Hawaiian Holdings Inc (HA) 2015 Q3 法說會逐字稿

Greetings and welcome to the Hawaiian Holdings third quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I will now turn the conference over to Miss Ashlee Kishimoto, Senior Director of Investor Relations. Thank you, Miss 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 third 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 costs and the balance sheet. We will then open the call up for questions, first from the 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 PM Eastern time today. If you have not received the release, it is available on the Investor Relations page of our website, hawaiianairlines.com.

During the course of our call today, we will refer to adjusted or non-GAAP numbers and metrics. A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found in our press release.

Before we begin, we'd like to remind everyone that the following prepared remarks contain forward-looking statements. And management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. For a more detailed discussion of the factors that could cause actual 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, 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. Thank you for joining us today.

We posted record-breaking results this third quarter, with adjusted net income of $78 million and earnings-per-share of $1.29. A 63% increase on last year. The earnings growth this quarter reflects the continuation of the trends we have experienced for much of the year. Fuel prices have been lower, and demand has remained strong in all of our geographies. While the strengthening of the US dollar and the decline in fuel surcharges have partially offset this bounty.

In the past quarter, we've also started to benefit from seeing the rates of industry capacity in all of our geographies begin to ebb. Together, these influences helped propel this quarter's adjusted pre-tax margin to 20%, and our return on invested capital for the trailing 12 months to 25%. Let me take a moment to thank all of the great employees at Hawaiian.

It has been a poor summer operationally, as reflected in our having recently posted our worst monthly punctuality in over a decade. The culprits have been several. The combination of a burgeoning flight schedule over Honolulu and airport construction, has meant that during the peak hours of the day, there have been insufficient gates. This has been exacerbated by congestion in customs, resulting in our not being permitted to deplane arriving international passengers promptly.

Lastly, an abrupt change to air traffic control procedures at Honolulu gave us no opportunity to make schedule changes to address the lengthened block times that have resulted. Throughout it all, my colleagues on the front lines have persevered. They've worked incredibly hard to minimize the impact of these issues, and they have done so, all the while, looking after our guests. We're supporters of the need to modernize Honolulu International Airport. So the construction is a necessary evil that will eventually lead to a much-needed improvement in the airport experience for our guests.

As ever, lots has been going on since our last call. Under our $100 million stock buyback program, we repurchased approximately 900,000 shares this quarter totaling $20 million. Since authorization of the program in April, we have repurchased 1.6 million shares for $38 million. This represents about 2.5% of our current market cap. We will continue to be opportunistic buyers of our stock.

Earlier today, we announced a program to upgrade all of our A330 premium cabins, including the installation of 180 degree Lie-Flat seats. Reflecting the uniqueness of our premium cabin needs, we have commissioned the production of a new seat that we are confident will be the best in its segment of the Lie-Flat seat market. As part of this refurbishment, we'll also be adding 28 extra-comfort needs in response to the strong demand for our premium economy seating. Assuming the complexities of certification and production can be navigated to schedule, our first retrofitted A330 will be delivered in the second quarter of 2016.

It is no coincidence that the interior modification to the fleet will complete, just as the A321neos begin to arrive in 2017. The A321neos will be deployed on routes between Hawaii and the West Coast, freeing some of the A330s currently deployed on our shorter five to six hour sectors. In turn, the freed up A330s will be deployed on longer-haul sectors, where the value of the new premium seat can best be appreciated.

Our mission, to provide the best value proposition, whether the front of the plane or the back, has not changed. As this evolution takes place, we will remain the airline providing the best value-for-money service between the islands of Hawaii, between Hawaii and the US West Coast and between Hawaii and destinations further afield. We will add detail to our plans for the A321neo fleet at our upcoming investor day in December.

Last month, we formally launched our new website, which offers our customers improved navigation, content and booking features. The new website also provides important new functionality, including more seamless integration of vacation packages and other products into the booking [pack]. Importantly, it provides the technical foundation for many more enhancements planned in the months ahead. All told, the new website will enable us to better convert demand into revenue.

