Hawaiian Holdings Inc (HA) 2015 Q4 法說會逐字稿

Greetings and welcome to the 2015 fourth-quarter and year-end 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.

I would now like to turn the conference over to your host, Ms. Ashlee Kishimoto. Thank you, Ms. Kishimoto, you may begin.

Thank you operator. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' financial results for the fourth quarter and full year 2015. On the call with me today are Mark Dunkerley, President and Chief Executive Officer, Peter Ingram, Chief Operations 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 end with some closing remarks.

By now, everyone should have access to the press release that went out at about four o'clock 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 in metrics. A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found in our press release or on the Investor Relations page of our website.

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 as well as reports filed on Forms 10-Q and 8-K.

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

Aloha, everyone, thank you for joining us today.

The strong fourth-quarter performance finished off a record-breaking year for Hawaiian. Our adjusted net income grew 86% to $49 million, or $0.85 per share. For the full year, adjusted net income nearly doubled to $189 million, or $3.09 per share.

Adjusted pretax margin for the quarter improved 6.2 points to 13.8% and for the full year grew 6.3 points to 13.2%. Our pretax return on invested capital rose to 27.5% for the full year.

The year ended much like the quarters which preceded it. The benefits of strong demand for travel to Hawaii, plus lower fuel prices, more than made up for the impact of the strengthening US dollar and the decline in fuel surcharges. Additionally, the high rate of industry capacity growth we experienced on our North American routes in the first half of the year gave way for a slow rate of growth in the second. This enabled us to improve our revenue performance in this particular geography, as Peter will enumerate.

We are now reaping the financial rewards from the five years of acquiring new aircraft, hiring thousands of new employees, and growing into new markets. 2015 was the first year in several that we generated free cash flow with approximately $460 million flowing in. This comprised of $476 million in net cash provided from operations, $118 million of net cash used for additions to property and equipment and pre-delivery deposits, and $101 million of cash proceeds received from the sale and lease-back of aircraft.

Our priority has been to strengthen our balance sheet by paying down the debt we have taken to finance our growth. About $400 million has been used to retire $124 million of aircraft debt before its maturity, to fund scheduled principal debt payments of $90 million, and to buy back the convertible notes for $185 million, of which $71 million related to the original principal outstanding and $114 million to equity. Beyond the $400 million in debt repayments I've just mentioned, we deployed a further $40 million to buy back 1.7 million our own shares.

Strengthening our balance sheet creates long-term value for our shareholders. At the end of December, we lowered our leverage on an adjusted debt to EBITDA basis to 2.7 times while maintaining a strong cash position of $560 million and a liquidity ratio of 32%.

The equity repurchases through our convertible buyback and share repurchase program total about 9% of our outstanding market cap. Going forward, we will continue to be opportunistic buyers of our stock.

The consistency in our financial performance is in large part the consequence of the consistency with which my colleagues throughout the business deliver customer service to our guests. We faced a number of external challenges this year as delayed airport construction impeded our operations. Nonetheless, our employees took this in stride, leaving us still in a position to boast that no airline does a better job of looking after its customers coming to Hawaii than Hawaiian Airlines.

Let me share some of the highlights since we last spoke back in December at our investor day. We are pleased to officially welcome to our Ohana Jon Snook as our Chief Operations Officer. Jon had been serving in the role in an interim capacity since October. And Aaron Alter has joined us as our Chief Legal Officer, having served as our external counsel since 2009.

We had another year of strong operational performance. We carried a record 10.7 million passengers. Importantly, this was achieved while maintaining our industry-leading operational and on-time performance.

While we won't see the final DOT performance statistics for the full year 2015 until February, our own strong performance in December plus DOT's rankings through November lead us to expect that we will finish the year as the nation's most punctual airline. Should this be so, it will be the unprecedented 12th year in a row that we have finished atop lead tables in operational performance.

Lastly, our IAM-C group, representing our clerical and passenger services employees, and our IAM-M group, representing our mechanics, line serviceman, cleaners and contract services personnel, both ratified new five-year contracts. All told, our 2,200 employees covered by these agreements will see an improvement in their standard of living with increases to pay. In return, the Company will gain savings in the costs of providing benefits as well as more flexible work rules which will increase employee productivity and efficiency.

2015 was a good year for us and our outlook for 2016 is even brighter. We hope to achieve further growth in earnings and to expand our margins. Our revenue performance should benefit from solid demand from all of our geographies, manageable competitive capacity growth to Hawaii, continued maturation of routes we've started over the past several years, lapping foreign exchange and fuel surcharge headwinds, and making further headway in selling value-added products.

Our cost performance should also improve thanks to the low price of oil, which based on the current fuel curve could amount to $140 million in cost savings for the year ahead. This will more than offset the other drivers of costs which we intend to keep within the boundaries of low single-digit growth for 2016 despite some out-of-the-ordinary increases in certain line items, as Shannon will explain.

