Hawaiian Holdings Inc (HA) 2015 Q2 法說會逐字稿

Greetings and welcome to Hawaiian Holdings second-quarter 2015 earnings call.

(Operator Instructions)

As reminder this conference is being recorded. It is now my pleasure to introduce Ashlee Kishimoto, Senior Director of Investor Relations. 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 second quarter of 2015. 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 cost and the balance sheet. We will then open the call up for questions, first from analysts and then by the media. Mark will end with 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, www.hawaiianairlines.com.

During the course of our call today we will refer to adjusted or non-GAAP numbers and metrics. A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found in our press release. Before we begin, we 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 on 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 as well as reports filed on Form 8-K.

And with that I'd like to turn the call over to Mark.

Thank you, Ashlee. Aloha, everyone, and thank you for joining us today. Earlier we posted strong results for the quarter based on low fuel prices and strong demand across our geographies. The adjusted net income of $37 million or $0.61 per share was a record for our business. Our adjusted pretax margin grew to 10.7%. The good results propelled our trailing 12 month pretax return on invested capital to 22%. These numbers came despite our having to battle the headwinds of the strengthening US dollar against foreign currencies and the virtual disappearance of fuel surcharges which traditionally form such an important part of the pricing environment in several of the foreign countries from which we fly.

Looking to the back half of the year indications are that we will see an improvement in the overall environment in which we operate as the rate of industry capacity growth on our North American routes begins to moderate. All the while demand on strong. Fuel prices remain low, and we continue to find ways of improving our ability to compete for the travelers' custom. The adverse impacts of foreign-exchange and declining fuel surcharges will be more acute in the third quarter. But nonetheless the many positives more than compensate for these headwinds. We expect to generate free cash flow and to strengthen our balance sheet. Year-on-year margins should also improve.

Let me take a moment to thank our employees in the air and on the ground for the outstanding job that they do each day. Our financial success would not be possible without their dedication and commitment. Since we last spoke there been a number of developments I would like to mention. We have repurchased $18 million or approximately 1% of our common stock. As a reminder, midway through last quarter we announced a two-year $100 million stock buyback program of our shares outstanding. Looking forward we will be opportunistic buyers of our stock.

Earlier in the month we announced that we had entered into a six-year lease agreement for an A330-200 to be delivered in June 2016 and that we had accelerated the planned retirement of some of our remaining Boeing 767s. The net impact is to smooth our capacity growth over the next few years. Previously we projected low single-digit growth rate through the end of the decade, and these latest developments are in keeping with those plans. Last week we also announced that we are expanding our Neighbor Island cargo service with the purchase of three ATR freighter aircraft. Operations will commence in the first half of 2016.

By acquiring these ATR freighter aircraft we are going to able to transform our Neighbor Island cargo business as the dedicated freighters will be able to carry the larger bulk items that the [hold] space the Boeing 717 does not accommodate. Perhaps a bigger benefit will come from our being able to offer cargo services from points on the US mainland and overseas to the Neighbor Islands not served by wide-body aircraft. The ATR freighters can take the standard containers used in the belly holds of the wide bodied aircraft making such connecting service viable. Our successful Neighbor Island Express cargo business will not be affected since we will continue to carry cargo in the belly holds of the Boeing 717s as we operate between the islands.

With that let me turn the call over to Peter to discuss our revenue performance before Shannon covers the finance section.

Thank you, Mark. Second quarter operating revenue was $571 million on a 4.2% capacity increase resulting in a PRASM decline of 4.8%. Foreign-exchange and fuel surcharge impacts accounted for 3.5 points or over 70% of the year-over-year RASM decline. We've continued to grow our value added revenue per passenger during the quarter increasing $3.70 to $22.95 due to the continued success of our extra comfort seat product. We will pass the anniversary of the launch of extra comfort in the third quarter so some of our growth here will moderate, but we have opportunities to continue to improve performance.

