Hawaiian Holdings Inc (HA) 2014 Q2 法說會逐字稿

Welcome to the Hawaiian Holdings second-quarter 2014 earnings conference call. (Operator Instructions)

I would now like to turn the conference over to your host, Ashlee Kishimoto, Senior Director of Investor Relations for Hawaiian Holdings. Thank you, Ms. Kishimoto. You may now begin.

Thank you, operator. Welcome everyone, and thank you for joining us today to discuss Hawaiian Holdings' financial results for the second 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, the balance sheet, and guidance. We will then open the call up for questions. And then Mark will make some closing remarks.

By now everyone should have access to the press release that went out at about 4:00 Eastern Time today. If you have not received the release, it is available on the Investor Relations page of our website, Hawaiiairlines.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 statement, 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.

Thank you, Ashlee.

Aloha everybody, and thank you for joining us. For the second quarter, we recorded adjusted net income of $0.35 a share, which was a 46% increase year over year. This was in line with guidance and consensus estimates.

Drafting these comments over the weekend, I was struck by how little has changed in our messaging these last three months. We've continued to enjoy the fruits of an improving trajectory in our business, first seen towards the end of last year. Each quarter results have strengthened substantially, built on strong demand across our geographies, stable fuel prices, and good cost control. Our effectiveness in turning these good conditions to our advantage has also been in evidence as we have grown our ancillary revenue faster than our passenger revenue.

We have continued to mature all that we have so recently initiated, and we have implemented a number of improvements in the way in which we do business internally, not readily seen from the outside. Our expectation is that assuming the good macro environment persists and allowing for the uncertainties of competitive behavior, we should see this positive trend continue, and perhaps accelerate for the remainder of the year.

As we reach the end of the delivery stream of A330s we are also looking forward to a period of net positive cash flows. Work is underway to determine the appropriate capital structure for our business, and while we've got nothing to announce today, we will likely be making some capital allocation decisions by year end.

Tempting though it might be to read verbatim from last quarter's script, given how little has changed in the meantime, let me instead fill you in on some of the more significant goings on since we last spoke. There are a number of network changes announced during the period. In North America, we launched new seasonal flying from Los Angeles and Oakland to Lihu'e and Kona at the end of June. We are pleased with the performance so far.

As our first long-haul flights to North America from Kauai and the Big Island, they are an important step for us in developing mainland services to these two islands. We also added back daily services from San Jose to Honolulu and from Los Angeles to Maui in May. On Los Angeles to Maui, we will now have daily year-round service plus seasonal flights in the summer.

Earlier this month we expanded our 'Ohanha by Hawaiian flying with the addition of service from Molokai to Maui and from Maui to the Big Island. Also in mid-April we launched three times weekly service from Beijing to Honolulu, and we are encouraged by the reception we have received. China will be an important component of Hawaii tourism in the upcoming years, and we are well positioned to take advantage of this opportunity.

As always, a heartfelt mahalo to all of my colleagues who continue to do a terrific job day in and day out, providing unique Hawaiian hospitality on the ground and aboard our flights, and also supporting the operation from the back office. Together they have created an unmatched quality of service that has become synonymous with our business. For the sixth straight year in a row the readers of Travel + Leisure have voted Hawaiian Airlines the best airline to Hawaii, and we have evidence that our customers overseas have formed similar views.

An hour ago we inked an MOU covering the conversion of our order for six A350-800s into six A330-800neos, and deferring their delivery. There are many terms to be more clearly fleshed out in the negotiations leading up to the formal purchase agreement. But the salient details are that the A330-800 aircraft will start arriving in 2019 instead of 2017. We have retained the element of flexibility in terms of tailoring deliveries to our needs as we get closer in to these dates.

Lastly, though we are not permitted to talk about the financial terms of the transaction, I can say that our capital expenditure commitments declined in absolute terms and are pushed further into the future under this new deal. For the period through the end of 2018, this reduction amounts to $500 million. The A330-800-neo represents an elegant solution to the gap which would occur if Airbus decides not to produce the A350-800.

From the cockpit through the passenger cabin, the aircraft is the same as what we operate today, giving us crew training, scheduling, and capacity commonality. At the same time it has greater range which will allow us to open markets deeper into Asia. And for the routes we already operate, it is considerably more fuel efficient.