Lastly, our Chief Operations Officer, Sean Menke, left Hawaiian last month, and I want to thank him for his contributions and wish him the best. Jon Snook has joined Air Ohana in the interim while we search for a permanent COO. Jon has served most recently as Senior Vice President of Customer Service for American Airlines.

The third-quarter's result reflect further improvement in our business from the early part of the year, when, in addition to the strengthening US dollar, we were also battling the impact of double-digit industry capacity growth between the West Coast and Hawaii. Assuming that fuel prices remain low, that the strong demand we are seeing does not evaporate and that the US dollar remains in its current range, the fourth quarter is set to prolong this trend of improving financial performance.

Let me turn the call over to Peter to discuss our revenue performance, before Shannon is going to cover our finance.

Thanks, Mark. Aloha, everyone.

Third-quarter operating revenue was $632 million, with capacity up 3.6% year-over-year. RASM declined 4.6%, which was at the better end of our original guidance range of down 4% to 7% due to solid demand throughout our network.

Overall, the quarter played out very much as we expected going in. With North America and neighbor-island results strengthening, and foreign exchange and fuel surcharge effects pressuring our international revenue performance. These third quarter year-over-year results reflected improvement from the second quarter. And absent the ForEx and fuel surcharge effects, our system RASM would've been down less than a half a point for the period. Our value-added revenue per passenger in the third quarter grew $0.70 to $21.52, due primarily to the continued success of Extra Comfort. Looking forward to next quarter, we expect moderate growth based in particular on the continuing success from our existing products, including our co-branded credit card and Extra Comfort.

As expected, our North America results have trended in a healthy direction this quarter, reflecting a better operating environment, with seat growth from the West Coast to Hawaii moderating to up 6% year-over-year compared to double-digit increases in the past three quarters. Overall, North America passenger revenue was up 2.9% in the quarter, with PRASM down 1.6% on a capacity increase of 4.6%. These results better than results of the first half of the year, with each month improving sequentially in the third quarter. Looking ahead, the outlook for capacity from the West Coast to Hawaii continues to moderate. Based on published schedules, industry capacity growth is expected to be up 5% in the upcoming fourth quarter and the first quarter of next year.

In the neighbor islands, we also saw sequential improvements. PRASM declined 1.7% from last year on capacity growth of 5.2%. Last quarter, we talked about the need to fine-tune some of the capacity adjustments we made in the early part of the year. And specifically, to dial back some of our growth in Kona and Hilo. These adjustments were fully reflected in our September schedule, and it is not a coincidence that this was the best month of the quarter, with positive year-over-year PRASM.

We continue to progress with our 717 interior modifications, and at the end of the quarter we had 14 of 18 aircraft completed. The program is scheduled to be completed by the end of the year. And looking ahead to the fourth quarter, we expect to see sequential year-over-year improvement to continue in our neighbor-island revenue performance.

Also as expected, international revenue performance was affected by the continued impact of the stronger US dollar and substantial year-over-year reductions in fuel surcharges. Importantly, demand remained steady from our international markets, despite the strength of the US dollar, demonstrating the resilience of demand for travel to Hawaii. In the third quarter, PRASM on our international routes recorded a mid-teens percentage decline, attributable completely to foreign exchange rates and fuel surcharges.

While this is obviously a significant impact, it needs to be considered in the context of A4A Pacific region PRASM results. Which, based on the latest available data for the third quarter, showed double-digit point declines from last year. It is also the case that in aggregate, our unit revenues in local currency continued to improve, demonstrating a strengthening of our market position. Of course, the lower fuel prices that have led to reduced fuel surcharges also significantly benefit our overall financial performance on these routes.

In the upcoming fourth quarter, ForEx and fuel surcharge headwinds are expected to be similar to what we saw in the third quarter at about 4 to 4.5 points of year-over-year system RASM impact. And while we are starting to enter a period where the strengthening dollar affected the prior year comps, we won't fully annualize the currency impacts until next year, as the US dollar has strengthened against various currencies over a multi month period. We continue to hedge our foreign currency exposure with yen and Australian dollar forwards. And for the upcoming fourth quarter, we are hedged at approximately 50% of our exposure, at levels better than current exchange rates.