During the second quarter, our domestic PRASM fell from last year with both North America and Neighbor Island routes contributing to the decline. In the case of the North American routes our results continue to be affected by industry capacity growth which has been at double-digit levels for each of the past three quarters resulting in a year-over-year PRASM decline of 7.2% in the second quarter. As we discussed last quarter higher capacity puts particular pressure on PRASM and trough and shoulder demand periods. Entering the second quarter, we were better positioned for this environment than we were entering the first quarter which contributed to a sequential improvement in the results this period with June the best month of the quarter on a year-over-year basis. We continue to fine-tune our tactics to deal with the competitive environment, and we expect the continuation of sequential improvements in North America in the third quarter. In addition, capacity growth begins to wane in the back half of the year. Based on published scheduled receipts from the West coast of Hawaii we expect an increase of 6% in the third quarter and 4% in the fourth quarter.

In the Neighbor Islands, PRASM declined 5% from last year on capacity growth of 6.5%. Since our own capacity increases contributed to the PRASM pressure, I'll go into a bit more detail here. Most of the added capacity was to Kona and Hilo in response to very strong traffic and revenue performance in recent periods. With much of our second quarter PRASM decline concentrated on these routes, we recognize that we turned the capacity dial a bit too far in this period. Despite our strong competitive position in the Neighbor Island markets, we are always active in our efforts to optimally match supply with demand. With these efforts comes the possibility of missing the mark, and that's what happened in the second quarter. We've are ready started to make adjustments, and we expect to see better results and sequential improvements in the back half of the year.

In addition, the capacity increased as we progressed with our interior modification program to our Boeing 717 fleet. In the second quarter we completed modifications on 8 aircraft ending the quarter with 11 of 18 aircraft completed. At the beginning of the quarter we had too few aircraft modified to adjust our booking levels for the additional seats. So while CASM was reduced by the additional seats revenue was not yet expanded and PRASM was diluted. By the end of the quarter, with the majority of the aircraft now modified, we have been able to increase the selling capacity for each flight in our reservation system and as a result we're now see be average of our passengers per departure increased as expected. Going forward, we don't expect the transition of the fleet to have a significant impact on PRASM performance.

Our international route network continues to mature, and we're seeing local currency unit revenue improvements year-over-year on most of our routes. Once the impacts of a strengthening US dollar and the loss of fuel surcharges is added, however, the picture changes substantially. Throughout all of this, demand for travel to Hawaii remains solid. We continued to make adjustments to ensure that we perform as well as possible in light of the macro factors affecting performance. In this light, we announced the decision to revert our Sapporo, Japan service to non-stop in both directions eliminating the triangular routing with Sendai. This change which takes effect at the beginning of October reflects our conclusion that the additional benefits of accessing Sendai demand isn't sufficient to overcome the higher cost of operating the triangle service.

As we move to the back half of the year foreign-exchange and fuel surcharge impacts will continue to dominate our year-over-year US dollar PRASM. We also have now lapped all of the network changes from the second quarter of last year that have helped offset these negatives in our international statistics. In the upcoming third quarter the system RASM impacts of 4x and fuel surcharge changes is expected to be about 4% compared to 3% and 3.5% in the first and second quarters respectively. Despite these headwinds, the overall financial performance of our international network is meaningfully enhanced by the powerful impact of lower fuel prices on long haul services and bolstered by improvements we are making on a local currency basis.

As a note we continue to hedge our foreign currency exposure with the use of forwards, and for the remainder of the year we have hedged approximately 50% of our yen and Australian dollar exposure at levels better than the current exchange rates. Looking forward, based on these factors our RASM is expected to decline 4% to 7% year-over-year in the third quarter on a capacity increase of 3% to 5%. In addition, we finalized our schedule for the second half of the year, and for the full-year we now expect ASMs to add the year 2% to 5% higher than last year a decrease from the previous guidance issued at the end of April. In conclusion, our people provide superior service. Our product is ideally suited for the long haul leisure mission. Our network is balanced with the mix of mature and growing markets in the United States and abroad. Our value-added revenue continues to grow, and all of this gives us tremendous optimism for the future. With that, let me turn the call over to Shannon to discuss our costs and the balance sheet.