With that, let me turn it over to Peter.

Thanks, Mark.

Operating revenue for the second quarter grew to $576 million, a 7.8% increase year over year, while passenger revenue increased 5.3%. Load factor for the quarter was 79.6%, a 1.3 percentage point decrease year over year, while yield increased 5.7%. Combining these results, PRASM increased 4.1% year over year while the faster growing category of other revenue contributed to raising overall RASM by 6.7%. These results were in line with guidance provided at the beginning of the quarter.

Continuing with prior practice, I will go over the results by geography, starting with North America to Hawaii, which represented half of our passenger revenue in the quarter, and where we posted another quarter of good results. PRASM was up 4% on the basis of strong yields, despite a 4 percentage point decrease in load factor off unusually high levels in the same period last year. As we expected, year-over-year improvements moderated sequentially through the quarter as year-on-year comparisons became tougher and industry capacity ticked slightly higher.

We expect industry capacity to grow in this geography to be up approximately 9% in the third and fourth quarters. Demand remains strong, and for our part we are comfortable with the additions that we have made to strengthen our competitive position off the West Coast, particularly from Los Angeles and the Bay Area.

The seasonal direct flights to Kona and Lihu'e that Mark mentioned earlier are booking well. We expect them to be accretive to our overall North America summer PRASM. North America has been an area of strength for us in the past several quarters and we anticipate this to continue, albeit with year-over-year PRASM changes more moderate against tougher comps.

Our neighbor island routes continue to perform well, generating 24% of passenger revenue this period and recording a sixth quarter in a row of year-over-year PRASM increases. Specifically PRASM was up 8.3% on a 0.4 percentage point increase in load factor. Demand for local travel remains strong, and we expect the trend of good yield performance to continue through the third quarter.

International routes accounted for 26% of our passenger revenue with PRASM declining 1.6% year over year on a 0.9 percentage point increase in load factor. These results continue a trend of sequential improvements, driven in part by lapping of the period last year where the strengthening US dollar undermined the value of our foreign currency sales. In this quarter, the year-over-year impact of currency was just $5 million, net of hedges. Absent the currency effects and the benefit of hedges, our PRASM would have been up approximately 2% in this area of our business.

Assuming we see no dramatic changes in the dollar value of foreign currencies that concern us, we would expect the international PRASM will turn positive in the remainder of the year. This reflects the maturing of our relatively new international routes, as well as some of the network adjustments announced earlier in the year that have only been fully in effect since the beginning of July. With further maturing of a clutch of new routes still ahead of us, we are excited about the contribution of these routes to our overall business, even in the environment of a stronger US dollar.

Before concluding the revenue discussion, I would like to highlight a couple of other bright spots in the quarter which helped to boost our revenue performance. Our cargo team continues to raise the bar, posting an excellent quarter, with revenue up 24% year over year to $19 million. These results were better than our expectation going into the period, and were highlighted by a record-breaking month of June that featured our four highest cargo traffic days ever. Going forward we expect to continue to build on the steady improvements we have seen in our cargo business over the past few years, albeit at a more moderate pace of year-over-year improvement as our network expansion slows.

We are also setting new standards for ourselves with respect to the sale of preferred seats. After posting our first million-dollar month of preferred seat revenue in March, we surpassed that threshold in each month of the second quarter. This performance has been enabled by selling preferred seat upgrades in advance starting late last year instead of only offering the product at check-in, and also expanding the sale of preferred seat upgrades to our neighbor island flights.

In the third quarter we'll take another step forward with the introduction of our extra comfort product on all our A330s, which will expand the inventory of extra legroom seats on this fleet from 24 to 40 per aircraft and have them at a higher price point, which reflects some additional product features that create both a compelling customer value proposition, as well as something that is accretive to the business without reducing our seat count.

With that, let me turn the call over to Scott.

Thank you, Peter.