Looking at the operating environment for our international markets to Hawaii. Based on published schedules, we're expecting seat growth of 1% in both the fourth quarter of this year and the first quarter of next year. We continue to make adjustments to ensure that we perform as well as possible in light of the macro factors affecting performance. And going into next year, we will continue to look for opportunities to optimize our schedule, including seasonal adjustments to our schedule, involving more flying during peak periods and less during the trough.

Let me switch gears to our outlook for the fourth quarter. We're expecting ASM growth of 2% to 4% from last year in the fourth quarter, which is in line with our full-year plan of ASMs up 3% to 5% from last year. From a RASM perspective, we are forecasting better results in the fourth quarter, with RASM expected to decline 2.5% to 5.5% from last year. These expectations reflect the continuation of positive trends in North America and the neighbor islands. Notably, excluding foreign exchange and fuel surcharge headwinds, our year-over-year RASM would be positive at the midpoint of this range.

In conclusion, these strong third-quarter results enhance our confidence in the business going forward. Demand to Hawaii remains steady and growing. The competitive capacity landscape in all of our geographies is manageable for as far as we have visibility. Domestically, the operating environment looks good. And internationally, we continue to benefit from the maturing of our routes and the development of our distribution capabilities. All of this positions us extremely well for the periods ahead.

With that, let me turn the call over to Shannon to discuss our costs and the balance sheet.

Thank you, Peter, and hello, everyone.

To recap the quarter, adjusted net income grew to $78 million or $1.29 per share, an increase of $29 million or $0.50 per share over the same period last year. Operating expenses, excluding fuel, increased $20.5 million from the prior year on a 3.6% increase in capacity. Which resulted in a 2.2% increase in CASM ex-fuel from last year. These results were better than original guidance, and in line with the improved guidance range we gave at the beginning of the month. The favorable results were due to a combination of permanent cost savings, and a shift in timing of maintenance expenses from the third to fourth quarter.

Fuel costs continued to provide a significant tailwind in the third quarter. Economic fuel costs per gallon for the third quarter decreased 37% to $1.95 per gallon. Which resulted in a $68 million decrease in our economic fuel costs from last year, on a 1.6% increase in fuel consumption.

Before we leave the third quarter, let me take a moment to discuss our share count and the impact on our earnings per share. As Mark mentioned earlier, we repurchased $20 million or approximately 900,000 of our shares outstanding this quarter. These repurchases reduced our basic share count based on the weighted average number of days outstanding for the quarter.

As of the end of the quarter, the convertible notes have a remaining principal balance of $3.3 million, which represents repurchases to date of [96%.] Dilution of 400,000 shares is reflected in the diluted share count this quarter.

In addition, the warrant related to our convertible note remains. As discussed on our last call, although the warrant is economically neutralized by a call option and will have no dilutive impact to actual shares issued, GAAP requires us to dilute our share count by an additional 6.4 million shares this quarter. If we had settled the warrant at the beginning of the quarter, our share count would decrease to 54.5 million. Which is the equivalent of an increase to adjusted EPS of $0.15. As a reminder, this additional dilution will continue until the warrants are settled or naturally expire in June of 2016.

Now turning to the balance sheet. We ended the quarter with $611 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 on an adjusted debt to adjusted EBITDAR basis continued to decrease this quarter, and sit at 3.1 times within our target range of 3 to 4 times. We continue to evaluate the best uses for our cash going forward, and will provide an update and address our capital allocation plans at our upcoming investor day in December.

Switching gears to the fourth-quarter outlook. We expect our unit costs, excluding fuel, to increase 3% to 6% from last year with the following items driving this increase: approximately 2 percentage points relate to wages and benefits, including the higher pension expenses we've seen throughout this year, resulting primarily from a decrease in discount rate and change in mortality assumptions, and also wage increases. About 1 percentage point due to a harder year-over-year comp in commissions and other selling expenses. As the rapid decline in fuel prices in the fourth quarter of last year resulted in a substantial reduction in our frequent flyer liability. And an increase in aircraft rent expense from the three new A330 leases delivered in February, May and October, offset by the lease return of two B767s totaling approximately 0.5 percentage points.

