Hawaiian Holdings Inc (HA) 2014 Q1 法說會逐字稿

Greetings and welcome to the Hawaiian Holdings first-quarter 2014 earnings 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, Ms. Ashlee Kishimoto, Senior Director of Investor Relations for Hawaiian Holdings. Thank you, Ms. Kishimoto. You may begin.

Thank you, operator. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings financial results for the first quarter of 2014.

On the call with me today are Mark Dunkerley, President and Chief Executive Officer; Peter Ingram, Chief Commercial Officer; and Scott Topping, Chief Financial Officer. Mark will begin with some overview comments. Next, Peter will take us through the revenue results, network, and capacity. Scott will follow with a discussion on costs, balance sheet, and guidance. We will then open the call up for questions, and then Mark will make a few closing remarks.

By now, everyone should have access to the press release that went out at about 4:00 PM Eastern time today. If you have not received the release, it is available on the 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'd like to remind everyone that the following prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore undue reliance should not be placed upon them.

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

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

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

As you can see from the press release, we issued a short while ago, we recorded an adjusted net loss of $0.02 per share for the first quarter. The result was ahead of last year's and the consensus estimates. Coming in the weakest quarter of the year, they represent a further strengthening of our business and an encouraging start to 2014.

The main drivers of our business remain as before, continued good cost control. While on the revenue side, recovery in our domestic markets offset to some degree by the twin impacts of unfavorable exchange rates and the relative infancy [of a clutch] of new international routes. These two impacts should become progressively less meaningful as the year wears on.

The first quarter impact of Easter falling earlier last year than this was noticeable but small. April revenue is strong suggesting that what little was lost in the first quarter will come to us in the second.

Ahead, other drivers of our results are also set to improve. So, caveating for the unforeseen and unknowable potential impacts of the price of fuel, exchange rates, and competitive behavior, 2014 continues to look like a year of better results.

The highlight of the quarter was the start of operations by 'Ohana by Hawaiian from Honolulu to Moloka'i and Lana'i, where we enjoyed heartfelt and warm receptions from these two communities. We also made or announced a number of adjustments to our network since our last call.

Twice weekly Honolulu to Beijing service started last week. We announced the suspension of services to Taipei and Fukuoka, as these two routes were underperforming.

We used the aircraft time freed up from these changes to enable us to put our larger A330 into Incheon five times a week to better match supply with the very peaky nature of demand on this particular route. Lastly, we increased our frequency to Brisbane by adding a fourth weekly flight.

Since our last call, we've also announced changes to our domestic network. These include a bolstering of our year-round LA-Maui service with the addition of a second daily flight during the peak summer. To take advantage of improving Bay Area trends, we are bringing back daily San Jose-Honolulu, which we dropped at the beginning of the year.

As ever, my colleagues from end to end in our Company have done a terrific job. Our operational preeminence in the industry remains intact while the level of service they deliver to our guests on board and on the ground is second to none among our competitors. Thanking them is a task of which I never tire.

Peter's going to delve into our revenue performance next, while a little later Scott's going to analyze our cost. Before I hand the call over to them, I'd better mention the extraordinary story involving us which unfolded over the weekend.

As you will have seen, a teenager stowed away in the wheel well of our aircrafts flying between San Jose and Maui. Beyond the basic facts already in the public domain, we don't intend to use this scarce time on this call to delve further into this matter. It leaves me only to express the sentiment shared throughout our Company that we are thankful to hear that the boy is well following this dangerous escapade.

Peter?

Thanks, Mark.

Operating revenue for the first quarter was $525 million, a 6.9% increase year over year, while passenger revenue increased 6.4%. Load factor in the quarter was 80%, a one percentage point decrease year over year, while yield increased 5.7%. Combined, this resulted in improvement in RASM and PRASM of 5% and 4.4% year over year, respectively, which was at the better end of the revised expectations we set at the beginning of March.

I'll go through the results by geography starting with North America, which provided 47% of our passenger revenue and posted another quarter of good results. PRASM was up 11.3%, despite a 1.6 percentage point decrease in load factor, continuing the better trends we've seen over the past three quarters.

