Hawaiian Holdings Inc (HA) 2014 Q4 法說會逐字稿

Welcome to the Hawaiian Holdings fourth quarter and full year 2014 earnings conference call. At this time all participants are in a listen-only mode. A 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 turn the conference over to your host, Ms. Ashlee Kishimoto. Thank you. You may begin.

Thank you, operator. Welcome everyone. And thank you for joining us today to discuss Hawaiian Holdings financial results for the fourth quarter and full year 2014. On the call with me today are Mark Dunkerley, President and Chief Executive Officer, Peter Ingram, Chief Commercial Officer, and Shannon Okinaka, Chief Financial Officer. Mark will begin with some overview comments. Next, Peter will take us through revenue performance. Shannon will follow with a discussion on costs and the balance sheet. We will then open the call up for questions and Mark will make some closing remarks.

By now everyone should have access to the press release that went out at about 4PM Eastern Time today. If you have not received the release, it is available on the investor relation page of our website, hawaiinairlines.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. With that, I'd like to turn the call over to Mark

Thank you, Ashlee. And Aloha, everyone. And thank you for joining us today. Before we begin I would like to welcome Shannon Okinaka as our Chief Financial Officer following the departure of Scott Topping a couple of weeks ago. We wish him the very best and we thank him for his contribution to Hawaiian these past several years. Some of you may be familiar with Shannon, who has held positions of increasing responsibility since she joined Hawaiian in 2005 and has served most recently as Vice president and controller since 2011. We all look forward to her leading the finance team and to you getting to know her better in the coming months.

For the fourth quarter our adjusted net income grew to $26 million or $0.40 cents a share. These results are in line with consensus estimates and represent another quarter of very strong results. For the full year, adjusted net income grew to $97 million or $1.55 per share, making 2014 a much better year than 2013. The year-ended much like the quarters which preceded it. We enjoyed strong demand for travel to and within Hawaii, the benefits of network changes that we'd made earlier in the year, the impact of our developing roots continuing to mature, healthy growth in non-passenger revenue, lower fuel prices and continuing cost control.

By the numbers, in 2014 our unit revenue grew 5.6% year-over-year, comfortably outpacing the performance of our peers. Our pre-tax ROIC grew to 16.3%. Adjusted net income increased 108% and the adjusted pre-tax margin grew to 6.9%. Hawaiian's amazing employees deserve the credit for all that has gone well. Their dedication to our customers and to the Company is a source of tremendous strength. Their individual efforts offset the advantages that our competitors derive from being so massive. Without the goodwill of our Ohana, or family, we would not have survived for over 85 years and more recently have prospered. Our business is getting better and stronger.

The strategic direction we adopted over the past several years is now bearing fruit. Looking to the year ahead, our outlook for 2015 is positive and, subject to the usual caveats for oil prices, demand and competitive behavior, we would expect expanding margins, a significant improvement in earnings, a large decrease in capital expenditures, positive free cash flow and the strengthening of our balance sheet. The decline in the price of oil has been an important catalyst.

If the current forward curve plays out over the next 12 months our fuel bill will be $240 million lighter, net of hedges, than it would have been otherwise. Despite the good fuel environment in the short-term we have no intention of straying from our long-term corporate strategy. So to be clear, we will not be making capacity or net worth decisions motivated by the state of today's oil markets. If you've followed us for awhile, you will also know that we have never used our fuel and currency hedging programs to speculate on the future direction of fuel and currencies.

Instead we have always sought to use hedges to reduce the volatility in our financial results and to manage economic risks associated with fluctuations in the market. This approach will not change in the current environment. And more about this later in Shannon's section. Since we last spoke there have been a number of developments worthy of mention. As part of our existing capacity plan, we announced the return of seasonal flying between Oakland and Los Angeles on the west coast and Kaua'i and the Big Island beginning in May.

In addition, we announced a second daily seasonal flight between Los Angeles and Maui starting in June. We recently filed an application with DOT to begin daily nonstop service this summer between Tokyo's Haneda Airport and Kona on the island of Hawaii. This was prompted by DOT's decision last month to review its award to Delta of a route right to fly between Seattle and Haneda. Our continued interest in additional rights underscores our confidence in Japan and in our ability to prosper there despite the recent strengthening of the U.S. dollar against the yen.