As mentioned earlier and to recap the quarter, we reported adjusted net income of $22.4 million, or $0.35 per share, a strong improvement compared to last year's adjusted net income of $12.6 million, or $0.24 per share. Our earnings per share this quarter reflects the dilution of 8.3 million shares under convertible notes and related warrants due in March 2016 that can now be converted. Our return on invested capital for the trailing 12 months ended June 30 was 13.5% before tax and 8.1% on an after-tax basis.

Second-quarter total operating expenses, excluding fuel, increased $22.7 million, resulting in a 5.8% increase in CASM ex fuel year over year, which was in line with guidance issued at the beginning of the quarter. As a reminder, our costs were elevated in the second quarter due to several projects and one-off items. Included were maintenance-related costs associated with cabin modifications for our extra comfort product and additional labor costs related to FAR 117 flight time and duty rules for pilots. These items totaled $8 million, or 2.4 percentage points, of the year-over-year increase in CASM ex fuel this quarter.

Turning to the balance sheet, we ended the quarter with $564 million in unrestricted cash, cash equivalents, and short term investments and $69 million available under our undrawn revolving credit facility. We are working on replacing and increasing the availability under this facility, which matures in the fourth quarter. Our CapEx in the quarter was approximately $165 million, which included $150 million related to payments for aircraft and aircraft-related items, including upcoming deliveries.

Also during the quarter we contributed $4 million to our pension plans. As we have noted in the past, our cash position is strong and we expect to enjoy positive free cash flow in upcoming years. Assessing our optimal capital structure in this new environment is a work in progress at the moment, and you can expect more details from us later in the year.

Let me now switch gears and move to our outlook for the third quarter and full year. Year-over-year ASMs are expected to be up 1% to up to 3% in the third quarter. For the full year, we have lowered our ASM outlook and have narrowed our guidance range by a point. The new range is now up 1% to up 3% due to refinements in our schedule for the second half of the year.

Regarding movements in our fleet, let me remind you of our delivery schedule for 2014 where we are effectively up only one incremental aircraft this year. In the first quarter we took delivery of two A330s that essentially replaced two aircraft that left our fleet in late 2013. In the second quarter we took delivery of two A330s and retired one 767 at the end of the quarter. 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 prefunded the remaining A330 delivery this year through a EETC with an attractive interest rate of 4.13%. We expect to finalize plans in the near term for the financing of our remaining A330s delivering in 2015.

Turning to the top line, revenue is expected to increase year over year in the third quarter with RASM up 3% to up 6%. We expect CASM ex fuel to be up 1% to up 4% in the third quarter. For the full year, we have narrowed our CASM ex fuel range and expect it to be up 3% to up 5%. We continue to expect the 2014 full year effective tax rate to be in the 38% to 40% range, and we do not expect to pay material cash taxes in 2016.

Sticking to our normal practice, we are not going to give fuel price guidance at this time, but we expect our fuel consumption to be up 0.5% to up 2.5% year over year for the third quarter. Our expected full year CapEx is slightly lower than previously projected, with an updated range of $460 million to $465 million. As mentioned earlier, we have financing in place for all of our A330 deliveries in 2014, totaling approximately $370 million.

That is 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, as needed, one follow-up question.

Operator please open the line up for questions.

Thank you. (Operator Instructions) Our first question comes from the line of John Godyn from Morgan Stanley.

Hey. Thank you for taking my question. The A330neo announcement I think is a pretty big deal. So I was hoping to just dig into that a little bit more.

Mark, I don't know if you have kind of any of these sound bites at your fingertips, but is there anything you can tell us about how you view the prospective operating economics of the A330neo versus the A350-800 on like-for-like routes?

I can give you a sort of broad wet finger in the air assessment. We're going to see a double-digit percentage reduction in direct operating costs, and we think it will place us somewhere in the realm of two-thirds to three-quarters of the way between what we expected, the difference between the 330 -- now classics -- 200s, and the A350. So we get the majority of the benefits will flow going to the A330-800, at the same time of course with lower capital costs.

Okay. That's very helpful.

Then I think one of the compelling features of what you've done here is certainly reducing CapEx and pushing out deliveries. I am curious, though, how this affects the team's long term ASM growth rate.

I believe in the past, and correct me if I am wrong, we have talked about the theoretical mid-single digit ASM growth rate over the long term. Is that still a number that kind of characterizes the growth opportunities that Hawaiian sees in front of it?