Industry capacity declined by 0.5% in this quarter, and looking ahead, it's expected to be up a modest 2% in the second quarter, and slightly more at 6% in the seasonal peak third quarter. Based on current bookings, we expect the trend of strong yield performance to continue into the second quarter, with demand strength sufficient to absorb the increase in supply.

Our neighbor island routes, which accounted for 25% of passenger revenue this quarter, also continued to post good results. We recorded our fifth quarter in a row of year-over-year PRASM increases in this area of the business, specifically PRASM was up 8.5% on a 0.7 percentage point decrease in load factor.

Mesa's Go operation, which has competed for neighbor island business since 2006, ceased operations at the beginning of April. Go had reduced its operations to two 50-seat RJs in recent periods, while our other main competitor has expanded service on a couple of the neighbor island routes.

The net result of these adjustments is a trimming of industry capacity to the neighbor island routes of 3% and 2% over each of the next two quarters, respectively. Demand for local travel remains strong, and we have the flexibility, if appropriate, to increase capacity.

Also, as Mark mentioned earlier, we successfully launched our 'Ohana by Hawaiian turboprop operations, welcoming back Moloka'i and Lana'i to our network. 'Ohana by Hawaiian represents less than 5% of our total neighbor island capacity, so the overall financial impact on our business will be small. But this service is important as it rounds out what is by far the most comprehensive network portfolio of any airline serving Hawaii.

Our international routes contributed 28% to our passenger revenue and continued to be negatively impacted by a number of new routes still in their infancy. This resulted in a PRASM decrease of 7.1% on a 0.2 percentage point decrease in load factor. Foreign currency headwinds totaled approximately $9 million net of hedges. Absent currency effects, including offsetting hedge benefits, PRASM would have been down approximately 1% year over year in this area of our business.

Looking ahead, the year-over-year effect of currency impacts will ease, absent a further deterioration of the yen and Australian dollar. Combined with the maturity of recently added services and the network adjustments Mark mentioned earlier, we expect PRASM declines to ease in the period ahead and turn positive as we progress throughout the year.

Also, I wanted to remind you of several commercial initiatives that we discussed at our Investor Day back in October. First, our cargo business continues to perform well, with revenues up $2.8 million year over year, or 20% this quarter.

Future increases will be challenged by a slower growing network and our international network changes, since Taipei was a solid contributor on the cargo side, and our opportunity in Incheon, another strong source of cargo will be moderated by the reduction in frequencies. We remain encouraged, however, by our ability to build cargo operations into a more substantial contributor to our business over the past few years and continue to seek opportunities throughout the network.

Second, our preferred seat revenue, which is recorded in the passenger revenue line, is on track to exceed the goal we shared at Investor Day of doubling the run rate of preferred seat revenue by the end of 2014, relative to the $6.6 million we brought in for the 12-month period ending September 30.

Third, in January we successfully launched our new co-brand credit card that is expected to improve our third-party sales of Hawaiian miles in upcoming periods.

Since about two-thirds of this is recorded as deferred revenue on the balance sheet and amortized into the income statement through passenger revenue over time, the EPS benefit of this tends to be lagged. But we're nonetheless thrilled to have a great new card product available to our loyalty program members and expect to build on this launch throughout the year.

In summary, our domestic business, North America, and neighbor island continues to post strong financial performance. Our international business is on an improving track, a process which will be bolstered by our network changes and the continued maturing of our new routes.

With that, I will turn the call over to Scott to discuss our cost performance, balance sheet, and provide an insight into the second quarter of 2014.

Thank you, Peter.

As mentioned earlier and to recap the quarter, the Company reported an adjusted net loss of $0.9 million or $0.02 per share. This compares with an adjusted net loss of $14.8 million or $0.29 per share for the same period last year. Our return on invested capital for the trailing 12 months ended the first quarter was 13.4% before tax and 8% on an after-tax basis.

First-quarter total operating expenses, excluding fuel, increased $15.5 million, resulting in a $2.8 million increase in PRASM, ex fuel, year over year. These results were $3 million better than the midpoint of the revised guidance range we issued at the beginning of March. To further break this down, $2 million is rolling into the second quarter due to timing, and $1 million represents permanent savings.

