Hawaiian Holdings Inc (HA) 2013 Q3 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings third 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) It is now my pleasure to introduce your host, Ashlee Kishimoto, Director of Investor Relations with Hawaiian Holdings.

Thank you, Miss Kishimoto, you may now begin.

Thank you, operator. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' third 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 here 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 about 4 o'clock Eastern Time today. If you have not received the release, it is available on our investor relations page of our 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 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.

Thanks, Ashlee. Thank you all for joining us today. As you can see from the press release we issued earlier, for the third quarter we recorded adjusted net income of $0.69 per share, in line with consensus.

Both revenue and costs were close to the expectations we had set at the beginning of the period. Our domestic businesses, both North America to Hawaii and amongst the neighbor islands, performed well during the peak summer period.

Performance in our international business was adversely impacted by both changes in the value of the dollar and by the dilutive consequences of having added a clutch of new routes during the last 12 months.

It was good to reach a period of the year when the rapid growth in industry capacity between the US West Coast and Hawaii seen of late started to recede. At the same time, another quarter allowed for the further maturing of the international routes still very much in their infancy.

To put these two improvements in context, if we take away the effects of the strengthening US dollar from our results, the third quarter would have been the single best quarter in our Company's history.

Unsurprisingly, all of this growth made the third quarter of the busiest single period in our Company's 84 years in business. Despite the heavy load of activity, my colleagues, as ever, have excelled. Not only does Hawaiian continue to lead the operational league tables, but in the last quarter we even exceeded our own significantly more exacting targets.

Our success as a business has long rested on their efforts and they have my thanks and appreciation.

Before we get into the numbers, let me highlight some of the significant developments in our business since our last earnings call. In August, we announced the reintroduction of daily nonstop service between Honolulu and Oakland, beginning in January of 2014. This is an increase from four times weekly service today. This will bring us to daily service to both Honolulu and Maui from Oakland.

We have kept the overall level of our Bay Area capacity flat by funding this added Oakland flying from reductions on other Bay Area routes.

We also announced less than daily service between Oakland and each of Kona and Lihu'e for the summer of 2014, and similar less than daily service for next summer between Los Angeles and the same two islands.

In September, we enhanced our in-flight experience on our Boeing 767s by becoming the only US carrier to offer the Apple iPad mini as the in-flight entertainment system. This initiative has been extremely well-received.

For this seasonally weak period of demand to New York, we have also reduced daily frequency to five times a week and redeployed the capacity to Oceania. This coincides with a period of seasonally strong demand for the Hawaii vacation from that part of the world.

Later this week, we're going to file an application with the US DOT to award Hawaiian the route right to serve Tokyo Haneda being vacated by American Airlines. If awarded, Hawaiian intends to use the route right between Haneda and Kona, Hawaii and is the only one of the original awardees of Haneda rights to have made a commercial success of them.

Our continued interest in additional rights underscores our confidence in Japan, and in our ability to prosper there, despite the substantial strengthening of the US dollar against the yen in the last year.

With that introduction, 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 third quarter, the Company reported adjusted net income of $36.8 million, or $0.69 per share. This compared with adjusted net income of $40.6 million, or $0.77 per share in the same period last year.

Our return on invested capital for the trailing 12 months was 12% before tax and 7.2% on an after-tax basis, which exceeded our weighted average cost of capital. Operating revenue for the third quarter was $599 million, a 9.1% increase year-over-year, while passenger revenue increased 9.3%. Load factor for the quarter decreased 0.1 percentage points to 83.2, while yield increased 0.3%.

Combined, this result resulted in an increase in Brazil RASM and PRASM of 0.1% and 0.2% year-over-year, respectively.

As [to] the effects of currency translation two US dollars, and new international flying, our overall PRASM would have been up approximately 6% year-over-year. And despite these headwinds, our unit revenue results marked a positive inflection spurred by strong performance in our domestic operations.

International service comprised 30% of our passenger, revenue with the majority of ticket sales in foreign currencies. We break this down approximately half of our international sales were in yen; 20% in the Australian dollar; 10% in the Korean won with the balance coming from various other currencies.

And, as you know, we hedge a portion of our foreign exchange exposure with forward contracts. Details on the hedging program can be found in the press release.