Yes, absolutely. When we ordered the A321neo, it was partly on the expect that the 350-800 would, at the very least, be late. And so part of the 321neo order protected the back half of this decade in terms of being able to grow at that single digit percentage.

This new order fits within that overall picture. And, as I mentioned, we have negotiated a degree of flexibility that will allow us to modulate our rate of growth according to conditions much closer in.

At the same time, during this period of time, we've got a bunch of 767s retiring. And so the combination of the retiring airplanes, the 321neos and the 330-800s coming in allows us to get to that mid or low single-digit rates of growth that we had highlighted.

Great. Just last one. You had mentioned that this opens up the opportunity for a discussion on capital returns maybe sooner than we had expected. I'm just curious. Of course, it's a Board decision. I'm curious as the management team sort of works with the Board, do you have any perspective on buybacks verses dividends? We have seen a few different strategies from airline peers out there, and I am curious what your take is. Thanks.

Well, certainly, candidly I wish I could tell you more but I think it would be premature for me to be out there voicing an inclination to one particular allocation of capital over another one. We are working on it. We want to do this in a very kind of thoughtful way, recognizing what the future holds. We are in a position where that is front and center of the work that is taking place at the moment internally.

Great. Thanks a lot.

You bet.

Thank you. Our next question comes from Michael Linenberg from Deutsche Bank.

Good afternoon. This is actually Catherine O'Brien filling in for Mike.

Yes, it doesn't sound like Mike.

Yes, I know. Thanks for the time. Given what some of your US peers have been noted on international yield weakness, particularly in the Transpacific, have you had to reconsider any of the routes you are currently serving? It seems like they're going really well from your earlier commentary. Or had to reconsider any plans for future growth? Or are you not really seeing any of that weakness in your market specifically?

We certainly have seen some weakness and we took some decisions earlier this year to make network changes in the face of those weaknesses. I would say that very much in keeping with the overall theme of our comments today, there has been no real change in our operating environment over what we've seen over the last six or so months.

And so what I would say is where we are now, one, does not constitute a surprise. Two, it is not a disappointing situation. If anything, we are seeing some maturing of some routes, which are helping us improve things over what they would otherwise be.

As to our strategy for growth, it's still very much there. In the markets in which we operate we very much like our costs and service proposition. So in none of the markets that we operate are we sitting there saying -- thinking to ourselves that we have a fundamentally uncompetitive product.

Okay, great. Then if you just have time for one more quick one.

So I realize most of your North America capacity is off the West Coast, but that was a market that we saw some issues in over the past several years, and it seems to have really turned around. Can you give us an update on West Coast specifically to Hawaii capacity, and if you see any competitive changes?

I realize that PRASM comps get tougher, but overall profitability of that unit, would you say that's holding up or improving based on higher demand? Any comments would be helpful.

Sure. We don't comment on the profitability of our individual geographies. We're a small company. It is important for us to maintain a degree of competitive mystery for our competitors, who will also be listening in on this call, no doubt.

What I would say is that after a period of time in which there was a clear excess capacity, some of that capacity came out. We are getting back into a period where capacity is growing off the West Coast to Hawaii. A fair chunk of that is actually us. We have inaugurated some new routes.

We have reasons to believe that the market can absorb that capacity. And so far the results that we have seen from the network changes that we have made in North America have been very positive.

Catherine, this is Peter. Just to reiterate what I said on the call, I think we're satisfied with the demand we're seeing that is, as Mark said, absorbing the capacity, some of which was seasonal for the peak period. So we're pretty comfortable with the competitive environment on the West Coast and we think we're in a very strong competitive position.

Okay, great. Thank you for the time.

You bet.

Thank you. Our next question comes from Hunter Keay from Wolfe Research.

Hi, everyone. Thank you.

Hey. Hunter.

Hey. A little bit more on the cash deployment as it relates to the way you talked about it. I am kind of curious, it seems a little early for you guys to be talking about that right now. I am kind of curious, the timing as to why you are bringing it up right now.

And as it relates to that, you said, I think before, you were going to be cash flow positive next year. But then you said earlier, Scott, you are going to be free cash flow positive in the upcoming year.