As a reminder, our costs were elevated in the first quarter due to several projects and one-off items. Together these items totaling approximately $9 million or 2.6 percentage points explain nearly all of the year-over-year increase in CASM, ex fuel, this quarter. From the liquidity standpoint, we ended the quarter with $479 million in unrestricted cash, cash equivalents, and short term investments, and $70 million available under our undrawn revolving credit facility.

Our CapEx in the quarter was approximately $170 million, which included $160 million related to payments for upcoming aircrafts and engine deliveries. Also, during the quarter, we contributed $3 million to our other post retirement plan.

Let me switch gears and move to our outlook for the second quarter and full year. Year-over-year ASMs are expected to be up 0.5% to up 2.5% in the second quarter, and remain at up 1% to up 4% for the full year.

Recall that our full year ASMs were revised downward in early March and reflect the network changes mentioned earlier. By replacing long haul flying with shorter flying to the West Coast, we've only marginally decreased our still very good wide-body utilization.

Let me remind you of our fleet delivery schedule for 2014 where we are effectively up just one incremental aircraft for the year. We took delivery of two A330s this quarter that essentially replaced two aircraft that left our fleet in late 2013. In the second quarter, we will take delivery of two A330s and retire one 767. There are no deliveries or retirements in the third quarter, and finally in the fourth quarter, we take delivery of one A330 and retire one 767.

In terms of financing, we have pre-funded all the remaining A330s this year through double ETCs which were issued in May last year. The A330 remains an asset in high demand among the different sources of capital, giving us an attractive range of options as we look to fund our last three A330s next year.

Turning to the top line for the second quarter, our revenues are expected to increase year over year with RASM expected to increase between 4.5% and 7.5%, and PRASM expected to increase between 3% and 6%. On the cost side, we expect CASM, ex fuel, to be up 4% to up 7% in the second quarter.

As we've mentioned, our costs would be inflated in the first half due to a number of one-off items and projects before receding in the second half of the year. Those one-off items include: start up costs for 'Ohana by Hawaiian, our new turboprop operation; maintenance related costs, due to cabin modifications for Extra Comfort economy product; 717 [painting] costs; and additional labor costs related to FAR 117 (inaudible) duty rules for pilots. Together these one-off items total approximately $9 million or 2.5 percentage points of the year-over-year CASM, ex fuel, increase in the second quarter.

A lot of this one-off activity comes to an end this summer, leading to much better cost performance in the second half and to such a degree that we are improving our full-year cost guidance. For the full year, we now expect our CASM, ex fuel, to be up 2% to up 5%.

We continue to expect our 2014 full-year effective tax rate to be in the 38% to 40% range, and we do not expect to pay material cash taxes until 2016.

Sticking with our normal practice, we are not going to give fuel price guidance at this time, but we expect our fuel consumption to be flat to up 2% year over year for the second quarter. We continue to expect our full-year CapEx to be in the range of $465 million to $475 million. As mentioned, we have financings in place for all of our A330 deliveries in 2014, totaling approximately $370 million.

That's the end of our prepared remarks. With that, I will turn the call back to Ashlee.

Thank you, Mark, Peter, and Scott. Also, thanks to all of you for joining us today and for your continued interest in Hawaiian Holdings. We are now ready for questions from the analysts.

As a reminder, please limit yourself to one question, and if needed, one follow-up question. Operator, please open the line up for questions.

(Operator Instructions)

John Godyn, Morgan Stanley.

Thanks for taking my questions.

I wanted to follow up a little bit about the cost guidance here. You mentioned a good guy in the first quarter. You mentioned some favorable trends in the second quarter. We saw the reduction to full-year guidance. But the range hasn't narrowed for full-year guidance, even though we now have what seems like more confidence on cost and two quarters of visibility.

It seems like when we put all this together, you had should be on the favorable end of cost guidance for the full year, even though the range hasn't narrowed. Am I interpreting what I am hearing the right way?

Yes, John, I think it's still moving around a little bit. We are very confident with the guidance that we've given, ticking it down slightly.