Our strong operational performance continued. We carried a record number of passengers in 2014 and continued to lead other airlines in on-time performance. Other measures of operational performance also saw us comparing favorably to our peers. At our investor day late last year, we shared with you our balance sheet strategy. So let me update you on where we stand in this respect. We ended the year above our 23% to 25% liquidity target, allowing us to allocate capital in the fourth quarter. We extinguished some A330 debt and repurchased 18% of our convertible notes.

The repurchase of our converts is noteworthy in that it says the dual purpose of removing debt from our balance sheet and eliminating 1.9 million shares of common stock from potential dilution. At year-end, our adjusted debt to EBITDAR stood at 4.2 times and by the end of the first quarter we expect to be slightly below four times, crossing the upper boundary of our target range.

Our free fact cash flow in 2015 is set to run ahead of what we projected as little ago as investor day. As a consequence, we have more to work with in terms of managing our balance sheet and maximizing long-term shareholder returns. We will continue our approach of being opportunistic buyers of the convertible notes and in addition, we will also be looking at other forms of capital allocation. 2014 was a good year for us.

Even setting aside the beneficial impact of less costly fuel towards year-end our underlying business strengthened and margins improved. For 2015, we expect the positive trends of an improving underlying business and lower fuel prices to result in even stronger performance so long as the world as we are experiencing it today does not change. Now over to Peter to discuss our revenue performance in commercial initiatives.

Thanks, Mark. Before diving into our revenue performance I too would like to thank all of Hawaiian's terrific employees for the great job they do taking care of our guests. Operating revenue in the fourth quarter grew to $575 million, an 8.1% increase year-over-year. PRASM grew 3.1% from last year while RASM grew even more, up 6.1%. This strong result was right in line with the guidance we provided at the beginning of the quarter. Solid revenue performance in the second half of the year lead to a full year increase in PRASM and RASM of 3.5% and 5.6% respectively. This unit revenue improvement outpaced all of our U.S. competitors for 2014 and gives us a fabulous foundation on which to build in 2015.

I will go through the results by geography. Our neighbor island routes generated 24% of passenger revenue and continue to provide a steady contribution to the network. PRASM in this geography increased 2.1% on a 1.7% decrease in load factor and 8% more capacity. Going forward we continue to see strong and able demand between the islands of the state and we expect to see the continuation of solid results. North America to Hawaii represented just under half of our overall passenger revenue, growing 10.4%. North America PRASM declined 3.3% on a 1.9 percentage point decrease in load factor in the face of double-digit industry growth and tough comparisons to a strong end of 2013. The capacity outlook has not changed much since we last spoke.

Based on published schedules, industry capacity between North America and Hawaii will be at record levels in the first half of the year with year-over-year growth leveling off a bit in the third quarter. As you know, our network adjustments in 2014 contributed to this growth, and we remain extremely pleased with the results of those changes. As 2014 drew to a close, our booked load factor for the first half of 2015 came under some pressure and the challenging booking trends continued into the early part of 2015. We have seen some recovery more recently, but we have some ground to make up on strong prior year results.

In this context we have adjusted our planned schedule in the second quarter by pushing back the start date of some of our seasonal services to focus the extra capacity on peak season. Despite the tough competitive environment, the financial performance of our North America roots remains very good. International roots accounted for 27% of our passenger revenue with PRASM up 11.4% on a 5.8 point increase in load factor. These improved results reflect the continuation of encouraging trends -- good demand, the benefit of network adjustments in the first half of 2014 and the maturing of our relatively new international roots.

The strengthening of the U.S. dollar net of hedges resulted in a $5 million offset to our results this quarter. Moving forward, the U.S. dollar has further strengthened against foreign currencies in general and against the yen and Aussie dollar in particular. We continue to hedge our foreign currency exposure with the use of forwards and for 2015, we have hedged approximately 45% of our yen and Australian dollar exposure at better levels than the current exchange rate. Compounding the forex headwinds from a revenue perspective is a reduction in fuel surcharges, mostly notably on our Japan and Korea routes.