These items contribute to 3.5 percentage points of the year-over-year increase in the fourth quarter. For the full year, we now expect our CASM ex-fuel to be on the favorable end of our previous guidance range, and up 1% to up 3% from last year. We also continue to expect a full year effective tax rate between 38% to 40%.

Based on the fuel curve as of October 14, our economic fuel cost per gallon for the fourth quarter is expected to be in the range of $1.75 to $1.85. And for the full year, $2 to $2.10. Our hedges expected to settle in the fourth quarter are currently at a loss of $13 million. And as of September 30, 2015, we hedged approximately 50% of our projected fuel requirements for the remainder of 2015, with heating oil swaps and puts. Looking forward, we're expecting to see improvements in our fuel hedges settling next year, as we begin to lap the lower fuel prices that began in the fourth quarter of last year. For the fourth quarter, we expect our fuel consumption to be in the range of down 1% to up 1% from last year. And for the full year, up 0.5% to 2.5%.

Based on the current outlook, we expect fuel savings from last year, net of hedges and volume increases, of $60 million in the fourth quarter and $220 million for all of 2015. These savings will more than offset the US dollar exchange rate, and lower fuel surcharge headwinds. Which, on a full year basis, are expected to be about $90 million in total net of hedges. We continue to expect our full-year CapEx to decrease significantly from 2014. As a reminder, all of our 2015 A330 deliveries are financed through sale leaseback arrangements. In the fourth quarter, will take delivery of an A330 and return a 767 at the end of its lease.

In conclusion, we continued to execute to our plan. We are financially stronger, and our outlook for record profitability in 2015 remains. Our margins are improving, and our balance sheet continues to strengthen. We're well positioned for the long term success of our business, with continued earnings growth and positive 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. They're now ready for questions from the analysts first, and then the media as time permits. As a reminder, please limit yourself to one question and if needed one follow up question. Operator, please open the line up now.

(Operator Instructions)

Helane Becker, Cowen and Company.

Just one question to clarify, Shannon, did you say -- what did you say about fuel cost savings in the fourth quarter? I missed that number.

I will get it for you, Helane. $60 million.

That is six-zero right?

Six-zero, yes.

Great. And then $220 million for the full year?

Correct.

Okay, that is not my question. But I did have one question.

I think you were talking about the reconfiguration of the aircraft and adding the seats to the A330s. Did you give us a cost estimate for what that will be, and how we should think about that in terms of CapEx?

No, we didn't. We haven't given an estimate of that. I think it is within the CapEx profiles that we have talked in general terms about for 2016 and 2017. So it sticks within what we have already said. And as we roll into investor day, we may have a little more for you then.

Okay, great. That was really my question, the rest of it was pretty awesome. Thank you.

Hunter Keay, Wolfe Research.

Mark, so a question for you. As you think about the competitive environment of the North American market, do you have a sense for what percentage of North American passengers to Hawaii really are not up for grabs due to maybe the dynamic of how Hawaii is such a heavy redemption market?

So for example, you may know that 25% of legacy airline X's passengers to Hawaii are redeeming miles. So they are not really a passenger that you guys target or think you can target. So the level of concentration as it relates to the number of passengers that the airlines are going for is up for grabs, is actually a lot smaller than the number of people that actually fly in that market. Do you know what I'm saying?

Am I thinking about that properly? Have you guys done any studies or have any data around that redemption angle of how people fly in that market for North America?

First of all, I think intellectually, you are striking on a point. Yes, so a lot of redemption miles are burned flying to Hawaii. And clearly, that traffic is not up for grabs if it is a MileagePlus or AAdvantage or Delta SkyMiles used, to name three. They're clearly going to redeem them on their own [metal]. We do not have an exact sense of how much that is. Frankly, it goes up and down depending on, presumably, on what these guys do in terms of managing their inventory.