As we turn to expenses, aircraft fuel costs increased $15.6 million, or 9.4%, driven essentially by increased consumption. We consumed 59 million gallons of jet fuel, up 8.7%. Our GAAP fuel cost was $3.06 per gallon compared to $3.04 last year, and our economic fuel cost per gallon was $3.12 as compared to $3.07 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 slightly better than we initially expected. CASM, ex-fuel, increased 2.1% year-over-year. As we mentioned on last quarter's call, we expected our CASM ex-fuel to be elevated this quarter for the following reasons.

In last year's third quarter, we had large favorable items on the maintenance and compensation line, totaling approximately $7 million. This tough year-over-year comp, combined with $2 million which rolled from the second quarter to the third quarter, inflated the gap in CASM ex-fuel by approximately $9 million or two percentage points. Absent these adjustments, our CASM ex-fuel would be flat.

Depreciation and amortization was down year-over-year. The increase 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 2012.

During the quarter, we returned one Boeing 767 at the end of its lease term and had no A-330 deliveries. Below the operating line we reported nonoperating expense of $7 million in the quarter compared to $1.1 million in the prior-year period. The most significant difference year-over-year relates to lower fuel hedging gains compared to last year and higher interest and debt amortization expense, due to additional A-330 financings.

Our balance sheet remains strong in this period of growth. We ended the quarter with $441 million in unrestricted cash, and $21 million in restricted cash, primarily for deposits related to future interest payments for the pre-funded ATC that we entered into this past May.

Our revolving credit facility remained undrawn at the end of the quarter, providing additional liquidity of $70 million, which is net of letters (technical difficulty) of credit. CapEx in the quarter was slightly higher than anticipated at $73 million, which included $50 million of payments for aircraft and aircraft-related items.

Wrapping up the third quarter, we accelerated and completed our minimum required contributions for the 2013 plan year, contributing $12 million to our pension plans. We are not required to make additional contributions for the remainder of the year.

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

Thank you. Revenue was in line with expectations in the third quarter. I will address each of the market geographies individually but, overall, our neighbor island business continued to perform well.

We saw meaningful improvement in North America as industry capacity declined over last year, and we have a mixed bag of performance in our new international operation. So let me start with North America.

North America represented 47% of our passenger revenue. Performance improved substantially during the third quarter. PRASM grew 10% on a 2% increase in load factor. Our own capacity was up by slightly less than 1%.

Our revenue results reflected an improving balance of supply and demand and our superior product offering. While it is difficult to precisely attribute a benefit to the implementation of our upgrade to the revenue management system, we believe this also contributed to the improvement.

As we have mentioned before, industry capacity growth has a significant impact on this part of our business. During the third quarter, industry capacity declined 1% compared to the double-digit year-over-year increases from the third quarter of last year to the first quarter of this year, and a 5% increase last quarter. Industry capacity is expected to continue to decline by 3% in the fourth quarter and 1% in the first quarter of next year, as some of the capacity added last year leaves the market.

Booking trends have been strong to date and we expect strong year-over-year revenue performance to continue in this geography in the fourth quarter. Our neighbor island routes, which accounted for 23% of our passenger revenue, posted good results in the quarter. PRASM was up 15.9% on a 4 percentage point increase in load factor.

Since 2011, we have grown ASMs by 8% in this area of our business while keeping supply and demand in good balance. We attribute the strong results in our neighbor island business to a number of complementary initiatives.

In terms of schedule, since growing capacity in 2012, we have focused over the last several quarters on optimizing capacity by day of week and by time of day. We have also fine-tuned our Maui hub operations to provide good connections to neighbor islands off our long-haul services to Maui from the Bay Area, Los Angeles, and Seattle.

In conjunction with our revenue management system upgrade, we also realigned our fare structure to increase the number of price points and provide more revenue management flexibility. All of these, we believe, contributed to the improved performance.

Our international routes accounted for 30% of our passenger revenue in the third quarter. In this part of our business, PRASM decreased 17.7% on a 2.6 percentage point decrease in load factor. Both of these results are sequentially better than the year-over-year results in the second quarter.