Our comments about the state of our business stand in contrast to the global economic angst that has rocked the foundations of the world's bosses these past few weeks. We don't intend to pass judgment on whether there is merit or not to the accumulation of fears being played out market by market. I can only say that, in our corner of the world, we are not seeing demand weakness of any kind.

Since 2007, there have been several global shocks of one sort or another. The global financial crisis and the capitulation of foreign currencies to the US dollar come particularly to mind. None of them have had an impact on demand for the Hawaii vacation. While we can't predict the future, the resilience of demand we've experienced in our immediate past gives us confidence about our immediate future.

Peter will now take us through the revenue picture.

Thank you Mark. Fourth-quarter operating revenue was $574 million with capacity up 2.9% year-over-year. RASM was at the better end of our original guidance range due to solid demand throughout our network, ending the quarter down 3%. PRASM improved in our domestic network, while foreign exchange and fuel surcharge effects continued to pressure international revenue performance.

These fourth-quarter results represent a third consecutive quarter of sequential improvements. And notably, absent the ForEx and fuel surcharge impacts totaling about 4 points, our system RASM would have been up for the period.

In North America, our revenue performance continued to improve as evidenced by a PRASM increase of 2.8% in the fourth quarter. Notably, PRASM was positive in each month of the quarter, including December, which faced a calendar challenge compared to 2014, which had an extra day of peak Thanksgiving travel.

We've enjoyed an upward sequential trend since the first quarter as capacity growth from the West Coast to Hawaii slowed to a more moderate pace in the second half of the year. In addition, our commercial team has done a good job of adapting to the competitive environment.

Looking ahead, the industry capacity outlook is manageable with 5% growth from our markets to Hawaii in the first quarter, and a decline of 1% in the second quarter, providing us optimism for the periods ahead.

Neighbor Island routes also posted positive PRASM this quarter at up 2.6%. The completion of 717 interior modifications by the end of the quarter and the refinement of some of the capacity growth in Kona and Hilo in September contributed to the improvements in our Neighbor Island revenue performance.

The Boeing 717 interior modifications added 125 seats to our 18 aircraft fleet, which is effectively equivalent to one additional very cost-effective aircraft. This allows us to supply more seats during the peak hours of the day and peak periods of the year when our planes are routinely full. The accretive impact of these seats on our profitability is best illustrated by the year-over-year performance in the fourth quarter. We carried 1.5 million passengers on 717 flights in the fourth quarter, an increase of 4.5% compared to last year.

Seats flown on 717 flights increased 2.6%. But because of our new aircraft configuration, we accomplished this with fewer departures, primarily due to off-peak period trimming. Adding capacity in this manner is clearly very cost-effective and our ability to fill these incremental seats is very accretive to profitability.

The underlying trends of our international business remain positive with steady demand for travel to Hawaii despite the strength of the US dollar and substantial year-over-year reductions in fuel surcharges. On a local currency basis, and excluding the impact of fuel surcharges, we are seeing improvements in our international business. In the upcoming first quarter, we expect trends to become more positive as ForEx and fuel surcharge headwinds begin to decelerate from the fourth quarter to an estimated 3 points of headwind for year-over-year system RASM. Based on current ForEx and fuel prices, we are turning the corner to the period of more level year-over-year comparisons ahead before fully annualizing the impacts later in the year.

Notably, in Japan, our largest international source of visitors, the currency trends are already considerably flatter as we enter the new year. We continue to hedge our foreign currency exposure with yen and Australian dollar forwards and for the upcoming first quarter, we are hedged at approximately 40% of our exposure at levels better than current exchange rates.

Internationally, the competitive environment remains manageable with moderate seat growth on our routes to Hawaii of up 1% in the first and second quarters of this year based on published schedules. We continue to look for opportunities to optimize our international network and to manage macro factors affecting our revenue performance.

At our investor day in December, we announced the addition of Narita service to our network starting in the summer, leveraging the terrific success we've enjoyed in Haneda. Japan is the largest international inbound market to Hawaii. We have strong distribution relationships and see even more opportunity for growth relative to the 13% share of Japan to Hawaii seat capacity we flew in 2015.

As we remain disciplined about managing our business, we also announced some seasonal refinements to our Australian schedules, taking a little bit of capacity out of the off-peak periods. Our value added revenue per passenger continues to strengthen and in the fourth quarter grew by $0.40 to $22.25 and by $2.29 to $22.01 for the full year. The growth in 2015 was due to the continued success of our sales of extra comfort and preferred seats, and the sale of Hawaiian Miles.