Thank you, Peter. To recap the quarter, adjusted net income grew to $37 million or $0.61 per share, an increase of $15 million or $0.26 over the same period last year. Adjusted net income this quarter excludes the non-cash mark-to-market gains on outstanding fuel hedges totaling $19 million on a pretax basis. Operating expenses excluding fuel increased $17.4 million from the prior year on a 4.2% increase in capacity which resulted in a 0.7% increase in CASM ex-fuel from last year. These results were in line with the improved guidance range we gave at the beginning of the month. The improvements were due to a shift of certain maintenance expenses and project costs to later in the year and the delivery delay of an A330-200 aircraft under lease. Fuel costs continue to provide a significant tailwind in the second quarter. Economic fuel cost per gallon for the second quarter decreased 28% to $2.23 per gallon which totaled a $47 million decrease in our economic fuel costs from last year on a 1.9% increase in fuel consumption.

Before we leave the second quarter let me take a moment to discuss our share count. As Mark mentioned earlier we repurchased 0.8 million of our shares outstanding which totaled $18 million in the second quarter. These repurchases are reflected as a reduction in our basic share count for the quarter based on the weighted average days outstanding. As of the end of the quarter the convertible notes have a remaining principal balance of $4.3 million which represents repurchases to date of 95%. Dilution of 0.5 million shares is reflected in the diluted share count this quarter. In addition, the related convertible note warrant remain. As discussed on our last call, although the warrant is economically neutralized and will have no dilutive impact to actual shares issued, GAAP requires us to reflect an additional 6.3 million shares in our diluted share count this quarter. As a reminder, dilution will continue until the [calls for it] are exercised or expires in June 2016. Excluding the non-economic dilution of the warrant, our share count would decreased to 55.6 million and would result in a $0.07 improvement for adjusted EPS.

Turning to the balance sheet, we ended the quarter with $606 million in unrestricted cash, cash equivalents and short-term investments. Our liquidity ratio including the availability under our undrawn revolving credit facility of $175 million was 34% on a trailing 12 month basis above our liquidity target of 23% to 25%. Our leverage continues to decrease this quarter, and on an adjusted debt to adjusted EBITDA basis so that 3.4 times within our target range of 3 to 4 times. Our strong profitability allows us to return cash our shareholders through the share repurchase program, manage our leverage levels through paying down debt and invest in our business. We continue to evaluate the best uses for our cash.

Switching gears to our third quarter and full-year outlook. Our unit cost excluding fuel for the third quarter is expected to increase 2.5% to 5.5% from last year. In the third quarter there are a few items driving this higher than in prior quarters. Approximately 2 percentage points relate to wages and benefits, including higher pension related expenses resulting primarily from the decrease in discount rate and change in the mortality assumptions and contract wage increases. Approximately 1 percentage point from an increase in the number of maintenance heavy checks from last year and an increase in aircraft rent expense from the two new A330 leases delivered in February and May offset by the lease return of one C767 totalling approximately 0.5 percentage points. These items contribute to 3.5 percentage points of the year-over-year increase in the third quarter.

For the full-year, we have narrowed our guidance range and continue to expect our CASM ex-fuel to increase 1.5% to 3.5% from last year. Also we continue to expect a full year effective tax rate between 38% to 40%. Based on our current outlook we expect to pay a minimal amount of cash taxes in 2015. Based on the fuel curve as of July 22, our economic fuel cost per gallon for the third quarter is expected to be in the range of $2 to $2.10 and for the full-year $2.05 to $2.15. Our hedges expected to settle in the third quarter, are currently at a loss of $13 million.