As in recent quarters, translating foreign receipts into dollars, along with mix effects from new international flying, has had a substantial impact on these numbers. So it is important that we delve more deeply.

Currency headwinds dampened PRASM by 11 percentage points before the benefits of hedging. Adding new flying contributed another 1.5 percentage point reduction to PRASM compared to a same-store comparison. So, absent the effects of exchange rate and changing mix, our overall PRASM would have been down approximately 5 percentage points.

If the dollar remains in the current trading range, vis-a-vis the yen and the Australian dollar, then we have got another six months-plus of unfavorable foreign-exchange comparisons. The impact of our mix of flying should be dwindling in the coming quarters since we will be lapping the start of a number of new international routes while not adding new destinations at the same rate.

Japan, as Scott mentioned earlier, accounts for roughly half of our international activity. It remains a successful part of our network despite the currency headwinds which amounted to $13 million, net of hedging in the quarter.

Within Japan, we have routes that are mature and are doing fine. We have routes on which we have competitive pressure, and we have routes that are in the early stages of maturation. As witnessed by today's request to be granted the Haneda route [right] vacated by American, we remain bullish on this market.

Much thanks is due to our travel partners in Japan, who have been key in helping us build a franchise, and with whom we enjoy tremendous working relationships.

ADM to the dollar was great while it lasted, but it was never key to our being successful. We can make money where the exchange rate has now settled at roundabouts JPY100 to the dollar and, indeed, we can succeed in Japan at the yen value below today's mark.

Let me now move south to Oceania, our routes to Australia and New Zealand. These accounted for a third of our international revenue. Starting with Sydney, we saw better results sequentially as the rate of industry capacity growth slowed dramatically from up 19% in the second quarter to up 1% in the third.

Our relatively new Brisbane route, meanwhile, continued to shine and has developed more quickly than the average. Australia has been a source of good results for us despite the weakening of the Australian dollar, taking a $1 million chunk out of our results.

Since there is a much longer booking curve in Australia than, for instance, in Japan, we expect the big move in currency that took place in the spring to start hitting our results in a much more significant way in the fourth quarter and into next year.

Elsewhere in Oceania, our service to Auckland is about six months old and continues to develop as expected.

Demand in Korea, while improving, has fallen short of our expectations. You will recall that there was a significant increase in capacity between Seoul and Hawaii last year that negatively affected our Korea performance. We had expected that, by now, demand would have caught up with capacity. But slower than expected economic growth has delayed this from occurring.

On the flip side, with a weaker economic backdrop, industry capacity is now moderating. And this should provide some benefit going forward.

Capacity declined 11% in the quarter and is expected to decline 10% in the fourth quarter and the first quarter of next year. Korea, with its growing middle class, remains an important opportunity for us going forward, and we feel the current imbalance between supply and demand will gradually come right.

The past three years have been a period of rapid expansion at Hawaiian. We have remained solidly profitable, adjusted for non-routine items, while launching service to 10 new cities.

We are now entering a different phase in our evolution. Capacity will start to slow and there will be fewer new route launches. Our efforts are going towards maturing the ones we have so recently started.

Our combination of cost competitiveness, widespread brand recognition, and high service quality position us better than any of our other competitors between the US West Coast and Hawaii. Our position within the islands of the State of Hawaii is good. Our international expansion has yielded great promise.

In sum, we remain confident that our strategy is sound and that we are positioned well for the years ahead. And, with that, I will turn the call back over to Scott, who is going to take you through our fourth-quarter guidance.

Thank you, Mark. As mentioned earlier, our growth will continue to slow in the fourth quarter and we expect capacity on an ASM basis to increase between 3.5% and 5.5% year-over-year.

As we have discussed in the past, slowing growth in the second half of the year is driven by the delivery schedule of our A-330s that was frontloaded in the first half of both 2012 and 2013. In the fourth quarter, we will add one A-330, while returning and retiring two 767s. By the end of the year, we will have grown by just one net wide-body aircraft for the year and our A-330s will outnumber our 767s.

PRASM and RASM are expected in the range of up 2.5% to up 5.5% year-over-year. These revenue metrics are boosted in part by an adjustment in the prior-year period.