December was our best month ever for premium economy seat sales, boosting our annual revenue over the $40 million threshold. While Hawaiian Mile sales also set a record for the year, powered by account growth and stronger than industry average spend on our cobranded credit card, fourth-quarter results for Hawaiian mile sales were further buoyed by a limited time 50,000 mile bonus offer, driving an increase in new Hawaiian Miles credit card account growth. These products remain a key focus for us as we enter 2016.

Cargo revenue was flat in 2015 despite macro headwinds, including lower fuel surcharges and weakness in outbound cargo markets in Asia. Cargo had a strong start in 2015 boosted by the dock slowdowns on the West Coast in the first quarter, which redirected some cargo shipments from sea to air, offsetting otherwise lighter traffic out of Asia. With a tougher comparison in the first quarter, we expect cargo revenue to be down slightly to begin the year before sequentially going through the remainder of -- before sequentially growing through the remainder of 2016, including the launch of our Neighbor Island Freighter operations later this year.

Let me switch gears to our outlook for the first quarter more generally. For the first quarter, we are expecting ASM growth of 2.5% to 4.5% from last year, and for the full year up 2.5% to 5.5%, which is unchanged from the guidance we gave at the beginning of December at our investor day. For RASM, we are forecasting the continuation of improving trends with RASM expected to be flat at the midpoint of our guidance of down 1.5% to up 1.5% from last year. These expectations reflect positive momentum in North America and the Neighbor Islands, as well as the 3 points of foreign exchange and fuel surcharge headwind that I noted earlier.

In conclusion, these strong fourth-quarter results and the trends we are seeing going forward reinforce our confidence that 2016 will be a better year than 2015. Demand to Hawaii remains solid throughout our geographies and continues to grow. The competitive capacity landscape in all our geographies is manageable as far as we have visibility. And with our products and services purposefully designed for the guests we serve, outstanding operational performance, and the unsurpassed hospitality provided by our frontline colleagues, we are positioned extremely well as we enter 2016.

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

Thanks Peter. To recap the quarter, adjusted net income grew 86% to a record-breaking $49 million, or $0.85 per share. For the full year, adjusted net income nearly doubled to a record $189 million, or $3.09 per share.

Operating expenses excluding fuel increased $30 million from the prior year on a 2.9% increase in capacity, which resulted in a 5.7% increase in CASM ex-fuel from last year. These results were at the higher end of the guidance that we provided at the end of October as they include about 1 percentage point of wage and benefits increases with the ratification of the IAM agreement.

Fuel costs continued to provide a significant tailwind in the fourth quarter. Economic fuel costs per gallon for the fourth quarter decreased 37% to $1.80 per gallon, which resulted in a $60 million decrease in our economic fuel cost from last year on flat fuel consumption with the continued benefits from our fuel efficiency initiative.

As I mentioned at our investor day in December, we took a variety of actions to reduce our fully diluted share count in 2015, including repurchasing nearly all of the convertible notes outstanding, and unwinding the warrants related to our convertible notes in mid-November. As a reminder, the settlement of the warrant resulted in a positive net cash settlement of $22 million which had no impact to the income statement.

Since the warrant settled in the middle of the fourth quarter, it continued to do with our shared count by 3.8 million shares in the fourth quarter. If the warrant settled at the beginning of the fourth quarter, our share count would have decreased to 53.8 million shares, which would have lead to an increase to adjusted EPS of $0.05 at the end of the quarter. Looking ahead to 2016, we are expected a lower diluted share count of 53 million to 54 million shares as a result of the actions taken in the fourth quarter and the year.

Turning to the balance sheet, as we mentioned at investor day, our plan was to use $150 million to early retire debt. And we executed on this plan and retired $124 million of outstanding aircraft debt in the fourth quarter. For the full year, early debt retirement and repurchases of our convertible notes totaled $195 million, which further decreased our leverage on an adjusted debt and adjusted EBITDAR basis to 2.7 times at the end of December. In addition to decreasing our leverage, the early debt retirement also provides valuable cost savings from interest expense totaling about $6 million in 2016.

With $400 million of capital allocation in 2015, we continue to maintain a strong cash position with $560 million in cash, cash equivalents, and short-term investments, and a liquidity ratio that is 2 points higher from last year at 32%. In addition to the excess cash we currently have, we are forecasting further generation of free cash flow. We will continue to retire debt, opportunistically repurchase shares, and fund our pension plans in excess of minimum required contributions.

Looking beyond 2016, we expect to continue to generate excess cash which we will use to fund our A321neos that begin delivery in 2017.

Switching gears to the first-quarter outlook, we expect our unit costs, excluding fuel, to increase 3% to 6% from last year with the following items driving the increase. As we continue to make investments in our people, approximately 0.5 point is related to the wage increases from the ratification of the IAM agreement and 1 percentage point from profit-sharing accrual increases, about 1.5 percentage points due to an increase in the number and type of heavy maintenance checks for our A330 and B717 fleets, and about 0.5 percentage point due to a harder year-over-year comp in commissions and other selling expenses due to a one-time positive settlement with global payment companies received last year. These items contribute to about 3.5 percentage points of the expected year-over-year increase in the first quarter.