We have lowered the full-year guidance, if you go back and look at what we said in early March, by 0.5%. So we have trimmed that, and that's a reflection of our increased confidence in being able to get there.

I guess what I am getting at is just what are the scenarios that takes you to the top end of -- the unfavorable end of cost guidance, let's put it that way, given all of the favorable trends we've seen and the increased confidence that we now have?

I think, John, in a business like ours there are some maintenance-related issues whose timing is always uncertain. We have some engines that we expense when they need to be maintained, and the amount of time that they operate before being maintained is variable.

We have a plan and an assumption there, but we often find the bits of maintenance move quite a bit. And in a business our size, a little bit of maintenance moving around can make a big difference. That's item number one.

Item number two is for the remainder of the year, we have, as we always, do some projects in mind, initiatives that we want to commence. Just the cadence of getting to them and getting them started and when the expenses related to those projects hit can be variable, and that's the reason why we continue to give a three-point range.

Clearly as we get closer towards the end of the year, our confidence builds; and that range will come down.

So when you see a shift in the range down by half a point but not a narrowing of the range, essentially what we're saying is there are some expenses that we had previously foreseen going throughout the year which we now believe we won't be absorbing. That allows for the shift; but we still have the variability out there, which explains the 3-point spread.

Okay. Thanks.

As we think about the derisking stories here as the percentage of capacity allocated to new routes continues to fall and the margin bump that comes from that, it seems increasingly likely that the stock stays up at these levels or perhaps even moves higher. I was just hoping that you could speak to the confer, as well as some of the share dilution around that, and thoughts around that as the management team tackles this issue.

Yes, John, we have certainly been focused on the convertible notes in the context of our balance sheet and liquidity. I think the basic question for us to answer, and it's something we're working on, is what are the merits of purchasing some of the notes in the open market verses our other potential uses of cash? That's the context that we'll look at, at that debt verses any other debt if we have opportunities to manage that.

Okay. Thanks.

Hunter Keay, Wolfe Research.

Hi, everybody. Thank you very much.

I'm curious what your plans are going to be for this A350 if Airbus walks away from the -800 model. I guess it's a multi-part question. Has Airbus asked you to consider the 900? And would you consider that?

If not, would you be comfortable walking away from the A350 order all together, if you feel like the 900 isn't a variant that could serve your needs?

There's a lot of chit chatting around about the A350-800. At the moment, it's still a live program over at Airbus.

We are, as we would always be, in conversations with Airbus about future delivery streams, including A321 and the A350. Beyond saying that we are having discussions with Airbus, we're just not in a position to comment on that right now.

Okay. That's fine, Mark.

When you bought the plane, where did you envision flying it? Is this something that you're going to fly into Asia, or just going to be East Coast US? Where was the original plan for that plane?

The airplane has two attributes which would be of use to us. Potentially one is that it is slightly larger than the A330-200, and therefore represents a step change in capacity for routes that operate, for example, a single daily service.

The next increment of capacity, if you have to fly it with a wide-body, would be 100% increase in capacity on the extra days that you would double up frequencies. If you have a slightly larger airplane, you can actually increase capacity while keeping a lot of your costs relatively fixed.

It has that attribute and the fact that it has range to allow us to exploit deeper into Asia than we'd be able to do with the A330-200.

Okay. That's helpful Mark. Thanks.

Some of the new service to LA-Maui and San Jose-Honolulu -- can you help us think about the thought process that went into adding service back to those? They both already have two competitors on it, who are pricing that route pretty aggressively from what I can tell.

I know it was a function of the routes where those planes were originally allocated not really working. But why should we not assume those routes are not just least worst options than the routes where those airplanes were previously deployed as opposed to good options?

Hunter, this is Peter. We think both of the routes are good options.

We've flown LA-Maui seasonally. It's actually a very significant O&D in terms of the overall market size, ranks in the top four or five I think of all the O&Ds between the US Mainland and Hawaii.

LA is a place where we've got a strong loyalty base. We've been carrying passengers on our Honolulu flight for a long time. Based on the strength that that seasonal route has done, we've been looking for an opportunity to add that route year-round. In fact, with LA-Maui, we're going to double it up seasonally in the peak summer period.