While there is obviously a silver lining on the fuel line to this revenue cloud, the combined impact of these factors has us expecting U.S. dollar denominated PRASM on our international routes to move downward in the first quarter despite foreign currency denominated improvements. Turning away from passenger revenue for a moment, in the fourth quarter sales of value added products were $21.86 per passenger, an increase of $7.45 or 52% year-over-year. Those of you who attended our investor day in December may remember that we introduced this metric at that time and I would refer you to our investor day commercial presentation for a reminder of the components of revenue that are included.

For all of 2014, we generated $19.72 per passenger, up $5.03 or 34% year-over-year. These improvements were driven by strong performance from the sale of HawaiianMiles, most notably through our COBRA and credit card relationship, and the launch of Extra Comfort in August. HawaiianMiles sales boosted the other revenue line by $12 million in the fourth quarter and $40 million for the full year. Meanwhile, our Extra Comfort and Preferred Seat sales, which we record on the passenger revenue line, averaged $2.9 million per month in the fourth quarter this year compared to only $800,000 per month in last year's fourth quarter.

In December, we set a new high water mark for these two products with revenues of over $3 million. The success of these non-fare revenue items illustrates the accretive opportunities we see to generate earnings growth from non-traditional sources. We are keenly focused on continuing to invest in these opportunities and expanding our product list in the periods ahead. A key contributor to this will be the launch of our new web site later this year. Our cargo team also posted another excellent quarter which is consistent with the improving trend we have seen over the past few years now. Cargo revenue increased 18% year-over-year to $21.4 million.

Lower fuel surcharges will temper this growth going forward, but we expect to continue to expand our cargo business in the periods ahead, albeit at a more moderate rate. Let me switch gears to the outlook for the upcoming first quarter. Year-over-year ASM's are expected to be up 3.5% to 5.5% in the first quarter and for the full year up 3% to 6%. The full year expectation is a bit lower than we talked about at investor day because of the second quarter schedule adjustments I mentioned earlier.

As noted earlier, a number of factors are affecting revenue as we move into the new year. The U.S. dollar is stronger and fuel surcharges on some of our international routes will be substantially lower. These two items alone combined for a three percentage point reduction in RASM performance for the system in the first quarter. As discussed earlier, North America bookings are affected by the record capacity to Hawaii. All told, these factors have us anticipating a system RASM decline of 3.5% to 6.5% in the first quarter.

We are extremely confident in the strong positioning of our network and resilient demand for Hawaii vacations and we will leverage these strengths to overcome whatever environmental challenges we face in the period ahead. With that let me welcome Shannon to her new role and turn the call over to her to discuss our costs and the balance sheet.

Thank you, Peter. As Mark mentioned earlier and to recap the quarter, adjusted net income grew 117% to $26.1 million or $0.40 cents per share. Adjusted net income this quarter excludes the non-cash impact of unrealized losses on outstanding fuel hedges totaling $21 million on a pre-tax basis and the loss on the early retirement of debts totaling $4 million pre-tax. Our earnings per share this quarter reflect the dilution of 11.3 million shares onto the convertible notes and related warrants due in March 2016.

Moving to costs, our fourth quarter total operating expenses, excluding fuel, increased $22.5 million from the prior year resulting in a 4.9% increase in CASM ex-fuel year-over-year. These results were better than the low end of the guidance range we gave at the beginning of the quarter primarily due to a decrease in frequent flyer expense driven by lower than expected future fuel prices and permanent savings from various projects. Lower fuel prices lead to a decrease in our fuel expense of $12 million year-over-year which reflects offsets from realized losses on our hedges and a 2.6% increase in consumption.

Economic fuel costs per gallon for the quarter was $2.84 as compared to $3.13 in the prior year quarter, a decrease of 9.3%. Our non-operating expenses increased $53.2 million year-over-year primarily due to the fuel hedging losses. Let me remind you, our fuel hedges do not qualify for effective hedge accounting treatment and all mark to market changes, realized gains or losses and premiums paid run through non-operating expense which totaled $35 million this quarter.