There two questions are related to each other, I guess. Why are you talking about cash deployment now? And do you expect to be free cash flow positive next year?

Okay, Hunter. I am not sure I understand exactly what you mean by why are we talking about it now. Are you asking that question with respect to why are we talking about it before we have anything to announce, or why are we talking about now, given how you'd imagine our cash flows are going to move over the next few years?

Yes, it's a fair question. Thank you for asking me that.

I guess the timing of it does relate to the aircraft order, right? What I am really trying to get at to, does it have any impact on your 2015 free cash flow? Again, do you guys expect to be generating free cash flow next year, or good amounts of free cash flow next year?

Because if you don't, the implication therefore is going to be you are going to be deploying cash that's either on the balance sheet or that's going to come into the business through debt, which is fine if you want to do that, by the way.

But I am just kind of curious as to know the timing of this sort of tease, if you will, on the free cash flow. You are not the only company, by the way, that talks about cash flowing before they do it. There is nothing wrong with that. I'm just kind of curious to know you're bringing it up today in the context of maybe the aircraft order and as it pertains to next year's free cash flow tenor.

A couple of things I would say. Yes, 2015 I think continues to look good from a positive cash flow perspective.

The second thing I would say is that almost kind of regardless of what our near-term outlook is, we are always mindful of what we think the best capital allocation strategy is, and what we are recognizing is that we are going into a new period, a period that feels very different from the period that we're exiting this year.

I think it's entirely appropriate. In fact, I think it's a responsibility of management to take pause and think about how things have changed and whether that occasions a change in our capital allocation strategy.

The third thing I'd say is we have obviously a lot of interest from shareholders and analysts as to what our strategy is, and we try and be transparent about that. I think we are indicating that we're coming upon a time when it would be a good thing for everybody if we can more clearly articulate what they can expect to see from us.

And then lastly, and perhaps most importantly, our results have been good. We are building cash balances today and there are -- it is bringing forward the date that we might otherwise think about how we might allocate cash in ways that are different than we have done in the past.

That's really helpful. Thanks for that, Mark. I guess one more question.

You mentioned something about some internal changes that we can't see from the outside. Can you give us a good idea of -- some examples, I should say, of what those are, what inning are you in in terms of these changes, whether they're procedural, I don't know what they are, in terms of headcount-related, footprint. I have no idea. But what are you talking about? What inning are you in on these things, and is there a financial benefit to them?

Yes, taking that as in reverse order. Hopefully there is a financial benefit to them. There better be, as I look around the room here and see some of my colleagues.

We've moved from being a relatively small regional player into a realm where we've grown very, very quickly. We have inaugurated a whole bunch of new routes. And perhaps unsurprisingly, our internal processes were built around frameworks, either IT platforms or even organizational relationships, which aren't entirely well suited to our larger size and more complex operation.

So a lot of what we're talking about here is new applications that we are developing. We've got things like our revenue accounting system is getting an important makeover which will give us better access to information upon which to make decisions.

We've got a real push on productivity in the workplace where we are looking at ourselves in a -- as we have now become larger to see where we can get additional productivity benefits that are now available that previously weren't. There are a whole bunch of these kinds of activities.

They don't all start one year and come to an end 18 months later. They're more continuing. I put it in the script largely because a lot is going on behind the scenes at Hawaiian Airlines, and we do think that there will be some substantial benefits that will come from that as they mature.

Thank you. Our next question comes from Helane Becker from Cowen & Company.

Thanks very much, operator. Hi, everybody. Thanks for the time. Just a couple of questions.

Peter, I think you alluded to the fact that some of the 9% capacity increase is seasonal. Do you have what you think is the estimate for seasonal versus permanent?

Helane, I don't have a number on it but I can tell you that we're doing some seasonal flying out of both Los Angeles and Oakland to Liu'e and Kona. That accounts for a couple of aircraft worth of flying. And we've got a second daily LA-Maui that comes out around Labor Day as well. And then we'll maintain the regular LA-Maui throughout the full season. So those are the seasonal bits that are coming out.

And then at Christmas time where we've got some aircraft availability, we have a little bit of extra flying that will come in primarily out of Los Angeles at that point in time, with some extra flying to Honolulu.