San Jose is a case where we've also seen strong demand throughout the Bay Area. We've got a good position at all three of the airports with San Jose, Oakland, and San Francisco. We've seen improving revenue trends in that market and really saw an opportunity here to solidify our service by having the Honolulu as well as the Maui.

Thanks, Peter.

Mike Linenberg, Deutsche Bank.

Good afternoon or good morning, everyone. I guess just a couple.

Scott, you had mentioned that Hawaiian was not expected to be a cash taxpayer I think until about 2016. Is that just a function of past NOLs? Or does some of that just reflect the investment that you've made in the business, and so you're benefiting from some of the timing differences there? What's driving that?

It is mainly the NOLs, Mike. That's the lion's share of it.

Okay. Very good.

Just a question, and maybe this is for Mark or Peter. We look at how the Honolulu-Fukuoka situation played out. Look, we applaud you for making the right decision, taking the aircraft out of that market. It was underperforming, and there's obviously markets elsewhere where you can generate better returns.

I look at a market like Honolulu-Brisbane, and my sense is that that's not a big market; and maybe it's sort of Honolulu-Fukuoka-esque. We see now Qantas Jetstar, they've announced that they're going to go into that market. Any thoughts on just that market size and maybe its ability to support two carriers and maybe point of sale strength?

Is more of the flow coming from Hawaii down, or vice versa, or can you get flow traffic over Honolulu from the Mainland US? Is there potential risk that Honolulu-Brisbane maybe becomes another Honolulu-Fukuoka? Any thoughts on that?

I don't know that we're concerned about that. Brisbane's been a very successful market for us. We've been very surprised and impressed with the size of the market and its robustness; so we start from a position of being very, very happy on that route.

Secondly, we think our competitive strength in the marketplace is unmatched. We've got the right product. We've got a good cost base. We have many more years of experience in the distribution channels in Australia than we have in some of these other countries that are newly-launched for us.

For a combination of reasons, we think that Brisbane will be quite different. Of course, anytime you're in a market and capacity increases, there are likely to be impacts. That's the rough and tumble of our game. But the landscape in Brisbane is very, very different than we had in Fukuoka.

Mike, I'd just add to that that this obviously isn't the first time we will have competed with Jetstar. I think there are different strengths and weaknesses each of us bring. We're pretty comfortable with our competitive situation vis-a-vis Jetstar.

Thanks. If I can squeeze in one last one. As I recall the American agreement with their pilots -- I think the initial agreement that they signed back before the merger, there was the carve out for Alaska, Hawaii, and then coach sharing with an East Coast carrier.

Then I think it was revised. You can correct me if I'm wrong, that the East Coast I think they lost the option do as much coach sharing with an East Coast carrier. But it still preserved an opportunity to do a lot more coach sharing with an Alaskan and a Hawaiian carrier.

Is there anything on that front with respect to you and American? Is it anything that we should anticipate? Is it something we should stay tuned on? Or is it something that's more for the back burner? Any thoughts on that?

What I would say is first of all, we're not entirely up to speed on the intricacies of their pilot contracts. We have a good commercial relationship with American Airlines. Obviously, there have been massive changes over at American. We very much hope to be able to continue that relationship.

Unsurprisingly, they will have some rather bigger-agenda items on their plate at the moment perhaps than us. But we would very much hope to continue the cooperation that we've had. If there's interest from both carriers to expand that, then of course in the interest of our shareholders, we'd be open to those sorts of talks.

Great. Thanks, Mark. I appreciate it.

Helane Becker, Cowen and Company.

Thanks very much. Hi, guys. Thanks for the time. I just have a couple of questions here.

In the press release, where you specifically talk about the $34 million outstanding under the floating rate notes for the two 767s, so are those planes slated to be returned or retired at some point? And what happens to those notes?

Yes, they're to be returned. The notes -- the plan would just be to pay those off at the maturity.

Helane, those are aircraft we own; so they're in our fleet plan for a while. We assume they are going to be with us in the fleet through the end of the decade. But obviously they're an owned asset, and so that is up to us to change that plan over time.