Here is the breakdown. Cash paid for realized losses on settlements and premiums totaled $14 million which included a $5 million offset from our put options which were in the money. The unrealized losses on our open positions that go out through 2015 totaled $21 million following the substantial move in fuel prices. The put options, which have been a feature of our program for some time, are notable in this period as they have meaningfully reduced hedge losses and allowed us to more fully participate in falling prices.

Turning to the balance sheet, we ended the quarter with $524 million in unrestricted cash, cash equivalence and short-term investments and an additional $175 million available under our revolving credit facility, which resulted in a liquidity ratio of 30%. Full year CapEx totaled approximately $440 million which included $319 million related to payments for aircraft and aircraft related items including upcoming deliveries. As Mark mentioned earlier, we extinguished with cash $69 million face value of outstanding debt which included the prepayment of A330 bank debt of $54 million and the repurchase of $15 million or 18% of the convertible note principal balance outstanding for a financial leverage result of 4.2 times on an adjusted debt to EBITDAR basis.

Looking ahead to 2015, CASM ex-fuel is expected to increase 1.5% to 4.5% year-over-year in the first quarter and for the full year, we continue to expect CASM ex-fuel to be up in the low single digit range over the prior year. As we mentioned last month at investor day, we have several cost challenges in 2015 and in the first quarter the specific drivers of the year-over-year increase is on the wages and benefits line due to higher pension costs resulting from a decrease in discount rate and change in mortality assumptions totaling $4 million and an increase in our variable performance based compensation resulting from our positive outlook for 2015 totaling another $4 million.

We also expect an increase in aircraft rent due to anticipated lease return costs of $2.5 million for the two 767's going back in 2015 at the end of their lease terms. We continue to expect our full year effective tax rate to be in the 38% to 40% range and based on our current outlook we expect to become cash taxpayers in 2015 as our net operating losses related to the bonus depreciation for the A330 aircraft we've purchased are expected to be fully utilized during the year.

As Mark mentioned, we will continue to maintain a disciplined approach to managing our fuel and foreign currency hedging programs focused on decreasing risk and reducing volatility in our financial results. If we believe that serving these aims can be accomplished by changing the way in which we execute our hedge program we may do so. However, nothing in the current view outlook is tempting us to do so in the moment. Today we have approximately 40% of our 2015 fuel requirements hedged using heating oil swaps to provide protection if fuel prices rise and put options that limit our downside risk.

Based on the forward fuel curve as of January 21st, we expect our first quarter economic fuel price per gallon including tucks and hedges to be in the range of $2.05 to $2.15 and for the full year to be between $1.90 and $2.00. Our hedges expected to settle in the first quarter are currently at a loss of $13 million. But as a result of the put options, first quarter hedge losses will not vary materially from this if fuel prices fall further. We expect our fuel consumption to be up 2% to 4% year-over-year for the first quarter and up 1% to 4% year-over-year for the full year.

Based on the current outlook, we expect fuel savings, net of hedges, of $50 million in the first quarter and $240 million in 2015. We expect our full year CapEx to decrease significantly from 2014 to a range of $45 to $55 million as our aircraft commitments decrease and we take delivery of our last three A330's this year, which are planned to be financed under sale-lease back agreements.

In conclusion, our outlook for 2015 is positive. Benefiting from lower fuel prices and the strategic investments we have made over the past few years we anticipate expanding margins, continued earnings growth and lower capital commitments, all contributing to increasing free cash flow which we will commit do reduce our financial leverage and increase long-term shareholder value. This represents the end of our prepared remarks, but before I turn the call over I too would like to thank all of Hawaiian's employees for their tremendous efforts for a terrific 2014. With that, I will turn the call back to Ashlee.

Thank you, Mark, Peter and Shannon. 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 now for questions.

(Operator Instructions). Our first question comes from the line of Michael Linenberg from Deutsche Bank. Please proceed with your question.

Just a couple questions here.

Sure, Mike.

Hi, Mark. I think when Peter was walking through some of the pressures on unit revenues and he talked about the fuel surcharges going away and, the question is a lot of times as energy prices come down and fuel surcharges go away, a lot of times airlines will replace them with an increase in the base fare. I guess just from Peter's commentary it sounds like maybe the market isn't strong enough to do that. The demand isn't there or maybe it is just the weakness in the foreign currency which is forcing you to overall take down the fares at least in dollar terms. Can you give a little more color about what is really going on there, what the dynamic is? Is it all demand or are there other factors involved?