Okay. And then as part of that, I think you guys went to five a week from daily JFK-Honolulu. Does that go back to daily at some point, or did I miss it? Did it already happen?

It will. It should be daily right now in the peak of the summer. What we did, we first started this actually last fall. We've reduced the schedule down to five times per week seasonally. We saw positive benefit out of that adjustment, and so we made a similar adjustment, both during the spring trough, as well as doing it for the fall of 2014, and actually with a little bit more lead time so our sales were better aligned with the capacity we ultimately flew.

And those have worked well and we are happy with the trend we have seen in terms of JFK results. And we'll fly it seven days in the peak and make the appropriate adjustments going forward.

Okay. And then you might have answered this when you answered Catherine's question, but do you have the sort of similar numbers for competitive capacity for international? I feel like the Hawaii airport people said, international is down about 3.5% for the next three months.

Yes. I don't have that on my fingertips, Helane. We can try and get that for you. It's a little bit difficult to think of international in the same way that we think of neighbor island and North America, just because you've got such disparate markets that aren't homogenous.

So when you see incremental flying, like we added earlier in the year from Beijing, it actually has zero effect on what we do out of Australia or Japan. But we can try and get you a cumulative number, and hopefully Ashlee can make some sense out of it for you.

Okay, thanks. Then just one little one. As we look at the numbers for the fourth quarter, is there -- you have a tough comp for the fourth quarter on unit revenue. Is there a chance fourth quarter is more like flat to down a little bit rather than up?

Helane, I don't think we are going to start guiding for the fourth quarter yet. We'll give you the third quarter number and we'll think about the fourth quarter as we get a little bit closer to it.

Okay.

Yes, and clearly we -- we have guided for the full year.

I guess I can back into it. All right. Well, Mark, I am glad your jellyfish incident came off without a hitch.

Yes, so was I. So was I.

Anyway, thanks for your help, guys.

You bet. Thanks, Helane.

Thank you. Our next question comes from Fred Lowrance from Avondale Partners.

Hey, good morning to you guys over there. A couple quick questions from me. One, just curious to hear why you shifted away from talking about passenger RASM and only looking at total operating revenues per ASM. That's typically something we see from guys like Spirit or Allegiant who have a huge, 30%, 40% chunk of their revenues coming from ancillaries.

Then sticking on the RASM front, is there any way for you guys to quantify for us how you thought about the impact of route terminations in Fukuoka and Taipei, how that impacted your thought process about RASM for the third quarter?

Yes, let me take those, Fred. First of all, in terms of the guidance, we were really just trying to simplify it. I think having multiple numbers out there we were concerned was going to create some confusion. And so we went with RASM, which is obviously the more comprehensive number, and helps give you guys a sense of where things are going to come in terms of overall operating margins and pretax margins when you start summing it up.

In terms of the network changes, certainly that is all part of what goes into the calculus of our guidance. We actually have a small enough network that we tend to build things up on a route-by-route basis, and obviously some of those things are in and not in versus prior year. So that's all in the mix.

I wouldn't want to go into describing the sort of components of the elements of change for similar competitive reasons to what Mark cited earlier about why we don't want to delve into too much detail in terms of the moving parts.

All right. And I think in first quarter, maybe it was Mark mentioned, that those routes that you did decide to terminate had deteriorated a little bit more during the first quarter. Is it safe to assume that as those approach their end in April and June respectively that those routes, the economics on them continue to deteriorate, or is that not actually the case?

Well, two pretty different cases in there. Taipei was canceled fairly early in the quarter so it didn't have a significant impact on the quarter. Fukuoka we operated throughout the quarter, and I think the situation you were describing would generally describe it, but it wasn't a meaningful change in trend between the first quarter and second quarter.

All right. Thank you, guys.

Thanks.

Thank you. Our next question comes from Glenn Engel from Bank of America.

Sorry about that. On the other revenue -- good afternoon, everybody. On the other revenue side, you were $17 million better than a year ago. And I think you said the cargoes -- implied it accounted for about $4 million of that. So what drove the other revenue up so much, and how sustainable is that?