And as of June 30, 2015, we have hedged approximately 50% of our projected fuel requirements for the remainder of 2015 with heating oil swaps and puts. We expect our fuel consumption to be up 0.5% to 2.5% from last year in both the third quarter and for the full-year. Based on the current outlook we expect fuel savings from last year net of hedges and volume increases of $60 million in the third quarter and $200 million for 2015. As Mark mentioned earlier, these savings will more than offset the US dollar exchange rates and lower fuel surcharge headwinds which on a full-year basis are expected to be $19 million in total. We continue to expect our full-year CapEx to decrease significantly from 2014 to range of $45 million to $55 million. As a reminder all of our 2015 A330 deliveries are financed through sale lease-back arrangements.

In conclusion we continue to execute to our plan. And the strong financial results in the first half of the year give us confidence for the future, and our outlook for record profitability in 2015 remains. The investments that we have made in our business over the past several years are seeing positive returns. We are well-positioned for the long-term success of our business with expanding margins, continued earnings growth and free cash flow. This concludes our prepared remarks, and with that I'll 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 first and then media. As reminder please limit yourself to one question and if needed one follow-up question. Operator, please open the line now.

Thank you.

(Operator Instructions)

Helane Becker, Cowen and Company.

Thanks very much, operator. Hello. So I think you were talking about some of the capacity pressure easing in the second half of the year. Are you seeing that in better pricing and in continued high load factors?

Helene, this is Peter. I think what we're seeing specifically if you're talking about North America where we talked about the capacity easing. I think what you're seeing is less pressure and that we've got that expectation for sequential improvement continuing into the second half of the year. There's still a lot of capacity out there, but on a relative basis the third quarter, the fourth quarter looked like a better picture to us than we had in the first half of the year.

Okay and then I just wanted to ask a question about, I don't know, Mark, if you can talk about your thoughts with respect to Australia, but I think you were opposed to the American Qantas deal. I don't know what you want to call it, co-chair or whatever. And I am wondering about your thoughts there.

Sure. I think they are relatively straightforward. I think the question for regulators around the world is whether or not they want to encourage viable competitive behavior across a broad spectrum of airlines. And when you promote the antitrust immunized collaboration between two dominant carriers at either end of the route, you are giving them a tremendous competitive advantage. And that competitive advantage, we believe, comes at the cost of other competitors and ultimately of the travelling public.

Got you. Okay. Thanks, thanks for the help.

You bet.

Mike Linenberg, Deutsche Bank.

Hey, good morning everyone. With respect to the fuel surcharges in markets like Japan and China, are they, given where fuel prices are now, are fuel surcharges even in the fare, or are they completely -- have they been completely eliminated?

You know, it varies from place to place. Mike, generally -- and the places where we see fuel surcharges, the ones that have been most mechanically reduced is in Japan and Korea. There are still fuel surcharges in those markets, but they are at much smaller levels than they were a year ago. At this point, based on the fuel curve we expect them to remain relatively stable, which still gives us year-on-year declines, because we haven't lapped the stability. But there were small surcharges in some of those markets.

Okay, great that's helpful.

And then, Mark, I want to ask you about the cargo operation. Look, I understand the motivation and how you can be a provider of all services, aviation services in and out of the Hawaiian Islands, but when you think about the element of complexity associated with just adding another business, is it truly commensurate with the type of revenue or the type of contribution that you'll get?

It seems quite small, and it seems like another thing that will take away some of the resources of management. What's -- just walk us through be thinking why it makes a lot of financial sense for your Company and your shareholders.

Sure.

First of all Mike I would acknowledge, this is going to be relatively small part of our overall business. It's going to be, we believe, quite an important part. But we don't think it's going to meaningfully impose burdens on the management for the following reasons. First of all, the operator of the service is going to be the operator we have today for Ohana by Hawaiian, which is not Hawaiian Airlines. We have subcontracted that work out in common with the way that most airlines do for their commuter carriers. So it will be the same operator of the airplanes.