But what it does say I think is that, our penetration of the market of that traffic, which is up for grabs, so to speak, is actually better than our passenger share in that market. And we are currently at about a quarter of all the traffic coming off the West Coast, and would therefore, be quite a bit higher than that in terms of the traffic that is so-called up for grabs.

Okay. But you guys don't have a sense for how much it is. Is it 15% of the passengers flying or redeeming miles, you guys do not really know what that number is, right?

Hunter, I do not know the number off the top of my head. And there is a way to estimate it looking at the DOT O&D numbers, and looking at the percentage of zero coupon tickets you have. My guess is that the number you just gave out would probably be at the high end, it would probably end up being actually less than that.

Okay, Peter, thanks a lot. Sort of another (inaudible) for you, but would but you guys ever consider expanding the operation to a point-to-point operation within the lower 48? Whether it is just as another area of growth for Hawaiian or as an opportunity to maybe drive some business to the Hawaiian islands? I don't know, have you guys even done any internal studies even of just like a longer-term type approach, anything around that at all?

Yes, we have certainly thought about it periodically when we do strategic reviews. What I would say is that, we don't have any ambitions at the moment to fly sectors uniquely within the lower 48. I think if we look more into the future, there is a question about whether the business model that we have centered on Hawaii which has, we think, been very, very successful over the years is one that we could replicate elsewhere. I think that is a different strategic question, but at the moment, we do not have any plans to operate sectors between two points on the continental United States.

Mike Linenberg, Deutsche Bank.

The A330 reconfiguration, it looks like the seat count is actually going to go down about 5%. I know it does not start till the second half of 2016, or maybe it's June of 2016. So as we think out, and I realize we're looking out far, but you have some A321s coming in I think. But you have your big wide-body fleet losing seats. Are we going to see capacity maybe trending lower than what we have seen in the past couple of quarters or what? How should we think about it?

So first of all, yes, you are correct. Our current A330s seat count is 294, it will go down to 278. Clearly, we think it is accretive, or else we would not have done it. We think we will get value add for the life of that seat, and the addition of Extra Comfort seats. Which have proven to be very successful in the marketplace.

In terms of seats growth, what I think you can expect to see for us in the medium-term trend, is low single digits, low to mid single digits. Somewhere in the 3% to 5%, 6%, somewhere at that level. There will be blips up and down. So for example, when we get things like the A321 delivered, they come in, and initially you're not operating as effectively or as efficiently as you can because the numbers of aircraft are pretty low.

So you will have some blips up and down. But that is our long-term trend for seat growth, reflecting, by the way, our belief about the growth in demand for the Hawaii vacation. Built to some not insignificant degree on the growth rates around the Pacific Rim, not just domestically in the United States.

Okay, great. And just one follow up here. When we think about fuel surcharges and we think about fuel surcharges in the markets where they are regulated, like I think in addition to Japan, I think they're regulated out of China. At what point is there no longer a fuel surcharge, at least a regulated fuel surcharge, out there in the fare structure?

It would seem like given the decline in fuel that we are scraping the bottom. So going forward if we were to have further declines in fuel, maybe we don't see the type of decline in fuel surcharge that we have seen over the last 12 months. Am I thinking about that right?

Yes, Mike. I think you are thinking about it right. The two main markets that we serve, where you have got this mechanical fuel surcharge related to a lagging indicator of fuel price, are Japan and Korea, are the main ones we have.

And they are -- the surcharge has not yet gone right to zero. But I think as you get beyond the fourth quarter, where we had the real big movement last year and you start getting into the first and second quarters next year, we have -- fuel prices have stabilized more from that early drop. So you will get to a period where the year-over-year fuel surcharge is an even comp.

Joseph DeNardi, Stifel.

Mark, maybe a more strategic question. And I can recognize that you guys are benefiting from some more favorable competitive capacity trends going forward. But maybe longer term, is there any way to mitigate some of that capacity risk through partnerships or new alliances, just to maybe get some of that better under your control?

Yes. Well first of all, so when you talk about alliances and co-chairs and things like that, first of all, I would make a couple of points. We have got a number of those relationships today, both domestically and internationally. Secondly, it is in the nature of those relationships that we don't control any outcomes. And of course, that is something that would be illegal, and not something that we therefore, contemplate in any way.