In last year's fourth quarter, we had an unfavorable frequent-flier adjustment on the passenger revenue line totaling $7.9 million pretax. This inflates our fourth quarter PRASM and RASM by 1.8 and 1.6 percentage points, respectively.

Turning to costs for the fourth quarter, we expect CASM ex-fuel to range from up 2% to up 5% year-over-year. This is also somewhat elevated, due to some variability quarter over quarter related to a favorable frequent-flier adjustment on the expense lines totaling $5.4 million. This tough year-over-year comp inflates our CASM ex-fuel guidance by about two percentage points.

So in sum, the frequent-flier accounting adjustments made last year had the effect of inflating our expected year-over-year RASM improvement by roughly 2 percentage points and our CASM performance by the same amount. In the fourth quarter, our CapEx is expected to be in the $90 million to $100 million range, including one A-330 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 this time, but we expect our fuel consumption to be flat to up 2% in the fourth quarter as a result of our capacity increases.

With that said, we have reached the conclusion of our prepared remarks. And 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.

(Operator Instructions) Mike Lindberg, Deutsche Bank.

Hello, everyone. This is actually (inaudible) from filling in for Mike. Thank you for taking our questions.

The first one I have is just on your turboprop business. I know it is a very small portion of your overall business, but there was some press recently that the government budget issues were affecting your ability to jumpstart that operation. So I was hoping you could speak to that.

And then, if you could also comment on your relationship with Empire Airlines, as it relates to that business unit. Thanks.

Sure. The contribution of turboprop to our business right now is zero because the FAA won't process the important certification work that needs to take place in order to allow us to start service. It is a completely unacceptable situation, utterly frustrating from our perspective and woeful in every dimension.

And we are going to -- we are extremely unhappy by the situation. It was caused, actually, by sequestration, not actually by the government shutdown. And, at this point in time, we have no estimate of when the FAA is going to be able to get around to our certification activities that need to take place. (multiple speakers) Go ahead.

Just one quick follow-on on that. Were you paying mortgages on those aircraft that you've taken for that operation or not yet? And was the financial impact this quarter? (multiple speakers)

Those aircraft are wholly owned by us. They are not leased. There is no debt associated with them. But they are owned assets of ours and they are sitting idle.

With respect to our relationship with Empire, it is a typical type of relationship of this nature. We, essentially, meet their costs of operating the flights, and they also are doing some maintenance and modification work on the airplane. Clearly, at the moment, those costs are relatively low because nothing is actually happening.

Okay. Great. Thanks. And then, sort of a high level big picture question. As your business starts to mature, as you overlap on some of these new markets, and you said that your capacity growth is expected to moderate, are you shifting focus at all a little bit more towards shareholder-friendly initiatives? I mean, are you considering a dividend, share repurchase, anything like that?

Yes. I mean, I think our big shareholder-friendly initiative, I think, is improving financial results, which I think we have talked at length about. Clearly, it is inappropriate for me on a call like this to make specific comment about things like share buybacks or dividends.

You should know that we are absolutely conscious of the need to provide returns to shareholders, and we do constantly evaluate what our near and medium-term prospects are and what we think will be best in terms of shareholder returns.

Okay. Great. Thank you.

Thank you.

(Operator Instructions) John Godyn, Morgan Stanley.

Hey, guys. Thanks for taking my questions.

Yes. No worries.

Mark, I was hoping -- you mentioned that the revenue outlook looks good year-over-year. I was hoping you could just elaborate on holiday bookings, specifically. I know you guys have a little bit of a longer booking curve here. Is there anything worth noting on the holidays, specifically?

Yes. Let me just turn that one over to Peter, who is here and who can answer that for you, John.

Yes. Hey, John. With respect in North America, which is where we have the most visibility on the booking trends, I would say that the fourth quarter trend-wise looks similar to the third quarter.

I would say the one nuance to watch for in the quarter is the timing of Thanksgiving, which makes November a little bit of a weaker month with a week in the middle of the month that is sort of an extra week compared to last year that is in a slower period. But we ought to make that back up in December when we get all of the return Thanksgiving traffic in the early part of December and then a relatively compressed period before the Christmas and New Year traffic picks up at the end of the year.