Yes, thanks, Mike, this is Peter. The fuel surcharges that you are referring to there are really specific to Japan and Korea where the environment is a fairly mechanical calculation of the fuel surcharge based on a reference to a trailing fuel price. We certainly always look for opportunities to improve our base fares when demand and competitive pressures will allow it. In this case we are really not seeing the opportunity to offset that fully, but we certainly are looking for opportunities to increase our fares. Some of that of course is, as you say, the foreign currency impacts and we are seeing in -- if you look at base fares and if you look at revenue performance including load factor in foreign currency terms we are seeing improvements but it does get eroded by the foreign currency.

Okay, perfect. When I look at your capacity for the quarter up 3.5% to 5.5% seems fairly reasonable. But then I think the mix is somewhat volatile. I think if I look North America to Hawaii it looks like maybe you are up 15% in the March quarter and maybe 13% in the June quarter. You talked about it being at a historical high. How much of that is being contributed by Hawaiian? And I guess conversely your international PRASM is going to be down a bit. Is that fair? Am I doing the numbers correctly?

Yes. I think in terms of the capacity, Mike, what you are seeing is really the full year impact or the impact on the first quarter of some of the capacity changes we made last year. So we haven't added anything new incrementally in this period. That is a bit of an increase in our service in the Los Angeles area and in the Bay Area to Hawaii which is being reflected year-over-year. Those increases came in the second quarter, third quarter, fourth quarter, last year, and so you will see that percentage increase from us decline on a year-over-year basis as we go through the year.

And in terms of the international, since we did our network adjustment, we have seen good improvement in international PRASM. If you look at this quarter and you look at last quarter and that is, with the forecast for the first quarter what you are seeing is a continued reduction in the currency driving that down and the fuel surcharge impact we just talked about. The underlying trends have not changed aside from the items that we discussed.

Okay, great. One last one to Shannon. The fuel price, that's new, right? You didn't normally give us a fuel price forecast. Is that going to be -- are we going to see that continue or is that just a one off because of the dramatic decline in energy prices you just wanted to give us something as a guide?

Hi, Mike, this is Shannon. Well, we decided to guide on the economic fuel costs because of the changes going on in the fuel environment, but I do believe it is something we will continue to do going forward.

Oh great. Thanks. Thanks, everyone.

Okay, good.

Our next question comes from the line of Helane Becker with Cowen and Company. Please proceed with your question.

Thank you very much, operator. Hi guys. Thank you for taking the time. Just a couple of questions in mostly housekeeping things. For one thing, as I look at your interest expense for the quarter that just ended, is that where the repurchase shows up so that going forward, that line item actually starts to decline year-over-year?

Hi, Helane, this is Shannon. No, the losses on the extinguishment of the debt show up in the other line, in non-op.

Okay. So that number goes down to something more like what it was a year ago or whatever?

Well, it depends on what kind of transactions we have going forward. There are a number of things in that other line. Things like the balance sheet true-up of our foreign exchange based -- foreign currency based balances will hit that other line. There are a number of things in that other line.

And then on the interest expense line, what should we be thinking about for that?

The interest expense line really reflects the debt financing of aircraft in 2014 and going forward. That's pretty stable for a run rate.

Okay. And then, Mark, as we think about the increase in free cash flow would you think about using that money to buy back stock?

I am surprising, Helane, we are not announcing exactly what we are looking at right at the moment. What I would say, though, is that at the investor day we laid out a leverage target which, in part thanks to the current fuel price, we are going to be coming within in shorter order than we had anticipated. That puts us in a range where we do have some ability to do some shareholder-friendly initiatives including more debt buy back and including potentially other more direct things for shareholders. We are not at this stage committing to it. We are saying that we remain opportunistic buyers of the convert.

Okay. And then do you think the third time Kona will work? Third time is different?

You know, I think we have got by far and away the strongest case for it. Frankly I felt that before, and I think other issues have intervened in such a way that the strongest case didn't end up carrying away the prize. I certainly hope it does this time around. I am eternally confident.