Glenn, this is Peter again. One of the -- the other components besides cargo that is meaningful is the frequent flyer, which really has -- there is two elements to what is driving that. Obviously, as you remember from last quarter, we had our new credit card deal, which is a very significant third-party sale-of-miles contract for us. So we're growing the cash we get as part of that deal.

There is also, as we entered into the new contract, a change in accounting that leaves us with about a third of that being -- running through the other revenue line versus 10% of the smaller number previously that was running through the other revenue line. So that is part of what you're seeing in there.

And then I would say there are a handful of other things that individually don't rise to the level of materiality to talk about. But things like vacation packages and rental cars and some of the other products that we are selling are increasingly important in aggregate, but individually they don't total up to the sort of big numbers that we tend to talk about in our scripts on this call.

That comment implies that your PRASM gains were understated and your other revenue gain was overstated by the change in accounting?

Yes, there is some shift between the lines because of that change in the frequent flyer accounting.

And would I expect a similar gap between PRASM and RASM in the third quarter as the second, or it will be slightly smaller?

Yes. That credit card deal came in place at the beginning of the year and sort of built up as we were able to market the card more aggressively late in the first quarter. So you will see some of that same behavior through the third and fourth quarters, and then should be a more normalized trend going into 2015.

For the first time you laid out your currency hedges. Can you just talk about the strategy and do you lock in currencies, use options? How do you do that?

Yes, Glenn. We use forward contracts for the most part in the currency hedging. We go out anywhere between 18 to up to 24 months on a declining basis. We start going into any quarter with about a 60% hedge, and then that trails down to something like 20% when you get out to 18 to 24 months.

We have a small budget of options that we use to manage the tail risks around these forward contracts because it can, as you know, go against you. But that's fairly small.

This is going to be a formulaic program like your fuel program where you are just going to lock in a certain percentage each quarter?

Yes, it's similar to that. Just a little longer tenor.

Thank you.

Thank you. Our next question comes from Bob McAdoo from Imperial Capital.

A couple quick ones.

Hey, Bob.

When you think about free cash flow going forward, what should we think about as maintenance CapEx on an annual basis?

This year it's just under $60 million, $55 million to $60 million.

When you think about it going forward, should we use that same kind of number?

That's kind of this year, but I think you should expect it to trail down as we go forward.

So use $45 million next year? That kind of trail down? More, less, round number?

We haven't gone through the budget process, but that's not an unreasonable number to choose.

Okay. Then how many seats would have been on the A350s as compared to the current A330 or the new A330?

About 320 seats. 315, 320 on the 350-800, and using exactly the same seating configuration, because it is the same fuselage as the A330-200, the A330neos will have 294 seats.

Okay. Could you just go back over, I got a little bit tangled up when you start talking about the percentage change of what the new A330 does versus the old A330 in terms of what -- on a typical flight, what's the trip cost reduction?

It's double-digit reduction in trip cost. That's compared to where we are today with the A330-200. It will be about two-thirds of the way between what we would have achieved with the A350-800 for far lower capital cost.

Okay. And when you say it's double digit better than the current A330, is that including the impact of it probably going to cost a little more than the current A330, or is that just directly the variable operating cost?

That's the variable operating cost.

Got it. Okay. Very good. Thank you.

And the fuel.

Thank you. Our next question comes from Steve O'Hara from Sidoti & Company.

Hi. Good morning.

Hey, Steve.

Could you just talk about, I know you are looking for decent RASM improvement in 3Q, and you had good growth in 2Q. And if I recall, you were using a new revenue management system. I am just kind of wondering what the impact of that was, or have you seen that impact yet?

Yes, Stephen. It's kind of hard to tease it out specifically because there are so many other moving parts going on. You can't do these experiments in a vacuum in our business.

I think we have -- I would say we have definitely seen the benefits of the revenue management system. I think it is the nature of these systems changes and the associated process change that goes around it that, because they rely on history, you should see incremental improvements over time.

So I think, one, we are seeing benefits. Two, that doesn't mean that there is no more benefits to achieve going forward.

Okay. Yes, that makes sense. Then just on the cargo improvement, was that -- I guess I am just wondering is that market share you are taking, or is that -- are you seeing a better cargo environment in general?