So year-over-year the -- November will be the weakest month of the quarter and December should be the strongest month of the quarter. But, overall, trends look pretty positive there.

Okay. That's very helpful. And, Mark, you mentioned, just kind of ticking through taking this list of headwinds that we have been tracking throughout the year, you mentioned that some of the markets -- and I think you highlighted Korea -- had not been building as well. You also mentioned that some FX headwinds are going to continue a bit here.

And, if I remember correctly, the competitive capacity numbers that you gave, while certainly that headwind is getting a bit better, it sounded like the number was a little worse than what I remembered before. I think you said negative 3% in the fourth quarter. You had been saying negative 5% before, if I have that right.

What I am getting at here is, I think there was a sense last quarter that, as we looked towards the end of this year and into next year, we would be poised for significant margin improvement year-over-year. It seems like your fourth quarter guidance is on the right track in that direction.

But in terms of some of these headwinds some of these that you highlighted, is there any sense that these are becoming risks that are significant enough to maybe alter that trend as we look into 2014? Just wanted you to kind of gauge that commentary a little bit for me.

Sure. Happy to. If you take exchange out of the picture -- and exchange is very important; it has to be included in the picture, but follow me through on this. I think the sort of improvements, the maturation that we are seeing in routes and against the expectation that a typical international route would take somewhere in the region of three years to come to full maturity, I think we are pretty pleased with how developments are building there.

I think we have suffered somewhat from the fact that we had an abnormally weak US dollar in that first year of Japan and, to an extent, Australia. And I think we are going to suffer more from comparison than we are going to suffer from fact.

I think Australia and Japan continue to do well for us as route groups, and we would anticipate that they will continue to contribute meaningfully and positively going forward. It is just year on year, when you take 20% out of the value of each ticket that you sell, it has some fairly dramatic impacts on year-over-year comps.

Got it. So is it fair to say there are continued headwinds, but the broader thesis of margin expansion and margin rebound here is still intact, even in the face of those headwinds?

Yes. Yes. I think it absolutely is.

Okay. That's helpful. And just last question and this might be for Scott, but when we think about the CASM ex-fuel profile, we have been in a period here of, just based on the aircraft deliveries, decelerating capacity growth.

As we enter perhaps some quarters where it reaccelerates in 2014, should we expect the CASM ex-fuel growth profile to turn negative again? Is that the right way to think about it? Or are there some puts and takes that might not cause that to happen as we look into 2014?

Yes. I think, John, there is some unevenness. And, again, for the fourth quarter there are some headwinds due to the effects of some accounting adjustments last year, as I mentioned on the frequent flyer accounting side. So there is kind of a built-in headwind for the quarter.

We will talk a little bit more about 2014 costs next week at investor day. We are pretty early in our budgeting process, but I think it is fair to say we are going to be focused on cost. And we are going to try to continue to improve in that area, but the math behind lower growth, as you said, will be working against us.

I would like to remind our listeners, if you do have a question, we would like you to restrain -- restrict your questions to one. And you may come back into queue for further questions. Hunter Keay, Wolfe Research.

Hi, everybody.

Hey, Hunter.

So a question, of the new service from LAX to Kona and Lihu'e, does this type of service to the outer islands, does that kind of cannibalize your higher-margin neighbor island business? And is it margin dilutive? And, as you add more service to -- nonstop service to these outer islands, should we think of the neighbor island business as simply just being too big?

Yes, let me have Peter answer that one for you.

Yes, Hunter, the service you are referring to -- and we have it from both LA and Oakland next summer -- is seasonal service that will go into Kona and Lihu'e. Frankly, the peak part of the day, when we have our wave of flights coming from the West Coast, we have got an awful lot of demand for Honolulu, but also a lot of demand for neighbor islands.

And there is a real shortage of our ability to provide connecting seats to the neighbor islands. So I don't think we're going to be feeling that it cannibalizes any of the capacity on the neighbor island flights. I think, in fact, it frees up some of the capacity on those flights for connections from other places, where we don't see the depth of demand that we have in the Bay Area and in LA to provide service directly to Kona, Lihu'e.