I do think that we have -- our network is of value to airlines that fly to Hawaii, and those that want to access the Hawaiian market. And their networks are of value to us, and we have a number of arms length relationships with such airlines. And they include, for example, ANA and Korean.

They include all of the big three US domestic carriers, whose codes we carry between the islands of Hawaii. And with whom we have interline relationships. Joe, did that answer your question? I was trying to parse it out a little bit.

Yes, it did. I think one of the concerns longer term that some investors have is to what extent you are going to be able to deal with higher competitive capacity growth on the North America side. So I'm just wondering if there's anything more that you guys can do to protect yourself against that, or is it just part of the nature of being a smaller carrier?

I think ultimately, we don't think any market can you protect yourself against competitors coming in, certainly in none of ours. What I can tell you is that we are absolutely confident that our mix of costs, brand and positioning in the marketplace is better than anybody else's for this particular market.

So we don't see anybody either present or prospective coming into the market and having us sitting there wishing we were them. We're quite happy being us. And so long as all of the players in the marketplace are sensitive to basic economic conditions, that should see us through to winning in this marketplace.

Shannon, I think you mentioned in the press release that you have achieved your leverage target. What is the plan there? Is it to hold it at that level or go lower?

Joe, we are still doing a bit more analysis on where we want to be going forward. So we have achieved the target pretty quickly this past year, from last summer. And we are now looking forward to 2016 and 2017. And we're going to talk that a bit more at investor day, but we are continuing to look at it and work on it.

Rajeev Lalwani, Morgan Stanley.

Just another question for you on the capacity side. It seems like things are trending in the right direction. What do you attribute that to? What is the risks that it could reverse and not be as favorable, not just the next couple of quarters, but as we look at next year and going forward?

I think when you look at the capacity picture and it's favorability, you have got to break it down a little bit between Hawaiian, what we did arguably to ourselves, and what competitors do. As we have taken some 767s and put A330s in, that has added some seats in the marketplace. The 330 has about 13% more seats in them than the 767. So quite a lot of that extra capacity in all candor was stuff we did to ourselves. That process is largely complete now. Some of the 76s that are yet to leave our fleet are likely to be replaced by 321neos, which actually have a smaller seating capacity.

In terms of competitor retention, I think that there has been a period where some carriers have come in. They have added capacity, and I think they have discovered that it is a pretty competitive marketplace. And again, as I said in answer to Joe's question, I think they have discovered that certainly Hawaiian has got a formula for serving this market that has been pretty successful, and they have decided to take some of their capacity and deploy it elsewhere.

At this stage, actually, let me rephrase that. Capacity isn't actually leaving the market. The rates of growth is declining. So that is really what is happening out there, and it doesn't really surprise us. These things go in cycles, and it feels like we are at the ebb of the cycle.

Understood. And then just a question on the RASM guide for 4Q. How conservative is or isn't it? It seems like you guys have been pretty conservative and have come in better as you got closer to actual, so any color there would be great.

This is Peter, Rajeev. Actually, in the last quarter, we came in within the range, albeit on the better end. And certainly, we are going to aim for the best RASM performance we can achieve. And so if we end up at the better end or better, that would be good.

Our objective when we give this information is to play it as straight down the middle as we can with you, based on the information we have at this time. I would say we have a pretty good level of confidence, as usual, about October and even November revenue at this point and there's still a fair bit of December to book. So that is really where the majority of the uncertainty and the quarterly guide is for us, both on a positive direction and a negative direction.

Actually, if I can add to that. If you look at the last three quarters, I think I'm right in saying, that we are at the positive end of the range or beyond the range in two of them. And we were at the trailing end of the range for one of them. We do try to play it straight down the middle, there is some variability within a quarter. It's the nature of the business.

Stephen O'Hara, Sidoti & Company.

