can't come as a surprise to you that I can't really comment on -- the implication of your question is you would like us to comment on alternative capital structures. And you know as a management team we can't do that in a forum like this.

Steve O'Hara, Sidoti & Co.

I was just curious, in terms of the number of routes you've added recently. I know you had a lot of growth internationally.

How many of those would you deem fully mature? How many are still maturing? My guess is there is still a lot of maturation left in a lot of those markets, and I guess maybe you could talk about where you see the best growth other than the market you are in right now.

Sure. Of the -- I think 10 routes in the last three years, I believe, I would describe two as fully mature. For international routes, two years to three years maturation is what you could expect.

Obviously, you are on a steeper part of the learning curve earlier than towards the third year. At this stage, I would describe two of the new routes as being mature. I think it is 10. I'm looking around the table to see it anyone is nodding up and down since we started in Q4 2010.

Okay. Where else do you see other opportunities? Do you expect to continue in Asia?

Yes, we do Asia. We continue to think of as being the area that is going to sustain most of our growth. I think -- you will notice, and this was going to be a consequence that we are going to be I suspect talking about as we roll into the back half of this year and early next year. A lot of the new routes, new cities we put online, we have done so with less than daily frequency. That has a couple of impacts.

It's the right thing to do given the size of the route, but I think quite a bit of our growth in the period ahead is going to come from building frequency. That should have, by the way, a benefit.

The reason I said we are going to be talking a little bit about this is, initially, if you start services as we have done three or four times a week, they are quite expensive routes to operate. You have crew expenses. You've got the infrastructure of setting up an operation in a foreign country, which is spread over relatively few frequencies.

As we increase frequencies, one of the things we are hoping to see is sort of retaining unit revenues and actually growing the size of unit revenues and reducing unit costs. I think that is going to become our largest area of growth going forward.

We've got Beijing starting next April. It will come as no surprise to any of you listening on this call that China has the capacity to be a huge market for us here in Hawaii. Whether it will be or not remains to be seen. We are confident that it will be, but that is going to be an area of particular focus for expansion.

And then, maybe a follow-up on China. I know there has been a lot of high rapid growth -- after the downturn, there has been rapid growth coming back from China. What are the key barriers to kind of keep that growth going? Where does the Visa waiver stand?

I think we have no prospect of visa waiver to mainline China coming anytime in the foreseeable future. It is not even remotely on the agenda. We'd settle for a more sensible visa regime rather than the visa waiver situation. I think that is a long ways off.

China, growth is slowing, but the grow is still many orders of magnitude greater than we are used to seeing in the West -- the Western world. I think importantly, the cohort of people that are coming into that bracket for which an international trip is a reasonable household expenditure is growing particularly fast. While we are seeing -- reading the headlines as everybody else does around China growth, we are not at this point even remotely worried that that is going to have a big impact on the growth of our path. We start from a such a small place of growth, we're unlikely to see an impact from the slight slowing of the Chinese growth rate.

Okay. Thank you.

Glenn Engel, Bank of America.

The supply side, when I look at your full-year number, it implies capacity growth of flat to up 5 in the fourth quarter, is anything running down year-over-year? What is the big differences?

Our capacity, I think that is the lapping of last year's -- the point at which we hit the accelerator last year. I think it is --

Were you fairly flat across-the-board?

I'm just thinking out loud. In the next six months, we have one 767 leaving -- and how many 330s coming?

We actually have one 330 coming in and 330s --

Leaving.

What you see by the end of the year, Glenn, is we are about one net aircraft up for the full-year. We did have a boost, and I think Scott alluded to this in his comments in the capacity in the first half.

That is actually a terrific thing for us. It gives us some extra capacity in the summer when we have the peak demand from North America and from some of our international markets. We will see some of those aircraft go into lease return and retirement at the end of the year. We can put 4Q at effectively a one airplane up.

Secondly, just on the market side, has the seasonality of your business changed with all of these new routes being added?

Yes, it has. Some of the Asian routes have more pronounced seasonality to them. We are still kind of working out an exact -- for example, Japan has very pronounced peaks and very pronounced troughs.

Beyond Japan, which is the overseas market -- the recently added overseas market we have been in the longest, there are going to be peaks and troughs in places like New Zealand. Places in Australia -- we know quite a bit about already. Places like Taiwan.

We expect to see peaks and drops. We have ideas because we do some market research. There is really no substitute for experience in the marketplace. When we talk about maturation, it is understanding these peaks and valleys a little bit better that is one of the important things we're talking about.

In general, and a general comment is not always true, but Japan tends to accelerate -- or to amplify some of our historic peaks. The South Pacific routes are many times quite different, and there can be peaks based on school vacations that vary from month to month within a season that are quite different from we have in North America.

And tied to that, your competitors seem to be saying they found the Hawaii North America market much more seasonal than they expected, and you are seeing much more, greater capacity cuts by day of week. Grade of differential in supply peak versus off-peak days, peak versus off-peak months. Are you going to start doing that with your international routes, start adjusting supply much more in a day of week and seasonal basis, or do you feel good about the schedules you have out there?

We have already started doing that in our international routes. We have added capacity into Sydney and Brisbane during their very peak months, which we subsequently removed. We've got some extra sections going into New Zealand as well.

So we are absolutely on board with the idea of varying frequencies by month. It's less day of week. It tends to be more -- it tends to align with things like school holidays and stuff like that rather than days of the week like -- people prefer to fly on a Friday than a Thursday.

Thank you very much.

John Reardon, Crowell Weedon.

I just have one question. Could you touch on your relationship with JetBlue and specifically, how has the feed out of New York worked? Has it lived up to your expectations? Is that something that is growing? I would just like some color on that.

Sure. We've got a terrific relationship with JetBlue. We enjoy working with them, and we certainly are enjoying some benefits as we believe they are of the relationship we have between the two of us. That is clearly an area where we see some growing connection activity, and we are continuing to find ways of improving that.

In general, I think we have been pleased with the connecting traffic that we have received from JetBlue. And I'm not sitting here remotely dissatisfied with the nature of our relationship with that company.

Great, thanks a lot.

Mr. Dunkerley, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thanks everybody again for joining us on today's call. As we just covered, there are many moving parts to our generally good second quarter results.

With so much going on, we are pleased to announce the date for our annual investor day when we are going to be able to shed even more light on the strategy that we have been actively pursuing. It's going to be held on October 29 in New York, so please look for your invitation to arrive shortly. And with that, mahalo for your time.

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