And then secondly, from a sales perspective and a commercial perspective, we are already participating in the market. What we are not doing is being able to provide this service to customers between the islands and overseas. So it adds another selling point to us commercially, and of course when we look at our turboprop operations by adding a couple of other turboprops, it also reduces our unit cost, because the overhead that already exists is just spread a little bit more thinly.

Okay, very good, thank you.

You bet.

Andrew Didora, Bank of America.

Hi, everyone.

Mark, can you maybe help me reconcile your comments on how the back half of the year should see an improvement? Your RASM guide is decelerating from Q2 to Q3, and last week Alaska came out saying they were seeing a little bit more yield pressure continuing into Q3 on their Hawaiian routes given capacity. Yet you are seeing using capacity. Just wondering where you think the disconnect here is?

Thanks.

Sure. Thanks, Andrew.

Obviously I can't comment on what Alaska said about their business. I can tell you what we're saying about our business. We are saying that with the reduction in the rate of growth of industry capacity, we are seeing sequential improvements, in the yield picture versus last year. And that is just what we are saying when we look at North America.

So we have highlighted that that's the case for North America. We have highlighted on this call that we think that for the neighbor island business there's some improvements coming. We've also highlighted that the -- what we would anticipate to be the low watermark of the effect of foreign exchange and fuel will also occur right at the end of the third quarter running into the fourth quarter.

For those netting out those pluses and minuses, we think overall the back half of the year looks more positive than we have felt certainly in this office, looking at the first half of the year when we were at the beginning of this year.

So the deceleration that is implied by your RASM guide, that's largely a function of FX and fuel surcharges?

Yes, no it definitely is.

And the one thing I would add to that, as well, is we don't have the benefit of the network changes in the year-on-year numbers anymore. So removing that from the picture gives you some deceleration from Q2 to 3Q.

Okay, thank you.

You bet.

Steve O'Hara, Sidoti & Company.

Hi good morning.

I'm just curious about maybe the long-term plans, and I know Asia had been a big focus, and I think it continues to be, with the purchase of the A321. And I am just wondering given all the massive changes in overall cost with fuel and changes in currency and all that, I'm just wondering how do you plan your business going forward with all these variables that seem to be a little more intense for an international carrier than maybe a domestic carrier.

Sure. First of all, as you rightly pointed out, we've had some offsetting impact on our international business. The stage lengths of course are much longer going to international destinations than they are going to domestic destinations, Beijing being further away from Hawaii for example than New York is.

So with those long stage lengths, the lower price of fuel has a proportionately bigger impact than it does on any of our other services. At the same time, the pretty precipitous fall in some of the overseas currencies has had a negative impact on us. Looking forward, first of all it's a part of our operation that remains profitable for us, so it's not a part of the network that we're seeing bleed red ink.

Secondly, looking at the long-term, which we do pretty assiduously, we believe that the long-term source of visitor traffic to Hawaii is going to come predominantly from the Asian countries around the Pacific Rim largely because of their economic growth. And over time, that economic growth should actually lead to a strengthening of their currencies versus the US dollar.

So I think those long term -- that long-term picture hasn't changed. The short-term picture of the substantial reduction in fuel prices and the substantial strengthening of the US dollar doesn't change our long-term view.

Okay and maybe just as a follow-up, looking at the -- I guess fuel has been a big tailwind this year, assuming it remains at the same level next year. At least on the unit revenue side there would appear to be some pretty easy comps. And I'm just wondering, in terms of a lot of the airlines are talking about how they don't have a plan for long-term fuel, $2 a gallon.

But maybe in the short term they're certainly taking advantage of it. Going forward, does 2016 look a little easier from a comp standpoint on the unit revenue, assuming the currency situation stays the same? Or do we have the same pressure as next year on unit revenue, given airlines pushing the envelope a little more than may be is good for unit revenue. I know it's a tough call, but I'm just wondering what your thoughts are there.

We are right now beginning to go through our budget process. It will be unsurprising that I would tend to agree with you and Peter would tend to be urging caution as being responsible for the commercial part of our Business.