Got you. Okay.

Then my other question is with respect to commissions and other selling expenses, they were down 7.3% or $2 million in the quarter. Why is that? Is that because you're not doing as much in Japan? Is that a new run rate that we should think about?

We had some favorability in Australia, and then the other piece of that is frequent flyer.

Helane, there are a couple of things there.

One, the commissions, we've got a couple of different elements to commissions in some of the different countries we serve. And there are some incentive commission that take a certain quarterly timing date that they can gave us some favorability. That'll move us around a little bit.

The frequent flyer ratio has to do with the valuation of frequent-flyer liability on the balance sheet, a lot of which is related to the price of fuel. That gives you a little wiggle in that line sometimes. It's not necessarily a trend you can count on.

We'd actually like some of the commissions cost to go up, which would be a sign that our revenue is improving.

Right. Okay.

Then just on other revenue, I'm thinking that that is where the co-branded revenue comes in. Can you say how much of that increase is the credit card verses ancillaries?

There are a couple of things in there. There is a portion of the revenue from the co-brand credit card goes in there. We actually, under our accounting policies, we end up bifurcating that between other revenue that we recognize immediately and another piece that we defer and recognize in passenger revenue over up to 22 months.

You've also got cargo in there, which I pointed out as one of the elements of improvement. You've got some of the other travel products, things like vacation packages and rental cars and hotels. There are a number of different pieces. The credit card is certainly a piece of the improving story there.

Okay. But you can't say how much is the credit card specifically verses the other stuff?

We haven't split it out in that detail. We don't go into line item detail through that typically.

Okay.

Then my last question, if I can, is I saw that Delta announced they were going to fly from JFK to Honolulu. It looks like just in December for the holiday, using a 767. Little letter, a, did you guys see that? And, b, what do you think about that? Thanks.

Yes, we did see it. We'll wait to see how the competitive dynamic changes. At the moment, it's for, as you rightly point out, only a couple weeks in December. And we'll see if they determine to make it permanent or not.

Again, the market flying from the East Coast to Hawaii is huge. It is second only to the West Coast market to Hawaii, and even behind the East Coast is Japan just to give you a sense of the context of the size.

There are many, many, many ways of getting to Hawaii from the East Coast, typically involving connections in between. It's hard to look at the nonstop capacity in that one city pair without taking a broader view as to the amount of connecting capacity to Hawaii in general.

So by itself, it's not particularly meaningful. It really does depend on whether airlines are going to be more or less liberal in their inventory on their segment in the lower 48 to get people to gateways to fly to Hawaii.

Got you. Okay. Great, thanks very much for your help.

Joe DeNardi, Stifel.

Thanks.

A question for Mark or Peter on the Taipei decision. It seems like you pulled the plug there a little bit more quickly than you'd normally would, less than a year old. Can you just help me understand, I guess, what drove the urgency?

Did you want that capacity elsewhere in the network? Or should we think about this as you guys changing your threshold for how long you're going to give a route to ramp up?

Joe, I don't think it's either one of those things. Let me take those in reverse order.

I think we're always looking at the routes and determining amongst the underperformers whether there is a pathway to success. So long as there's one that we believe in, that we think it's worth investing in, we will keep operating. Like any investment, some of them will work out and some of them perhaps won't.

In the case of Taipei, the issue was pretty stark. In every other market that we had got into shortly following the acception of that country's citizens through the US Visa Waiver Program, we've seen something in the order of a 50% to 100% increase in the amount of O&D traffic from that country.

If you go back to Korea, which got Visa Waiver access in the middle of the global financial crisis, year over year we saw a 100% increase in visitors to Hawaii following that. It was against those sorts of expectations that we launched service to Taipei after they became eligible for US Visa Waiver. In fact, it ended up stimulating the market to about 20%, which was far lower than we anticipated and made the service unfeasible.

At the same time, I think one of the lessons learned was that the level of recognition of Hawaii as a tourism destination in Taiwan was less than in other Asian markets. That is something we'll be more watchful of before we go in again.