Obviously, we are not the only ones who have discovered flying direct to the neighbor islands. This is a trend we have seen for a long time. It is something -- because we don't have big hubs from which to feed on the mainland, and because we don't have narrowbody aircraft in our fleet to serve the neighbor islands, where it makes sense for us is really in that peak summer period where we get a little bit of aircraft back by the way we time our maintenance.

And that allows us to put these seasonal services in at that period of peak demand. And we are confident both these -- or all these routes are going to do well next summer.

Helane Becker, Cowen and Company.

Thank you very much, operator. Hi, guys. Thanks for taking a question.

Hey, Helane. Yes.

So I only have two questions, but one is -- I'm going to ask them at the same time. One is maintenance. I am kind of surprised to see the 17% increase in the quarter given the shift in mix in aircraft.

And the other is really a process accounting issue. With the stock price over $8, you are kind of in the money on the $7.88 convert, and I kind of wonder what your thought process is with respect to share count regarding that convert if the stock stays where it is.

Helane, sorry. The first part of your question, I mistook what you said. Do you mind saying it again?

On the maintenance question, you mean? (multiple speakers)

Yes (multiple speakers).

You had a 70% increase in maintenance in your quarter, and I would have thought given the change in mix of aircraft, maintenance would have come down a little bit.

Scott?

Yes. I think it was really the year-over-year comparison had some unusual maintenance catch-ups and adjustments and accruals last year that made the 17% kind of overstate what the real run rate is.

On the convert, Helane, we are certainly looking at that. One thing to keep in mind is that we account for those with the treasury stock method, which means the dilution comes in fairly gradually and it doesn't become very material. And of course it has to be over $7.88 to be dilutive on a GAAP basis.

I would also like to remind everyone that there is a hedge in place on the convert. So, from an economic standpoint; from a cash flow standpoint, we have effectively raised the conversion price from $7.88 to $10. And so the economics of it are -- [what the] focus should be, but of course on a GAAP accounting basis, we also have to recognize that dilution begins to come in gradually at $7.88 and above.

Fred Lowrance, Avondale Partners.

Thank you. Just wanted to shift the focus over to Japan real quick. As I look at the competitive capacity growth over there, you see (technical difficulty) the arrival (technical difficulty) to that market over the last several months. Japan's airlines started to add some capacity in Narita, Osaka, Nagoya, and then accelerated to the double-digit growth rate in the fourth quarter, first quarter in the second quarter of next year.

So are we looking at another West Coast US to Hawaii competitive headwind here in Japan? Or does the fact that most of this growth is on Narita/Honolulu, which you technically don't compete on, but you have that Tokyo exposure through Haneda, does that limit the impact on the overall fair environment that you expect out of the Tokyo market?

Well, Tokyo -- I think you have asked the exactly right question. Narita is not a perfect substitute for Haneda, so there is some degree of insulation. But neither is it completely -- such a completely separate market that there is not a relationship between overall capacity out of Tokyo and our individual performance on Haneda.

So, where you see capacity going up, I think it is fair to assume that there will be some effect on our ability to secure price increases caused by that. But, at the same time, during the same period of time, we are building our name awareness, our brand presence. We have -- are deepening the relationships that we have with our distribution partners.

In some of our other markets, which are even newer, we are still in the process of understanding the nuances of how to sell and distribute tickets. So we have got some very important positive influences on where unit revenues are going, all other things being equal. And to the extent that things aren't equal, will we then have to offset or even -- or it can become additive to that.

I think Japan, as a whole, we continue -- we have got a lot of moving parts. Some of them you just highlighted, which makes it -- at this stage, we are not saying that there is a decline in demand caused by the stronger US dollar, the weaker yen, because we can't actually parse that out of what is going on there.

In general, we are quite pleased with the way that Japan is developing. We do have to deal, as you say, with some capacity headwinds in Tokyo. That is kind of a roundabout answer, but I hope that kind of captures the sense of it.

(Operator Instructions) Bob McAdoo, Imperial Capital.

Hi, guys.

Hey, Bob.

As we have seen, in some places, you squeezed capacity down to something less than daily service, whether it is Kennedy or some of the new markets in the Oceania area and whatever, is there anything to be gained by going to something less than seven days a week in places like Korea or Fukuoka or Osaka or some of the other airports that maybe are not matured yet?