Helane, we thought Kona would work the first and the second time, but we haven't got a chance to prove it yet.

Right. I guess I am thinking maybe third time is the charm, right? You finally get the chance to prove it.

Yes, we certainly hope so.

Great. Well, thanks for the time.

Sure.

Thank you. Our next question comes from the line of Hunter Keay with Wolfe Research. Please proceed with your questions.

Hi everybody, thank you for taking my question. Shannon, did you say CapEx in 2015 was going to be $45 million to $55 million dollars?

Yes, that's correct.

That seems extremely low. Is that a net number? Are you not counting some of the sale-lease back? Is that going to be mechanically run through the cash flow statement a little bit differently because you got three planes coming this year? Is that the plan?

Right. Yes. The plan for those three coming in 2015 are to be financed under sale-lease back so that is not included in our CapEx number.

Okay. Thank you very much. I guess another quick one for you, Shannon. After Scott's departure, what is under review in terms of the things that fall under your purview as CFO? And congratulations, by the way.

Thank you.

Is there anything that philosophically you think about addressing whether it is hedging or leverage, a lot of which has already been discussed on this call today, but is there anything that is off the table in terms of something that you might address and potentially change the direction of the Company in what you do on a day-to-day basis as CFO?

Well, as we mentioned at investor day, I think our focus is largely on the free cash flows we are expecting and how we allocate that cash. The team here is a very strong team. We have been talking a lot about that and where we go with that. We are still in our first phase of what we call here de-risking the business, which includes the de-leveraging plan and improving the balance sheet. As we go into the future we will look at our next phases of how we allocate that capital.

Okay, thanks. And then last one, the North American market to Hawaii again, I think, Mark probably a question for you. Feel free to not address this as it is a competitive question, I will say this in advance, but the industry has gotten -- it's pushed and it's pulled back. There has been some ebbs and flows of competitive capacity in the Hawaiian market over the last couple years. I think Virgin has made it pretty clear that they are going to probably add some capacity into that market particularly from the Bay Area markets where you guys serve. How do you plan on defending your turf? How do you plan on competing? Is it going to be from a product perspective, or is it going to be a ramped up marketing campaign? Are you going to focus more on leveraging some point of sale traffic in Hawaii? How do you defend what is yours?

As you surmised I can't get into too much what we are going to do in the future, but what I will say and your question gives me a good opportunity to reiterate it is, as we look around at the people we compete against today which is largely all of the major U.S. airlines in that particular marketplace, and as we look at the pluses and minuses of potential competitors who are not yet represented in the market, we don't see any other operator out there that has a combination of costs and service and ability to access the market that we would trade places with. For us I think it is all the question of how many seats are in the marketplace and we are largely indifferent as to whether those seats are provided by brand a, brand b, brand c or whoever else.

Okay, thanks a lot.

Thank you. Our next question comes from the line of Fred Lowrance from Avondale Partners. Please proceed with your questions.

Thank you, operator. A quick couple questions for you guys. With this convert pay down that you had in the fourth quarter, did that also reduce your hedge position with the warrants? Just thinking about how we get to our fully diluted share count for first through fourth quarter this year.

There are many things that go into that position, and so we can't sort of address that very directly. I think you would have to reach out to the people who hold these sorts of converts and ask them exactly how they would behave.

Okay. And then just another question. I know, Shannon, you gave us sort of the combined strong dollar, lower fuel surcharge headwind for RASM in the first quarter. Any chance you can break that out between the two and just thinking as we move forward for the full year if we were to straight line sort of current Australian dollar and Japanese yen rates out over the rest of the year, are we approaching that 200 basis point RASM headwind that we had back in 2013 thanks to the yen?

I think it is. I gave the numbers for the first quarter that the currency and the fuel surcharge were about three percentage points of headwind on a system basis. The split there is about half and half, so the currency is in line with the sort of number that you are talking about there, Fred.

Okay. Thank you.

Thank you. Our next question comes from the line of Steve O'Hara with Sidoti & Company. Please proceed with your questions.

Hi. Good afternoon.