I think Taiwan will eventually grow to be a significant market. We just didn't feel that the costs of flying to Taiwan in the interim justified the returns we'd get from that route. So we made a straightforward business decision.

Okay.

Then another question on the A350 -- I know there's a lot of uncertainty there with what Airbus is going do, as Hunter alluded to. But what gives you the confidence that that type of investment is going to pay off? If you look at 2016, it looks like the cash flow is going to improve. But based on the delivery plan you guys have right now, it's going to turn around pretty quickly in 2017.

Can you just help me understand what gives you the confidence that you need to make that big of a bet on growth?

If you look at a couple things, one is a much more fuel efficient aircraft than the aircraft we currently have in our fleet. We believe the returns from operating essentially would justify the capital expense of getting into those aircraft.

That is an experience that we have seen borne out in terms of refleeting that we've done so far. And so that clearly gives us some confidence going forward.

Okay. Thanks.

Steve O'Hara, Sidoti and Company.

Hi. Good morning.

Hi, Steve.

I was just curious in terms of the demand environment and maybe what you're seeing with where the yen is now versus where it was. It sounds like demand, from your comments, is still pretty good from Japan. Maybe you could just add a little more color there?

Sure. Demand is still pretty good from Japan. There are a lot of different moving parts in our numbers that makes the exact parsing of them out a little bit difficult.

The influences we have in there at the moment are as follows. We've got the year-over-year changes in the exchange rate. We've got the fact that we are in a right now seasonally very low period in the month before Golden Week, which is a very high period -- people travel very much.

We've got the much-reported change in sales tax in Japan, which likely front loaded a lot of household expenditure on domestic consumables before the tax went into effect. The tax is not interestingly enough applied to travel overseas, so it doesn't affect us directly. It's more how people spend money.

And we've got in a number, in some markets, some changes in capacity.

We've got a lot going on that makes it a pretty muddy picture. But the underlying level of demand, our perception and experience in what we're seeing in terms of the foot traffic through the door, continues to be pretty encouraging.

Okay. Then I was just curious in terms of the issues with Taipei, whose responsibility is it to spread the word in terms of the Hawaii vacation? Were there any missteps in that area?

And then finally, what other areas are being seeded right now that you think might be good potential opportunities down the road?

Yes, frankly, I think we've all got responsibility, all of us in the Hawaii tourism community, for not having prepared that groundwork well enough. I think you've got to be pretty open and reflective from these things in order to learn from them and not to repeat those issues going forward. It was disappointing to us and something we absolutely want to rectify going forward.

Going forward, what we're doing is we're targeting other countries of course. China is the huge new development for us. We're going to be reorienting some of our promotional activity to be less directly focused on why fly Hawaiian Airlines and more focused on why Hawaii is the destination that you want to visit.

We for sure are going to be encouraging our community partners here in Hawaii to redirect their resources in a way that represents the potential of the future rather than the history of the past. That's a processes that involves some discussion and negotiation here in the state.

Okay. All right. Thank you.

Glenn Engel, Bank of America.

(audio break) the difference between RASM and PRASM. In the first quarter, RASM was about a half a point better than PRASM. In the second quarter, you're saying it's going to be 1.5 points better. That seems at odds with your comments about cargo offering less of a contribution. (multiple voices)

I think some of what you're going to see there in the second quarter, Glenn, is a continued building of the momentum with the new credit card program, and comparing it against a period in the prior year when we were winding down the marketing of the credit card with our previous partner.

This year, we're moving into a period of strength and growth. And last year, we were in a bit of a slowdown period in terms of the credit card activity.

A question on margins. A few years ago, I would have pointed to the International as being the highest margins in the system. Is there much difference in the margins among the three regions you have now? And who's the leader, and who's the laggard?

I'd say the margins are roughly comparable. What you have in International is a much wider distribution of margins between the good and the developing routes. That's to be expected.

What we're signaling here is not underperformance, but that the message that we've been sending been sending -- we hope very consistently -- which is when you launch a bunch of new routes, it takes a while for them to mature. I still think for the long term the International probably has long-term prospects. We've got to mature some routes; and for the time being, I think things are roughly balanced.