I think what we have really done, and this has been a continuing trend for a couple of years, is we have, as the network has grown and we have been able to add points internationally and attract cargo internationally, that's being part of the benefit. I think we have improved our effectiveness as a team, and I am really quite proud of what everyone in cargo has accomplished for us in terms of selling in our more mature markets, whether it is off the West Coast.

The A330 is a marginally better cargo airplane than the 767 in terms of its lift capability and because we've got a consistent configuration with all large cargo doors, whereas our 767 fleet has historically been more of a hodgepodge. That means we can promise the product every day and know we are going to be able to deliver it because we know that every airplane that shows up has the same capability. So I think all those things contribute to it.

The overall cargo environment I don't think is particularly robust. If you look at how we have grown cargo revenues as a proportion of our total business, it has outpaced the rate of growth of our domestic competitor certainly, and I think if you read the press clippings about people talking about the global cargo environment there is generally a consensus that it has been a slow recovery at best for the air cargo business. So we must be improving our market share in that environment.

Okay. Thank you.

Thank you. Our next question comes from Joe DeNardi from Stifel.

Hey. Thanks. Good afternoon.

Hey, Joe.

I am curious on the $500 million in CapEx savings. It seems a little light to me, given that you were expecting four A350s. Is there anything offsetting that?

Then maybe longer term, do you think this puts you guys in a position where you can generate positive sustained free cash flow, or should we still expect some cyclicality as the A330s come in?

Okay. I really can't go into the calculation of the $500 million, such are the standard confidentiality agreements between manufacturers and airlines. However, that number is the right number.

As to, does this kind of forever change the cyclicality of our cash flows, I think the answer is no. We are reducing the cash-out and delaying it, which has obvious benefits. We are growing, so -- providing we do so profitably, and that's certainly what we are doing at the moment. The amount of cash coming in is also a great benefit.

We have got tremendous flexibility in our order book so that we can kind of tailor our capital obligations to how well we're doing and how much cash that we're generating. But close in, year on year, will there be cyclicality going forward? The answer is yes.

Okay. Mark, obviously you guys made some changes to the network earlier in the year. (technical difficulty) anything as dramatic since then. Can you just talk about, are there still routes in the network that are maybe in that -- that you are taking a look at, or you are pretty satisfied with everything at this point?

We're satisfied with everything at this point. There is still some in development, obviously, but the development's been satisfactory.

Okay. Then Peter, on the competitive capacity trend that you went through, how has that changed over the past couple months? Has it gotten better or worse kind of as the last few months have gone on?

There hasn't been a dramatic change. I think on the margin there has probably been more additions than reductions, but I haven't -- I wouldn't characterize it as a big wave one direction or the other. I think it is more different airlines adjusting to opportunities as they see them in the marketplace.

Thank you. Our last question comes from Michael Derchin from CRT Capital Group.

Hi.

Hi.

I wanted to ask you on that A350-800, had one of the reasons for taking it was it gave you the opportunity to fly some really long-haul kind of markets, like maybe Brazil or China mainland.

What's the new range on the A330neo with the new engines? How much range do you have? And kind of what percentage of the kind of the longer term new, new markets out there can you still do with that plane?

The A330-800-neo won't have the same range as the A350-800, but it is sufficiently close with the few markets that fall outside the range circle for the A330-800, but inside the range circle for the A350-800, is sufficiently small that we think that this is very positive development for us.

Does that have -- do you have London capability from Honolulu nonstop?

I think some of the analysis still has to be performed on that. It will depend fairly substantially on what the seating configuration we have in the airplane is. In an environment where we thin out some of the seating configuration because we want to have, for example, either a larger business-class cabin or one with more space for longer haul travelers, then it probably will fall within range.

Yes, I am asking that for your employees, by the way, Mark.

Absolutely.

Okay. Thank you.

Thank you. At this time I will turn the call back over to Mark Dunkerley for closing comments.

Okay. Thanks everybody for joining us today on this call. Before we go, I'd like to share with you the date for our upcoming Annual Investor Day. It's going to be held the morning of December 3 in New York with further details to follow in the upcoming months. Obviously, we hope to see you all then, if not before. Take care, and thanks so much for joining us on the call.

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