Is there reason why we are still at seven or are they just doing so well they need to be at seven? Kind of give us some color on that, if you would, please.

Sure. Absolutely. I mean, it's kind of a market by market analysis. I don't think there is any rule of thumb that you can apply. A place like Fukuoka and Osaka, we are head-to-head with competitors that are operating daily.

So once you -- the math of going below daily is relatively straightforward, which is that if you go from, let us say, daily service to four times a week, the number of outbound and return combinations that you can sell diminishes by a greater ratio than the three-sevenths that you have taken away. Because people travel round-trip, and the chances are that if they can't travel on you round-trip, they won't travel with you on the outbound leg as well.

That is not so important in markets where your competitors aren't flying daily; where you get to choose which days of the week that you travel and where the market is not mature. In places where your competitors are daily, when there are no good connecting opportunities that you can offer with coach air partners and the like, it becomes more problematic. That probably is the biggest single driver of decisions around where we are less than daily and where we go to daily.

Also, of course, most importantly, is just the size of the market -- the number of people traveling. I think what is interesting in Korea that you called out specifically, is we went from a situation in which we were five times a week, we had a competitor that was daily. They went up to -- in a relatively short period of time, they went up to three times daily.

We had another competitor in daily and we added two more services. A lot of that extra added services coming out. The market is still growing and I think we feel pretty pleased with the prospect of supply and demand coming back better into balance.

What if you just cut out one round-trip, I mean, rather than cutting out three roundtrips?

Yes. Well, if you cut out one --

(multiple speakers) lose that much?

Yes. Well, you certainly do. You penalize yourself by more than one-seventh in terms of the number of outbound and return combinations that you can offer the customer. Because, if you cut out Monday, just for the sake of argument, people who wanted to travel outbound on a Wednesday and back on a Monday won't fly on you. People who wanted to go --

I understand that. It is obvious; I mean, the numbers are clear. I am just trying to figure out if economically do you really lose -- if it is there any way to -- a Tuesday over and a Wednesday back kind of thing? I mean, in the middle of the week when I assume there are -- is there no cycle or cyclicality as you move through the week? I'm just trying to figure out (multiple speakers)

Sure. Sure. No. There is. I mean, clearly, we look at this, by the way. If you recall, Sydney, we started at I think five a week. We went down to for a week. We pulled it up to daily. We have gone up to 10 a week. So we do move days of the week around.

I am answering this question more just to give you a window into how we think about it. It is the nature of life that you do have lower days in the middle of the week or typically than you do at the weekends and so forth.

The problem is that a lot of people like to travel one day -- one way during a peak day of the week and some of them come back on what is a low day of the week. And, if you are not careful, if you chop out the low day of the week, what you are doing is turning a peak day of the week into a low day of the week, because you don't get the business in the first place.

I would just add to that, I think Mark has answered it correctly, but it really is something that we look at on a case-by-case basis. There are examples where we have gone less than daily in some of the San Jose and Oakland markets out of the Bay Area and, Bob, you mentioned New York in your original question.

One of the advantages we have in place is like that is, because we have other service and we can more connections, that if we are not flying Oakland-Honolulu on a daily basis, we can connect it back over Maui and still provide the seven-day-a-week coverage.

Similarly, with JFK, we have got the connectivity through JetBlue and Virgin America and our coach air partnerships there to make some connections over the West Coast. So that also factors into that case by base case analysis. And we are certainly willing to evaluate those things going forward, make those decisions, and adjust the schedule seasonally. But there is no hard and fast rule to answer that in every case.

At this time, we have no further questions. I would like to turn the call back over to Mark Dunkerley for our closing comments.

Okay. Thank you, everybody, for joining us on today's call. Importantly, next Tuesday we are holding our annual investor webcast. And it is a format that gives us much greater scope to discuss our strategy and the path ahead, and perhaps to be able to answer some of the questions that you have asked in this conference call with respect greater specificity.

We hope that you will have an opportunity to listen in to our webcast and that is at 1 p.m. Eastern Daylight Time. That is accessible on the investor relations page of our website. So with that, mahalo for joining us today.

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