The final question I have is on fleet for 2015. I believe there's three A330s coming in. Is there still planned to be an equal number leaving? Or will you be a net addition in 2015 as well?

We go up a little bit in 2015, Glenn. We've got some retirements coming in 2016, and we're still working through the specifics of how we're going to manage the capacity over that two-year period.

Okay, so 2015, more coming in than coming out. Okay. Thanks.

Kevin Crissey, Skyline Research.

Hi, Kevin. Kevin?

Yes, sorry. Can you hear me now? Thanks for taking the call.

On cargo, can you remind us the source? You're sourcing that freight primarily from forwarders? Do you have any folks that source that freight yourself?

It's primarily through freight forwarders.

Okay.

And can you talk again -- I've asked you in the past, I believe, on hotel sales; and I know there are some international markets. There are some packages and so forth that make it maybe trickier. Can you talk about where you are for selling other things, maybe just in a broader context, things other than just the flight and cargo as part of your mix? Thanks.

Yes, we do have the vacation package business; and we partner with Orbitz on that for fulfillment. A lot of that is based on our domestic network, and that is primarily a result of it being through our direct channels and being able to source that through the website. That business is growing and doing well.

We've got hotels and rental cars and trip insurance that are smaller in overall size than that vacation package piece, but still good contributors. Obviously preferred seats, which rolls up into passenger revenue, has been a big growth area for us and a good incremental source of revenue.

We've made a number of changes over the past six, eight months to really build on that. We have our Extra Comfort product coming online into the third quarter, which will be a positive for that.

I would just say one of the catalysts we're working on that we talked about again at Investor Day was the investment we're making in our website, which is going to make us that much better in terms of being able to market and promote and present these opportunities to our guests. We see a lot of opportunity here and really would like to have a good pipeline of other new products to come forward as we get the new website online.

Thanks.

Do you see very different buying behavior country by country in terms of your preferred seating or better cost of seating? Is that something you see that varies by country, or not so much?

I don't know so much that it is different buying behavior. We right now perform better on those products in the North America geography, but I don't think that is so much a case of demand as it is we've got a much greater proportion of direct sales and electronic check in.

As we are able to present those offers more effectively to our international guests, we're seeing more uptake on them. But it's really for us to be able to figure out the best way to present them when people aren't coming to us through exactly the same channels we get domestically.

Understood. Thank you.

Michael Derchin, CRT Capital Group.

Hi, everyone.

Hello, Mike.

I want to get some idea of how large a market do you think ultimately Mainland China will be? You just started Beijing services recently.

Also, how dependent is that on bilaterals and the ability to get routes and kind of just what the process is?

The market is of such massive potential, it almost defies our ability to calculate. It is a market which, if you take by comparison the number, there are roughly today, I believe, something on the order of 18 daily flights from Japan to Honolulu. That is on an obviously wealthy country with about 150 million inhabitants.

There are already about 150 million of China's over a billion citizens who have roughly the same level of wealth as the Japanese average. That alone, without even stretching, gets you from a place where today there are nine flights a week to an environment where you could foresee 20 or more flights a day into the state of Hawaii.

The real issue is that it is a developing market in the sense that foreign travel, patterns of travel, the distribution system in China, are not as well-worn and solid as they are in other markets. But as that process gels, there's essentially almost no limit to the amount of demand that China could spur for travel to Hawaii.

And the bilaterals, what is that situation?

Yes, the bilaterals at the moment would represent a limitation in as much as I think there's something in the order of about 14 unused frequencies, something in that order of magnitude. There is room for as much growth in the immediate future as we could potentially foresee. But over time, it would be important to see those limitations relaxed.

Thanks very much.

Thank you. Ladies and gentlemen, there are no further questions at this time.

I'd like to turn the floor back over to Mark Dunkerley for closing comments.

Thanks, Operator.

Thanks, everybody, again for joining us today.

We're starting the year as we had expected. That's with a continuation of improving trends throughout the business. We appreciate your continued interest and support as we work toward further improvements throughout the remainder of 2014.

Mahalo and thank you and good-bye.

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