But what I would say is that we would expect in our -- in our overseas markets, part of the issue that we don't have a full picture yet is industry capacity, and that has a big impact on what happens in the unit revenues. But in a like capacity environment, we would expect to see unit improvements really across all of our routes as we bring to fruition a bunch of the internal projects that we have underway.

We have a new a website. We're changing our revenue management system. We've done a bunch of things that were all underwritten by the belief that this will improve unit revenues. Of course the world doesn't just stay the same. As we get a little bit closer to 2016 we will be able to guide a bit more clearly.

Adam Hackel, Sterne Agee.

Hi, guys how are you?

Good thanks Adam.

Just a couple of quick ones you just hit on one of my questions, which is revenue management system and the new website. Do you have any idea if we will see in the incremental benefit on the income statement and 2015, or is this more of a 2016 event? Any color there would be great?

In terms of both those areas I think we will see incremental improvement over time. It is hard to attribute a specific number to it. The website we launched our beta during the second quarter, and that is going well, and we would expect in the third quarter to have the full switch over our English-language to the new website. Over time that is going to provide us a lot of benefit in terms of selling better -- merchandising, better to all of our guests and also selling better in the international marketplace where our website product was not up to the standards that we would expect of ourselves.

Okay, perfect, thank you very much.

You bet.

Hunter Keay with Wolfe Research.

Hello. Thank you very much. Some other airlines have talked in the past about the stock market effect as it relates to impacting their bookings; particularly the stock market was down big. They see, as soon as that day bookings were going to tail off. I know China is a very small portion of your Business. But did you see any kind of material change in booking patterns or demand as the Chinese stock market sold off sharply, given the amount of retail dollars that are invested there?

We haven't really seen anything, Hunter, that we would attribute to a stock market effect there.

Can you give us the RASM by region for -- I think you gave us North America. Can you give us inter island? I may have missed it, and international. And also can you remind us when the repo expires and how you will think about being opportunistic? How much flexibility actually exists for you to come in and time your buybacks?

Hunter, I will answer the PRASM part; so this is PRASM, not RASM. But North America was 7.2% down, international was 7.7% down and neighbor island was 5% down.

Hunter, this is Shannon. I will answer your repurchase questions, so it was a two-year authorization for a $100 million program, and we will just continue to be opportunistic.

We'll take questions from the media. David Segal, Honolulu Star Advertiser.

Hi, Mark, I just want to get an overview comment from you on the different revenues for the quarter. I know Peter just talked about the PRASM being down, and I know you talked about the pressure on the North American routes that should wing somewhat in the second half. But when you look at the overall quarter in general, what would you most attribute the difference in revenue to?

I think -- we have three different parts of our Business. When we look at North America, there's been a lot of capacity added that has the impact of reducing unit revenues on the international. The dominant impact has been the strengthening of the US dollar and the loss of some fuel surcharges, which are tied to the current price of fuel. And when we look at neighbor island, we have acknowledged that we added a little too much capacity in the second quarter and were less successful than we had anticipated at filling some of the additional seats that we have in the market.

One follow-up question: regarding the fuel cost, if I wrote the numbers down correctly, you are saying fuel savings will be $60 million in the third quarter and $200 million for 2015. When you mention those numbers, these are savings versus the earlier periods?

That's correct.

What would your savings have been in the concluding quarter, the second quarter? Is that the 35.4% reduction that on your statement?

This is Shannon. For the second quarter on economic basis, we had a $47 million decrease from the prior year.

Okay, that's it.

At this time I would like to turn the floor back over to Mark Dunkerley for closing comments.

That you everybody for joining us today. Our record second quarter results have strong demand and low fuel prices position us well for the remainder of the year. We expect earnings growth, improving profit margins, positive free cash flow further strengthening of the balance sheet and direct shareholder returns.

Before we leave please do mark your calendars for our annual investor day, which is going to be held in the morning of December 2 in New York City. More details will follow. Thank you very much. And Mahalo.

Thank you ladies and gentlemen this. Concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.