Hi, Steve.

Could you just talk about what you think about, how you think about ex-fuel unit costs maybe going further out and if you see something, what's kind of a normalized rate? And then also, if you do get the Kona route, how do you think about what would capacity look like in terms of growth this year? And then maybe talk about the mix in terms of how you think about PRASM kind of shifting from domestic to international and whether that is kind of a good guy, bad guy?

Okay. In terms of our ex-fuel unit costs going out for the rest of the year, we have talked about low single digit numbers and that's the guidance we are giving for the time being. I think in that number we have got a number of things going on, some of which we have already talked about in the first quarter. We have got things like the pension expense which is a result of changes in the mortality table and the discount rates, so things like that will tend to flow through. If we look at the major areas, I think most cost elements are keeping into what I would call a pretty normal range.

Then we have a couple of items that have some sort of inflationary pressure that we talked about. There is benefit stuff and pension stuff, I think some of the airport use charges flow a little higher than kind of flat, and we've got some lease return costs and some one time check events. But I think they are all slices on low single digits in terms of our overall outlook.

And Steve, on the second part of your question with regards to where the capacity for the Kona Haneda service would come from, I can tell you that we don't, we wouldn't intend for that to be incremental flying to our network so we won't be allocating any more aircraft to the network to fly that route this year. So the ASM impact, to the extent there was one, would really be just a function of changes in stage length as opposed to an increment of new flying allocated to the network.

Where exactly that capacity will come from is something I wouldn't want to signal until we actually have the route in hand and we'll announce those decisions at that point in time. And as far as the RASM impact of that, again I don't think we want to get into forecasting RASM beyond what we've given you for the first quarter of this year.

Okay. Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Joe DeNardi with Stifel. Please proceed with your question.

Hey thanks. Scott, if you were to look at the fuel surcharge headwind going forward, what fuel price are those surcharges being based on right now? If oil stays where it is do those continue to come down throughout the year? What is the lag effect of that?

I will give you an example of Japan that tends to work on about a couple of months lag. So we have clear sight into what the fuel surcharge is today, obviously, and what it will be starting in February for the next couple of months. And then as we build our plans for the year we sync up our expectations on that with the fuel price in our plan but obviously that's subject to change as you see fuel move over time.

And fuel surcharges don't go below zero and I think we are pretty much knocking on that door in several of these markets right now.

That's correct.

Okay. But if oil stays where it is fuel surcharges are coming down further? Is that fair?

There is -- we will have one step down in the beginning of February and if fuel went down below that the next level, as Mark says, is in fact zero.

And to put it another way, Joe, we have given you guys guidance for the first quarter which in part is based on our projection of where fuel prices are today. So fuel prices --and at that level, at the end of Q1, essentially fuel surcharges would be all but nonexistent in the international markets that we serve. No more to be had beyond that.

Okay. That makes sense. And I'm sorry; I meant to say Peter.

No worries.

Shannon, did you say you will be a cash taxpayer in 2016 or 2017?

2015, this year.

2015, okay.

Yes.

And then, Mark, a question similar to Hunter's just in terms of de-risking the business model going forward, is there anything you guys can do or you think about in terms of maybe insulating yourself from competitive capacity risk?

I think the best way that we have insulated ourselves from risk and intend to continue to do so is by diversifying our network. If you look back to our business in 2010 we were over 90% domestic and the lion's share of that was off the west coast. We felt that left us naturally through no fault of our own, if you like, but naturally very exposed to a pretty discrete market. With the growth in our international business, we have lessened that exposure and it is very much part of our corporate strategy that as we grow we seek to continue to diversify our business. Again, at the end of the day, I think we like our position in all of our markets. There is nothing that goes to any underlying competitive weakness. It is on a market by market capacity situation by capacity situation basis.

Okay. Thanks for the time.

You bet.

Thank you. Ladies and gentlemen, at this time there are no further questions. I would like to turn it back to Mark Dunkerley for closing comments.

Okay. Thank you, everybody, for joining us on today's call. Appreciate your questions today, and we are looking forward to 2015, with its low fuel prices and the successes we have enjoyed in 2014, when we think it is going to be an even better year. Thank you.

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