I was hoping, just going back to Mike Linenberg's question. On the fuel surcharge, I am wondering, maybe how transparent that is to the consumer in those markets? And I am wondering if there is any continuation in the dollar/yen relationship? How do you think that impacts demand or maybe worsening of that relationship, how does that impact demand? I guess I'm wondering, has the fuel surcharge maybe, I don't want to say artificially, but helped demand stay up versus what is happening with the dollar/yen relationship?

Yes, Steve, there's a lot of moving factors there. I would say the fuel surcharge is pretty transparent in those markets that we talked about, Japan and Korea, where it is fairly formulaic, how it gets calculated, and I think people see that reflected in their pricing. It does affect travel to other destinations as well, and so that balances out some of the competitive impacts.

I think as far as demand goes, we have been very pleased throughout this year that despite the increases and the strength of the US dollar over a solid year, year and half period now, that we have seen demand for Hawaii vacations remain very strong. And it is, as I said in the prepared remarks, it is a testament to the resilience of Hawaii as a destination. It is an aspirational destination for people throughout the Pacific Rim, and we think that positions us well for the future.

Okay, thank you. And the just quickly on the A321s and transitioning some of the A330s out. I'm wondering what type of -- how much confidence do you have that you can manage that transition well? It would seem like there is a little bit of risk there in terms of pulling out wide-body aircraft, replacing a number of them with narrow-body aircraft. From maybe a customer service or quality perception standpoint.

And then maybe what is the capacity -- what is your capacity outlook for the West Coast to Hawaii, would you be a net -- would be adding net capacity or taking some away? And I know you guys switch things around with some Japanese markets, so maybe you go back to what you had previous to that move. But if you could talk about that a bit, I'd appreciate it. Thank you.

Sure. Well first of all, we're not taking out A330s for 321neos, which I think you'd referenced in your question. We have got 76s that over time will retire from our fleet. And as we built our A321neo fleet, that there'll be some likely degree of substitution there.

Secondly, I think what the 321neo does is it allows us to manage capacity to reach market according to its merits. So at the moment, we have only got one vehicle that can fly to these markets, and it has got 294 seats in. There will be markets where I think we're going to be putting seats up by going to two flights a day serving not just Honolulu, but a neighbor island directly. Where today, we only have a wide body going from Honolulu to that market. And there'll be other markets where we can be wide bodies in the peak months and narrow bodies in the less peak months.

Overall, we would envision that capacity between the US West Coast and Hawaii on Hawaiian Airlines will grow in the low single-digit range. But having a smaller capacity hull will allow us to better match supply and demand, and better able, frankly, to serve the neighbor islands than we do today.

Michael Derchin, Sterne Agee.

Mike, to make sure I heard you correctly. Did you say that if you exclude the impact of FX and fuel surcharge in the fourth quarter that the RASM guidance would actually be positive in the fourth quarter?

Yes. The midpoint of the RASM guidance would be positive in the fourth quarter.

Okay. That is good to know. And did you also say that in the inter-islands, by September, you are now turned positive in that regard?

Yes.

Okay. The only other question I have is that on your capital deployment plan going forward, you are generating a lot of free cash right now. It seems like your leverage goals are hit way early, and it sounds like you are going to be looking at that carefully and getting back to us later. I am assuming that -- is it fair to say that further deleveraging is in the cards here?

I think your statements, Mike, up to that last point, I would absolutely confirm. I think on that last point, we have the ambition of sharing a lot more detail come December 2 when we meet with you all in New York and go over investor day.

Okay, I appreciate it, thanks.

Thank you. At this time, that concludes the analyst portion of the conference call. We're now ready for questions from the media.

(Operator Instructions)

Thank you. It appears we have no media questions. I would now turn the conference back over to Mr. Dunkerley.

Thank you very much, operator. Thanks, again, for joining us today. We're pleased with the third-quarter's record-breaking results, and at our prospects for the remainder of the year.

Another reminder, the morning of December 2, New York City is going to be our investor day, where we are going to provide more details on our outlook for 2016 and beyond. Attendees are also going to have the opportunity to meet some more members of the management team, which is something we always like to do at an investor day.

So with that, thank you very much, and we look forward to seeing you very soon.

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