For the full year, we expect our CASM ex-fuel to be up in the low single digit range, which does not include any assumptions about the amenable contract with our pilots union and our employees covered by a contract with the TWU. We will provide a revised estimate if necessary when agreements are reached.

The year-over-year increases for the full year are similar to the first quarter with expected increases from maintenance totaling 1 percentage point, wages totaling 0.5 point on the ratification of the IAM agreement, and profit-sharing totaling 1 point and space rent totaling 0.5 point for a new maintenance and cargo facility that is currently estimated to begin in the third quarter, our expected date of move in. Keep in mind any changes to the move-in date may cause changes to our forecast. Over the long-term, this new space will transform the way we work and is expected to bring important productivity savings to offset increased rent costs.

Based on the fuel curve as of January 25, our economic fuel cost per gallon for the first quarter is expected to be in the range of $1.50 to $1.60 and for the full year $1.35 to $1.45. Our hedges expected to settle in the first quarter are currently at a loss of $22 million. And as of December 31, we hedged approximately 35% of our projected fuel requirements for 2016 with heating oil swaps.

We will continue to maintain a disciplined approach to managing our program and are focused first and foremost on decreasing operating and economic risk. We continue to expect our CapEx to be lower than the peak in 2014 but higher than 2015 to a range of $160 million to $170 million. 2016 consists of $80 million of pre-delivery payments for the upcoming A321neo deliveries, $45 million of maintenance CapEx, and $40 million for other items, including the A330 LifeLock an Extra Comfort interior modifications. Our current 2016 fleet plan is to add one A330 under lease in June.

For the first quarter, we expect our fuel consumption to be in the range of up 1% to up 3% from last year, and for the full year up 1.5% to up 4.5%. Based on the current outlook, we expect fuel savings from last year net of hedges and volume increases of $36 million in the first quarter and $140 million for all of 2016.

We finished 2015 financially stronger with record earnings growth, record margins and a stronger balance sheet. We are well-positioned for long-term success and we are excited about the financial outlook for 2016. With continued strong financial performance, we intend to use the excess cash that we generate to continue strengthening our balance sheet, investing in our business and people, and enhancing long-term shareholder value.

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 if time permits. 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). Helane Becker, Cowen & Co.

Hi guys. Thanks so much for taking the question. So as we think about going through the year, I think, Peter, you said that some of the comps start to get easier. So do we get to that point where PRASM is up year-over-year?

I'm not going to be lured into giving RASM guidance beyond the first quarter. But I think in terms of painting a picture of what the year looks like, I think if you think back to the slide we showed at investor day, we see that the ForEx headwinds in Japan really start to flatten out starting from the beginning of the year. In Australia and New Zealand, the ForEx headwinds, based on where the market is trading right now for currency, would suggest that, by the time we get to the back part of the year, we've gotten easier comp there.

And in terms of fuel surcharges, there is still some period to go before we lap, that there's not much lower we can go of the fuel surcharges in the main geographies where we have it, which for us is Japan and Korea. You already see us posting positive year-over-year numbers in the domestic geographies, and we are happy about that and expecting that to continue into the first quarter.

So, we see trends moving in the right direction and don't see a reason why things should deteriorate sequentially. But it's too early to be talking about guidance for the rest of the year from a revenue perspective.

That's fair enough. I don't think I was trying to lure you into talking about it. I Think I was trying to get a sense of kind of the timing and how I should think about it. But that's okay.

And then the other thing is when you think about your markets right now, they are actually in incredible shape relative to kind of a few years ago when you were seeing huge double-digit capacity growth rates into Hawaii off the West Coast and so on. As you think about having positive unit revenue, which I don't think anybody else in the industry has, does that concern you that you will see more -- like people will wake up and go, oh, we forgot about Hawaii, we should grow there, that you will see more competitive increases?

First of all, I think the first part of your assessment is absolutely correct. I think we've been a little bit countercyclical the last couple of years. We've seen a lot of double-digit capacity growth into the main West Coast to Hawaii markets. That's now receded, and as you can see sort of flat to slightly negative is our prospect for the rest of the year.

People can always come in and out of the markets. I think we take a lot of comfort from the fact that we think we've got the right cost structure, the right product for this particular marketplace. And if you look sort of generally in the market, having had well over a year of double-digit capacity growth, it may be not high on other carriers' lists of priorities to jump in right now.

Just to add one point to that, one of the things you've heard us say consistently over the past year and really the past several years is commenting on the strength and continuation of strong demand for travel to Hawaii. And one of the remarkable things off the West Coast in particular is that we have seen a lot of capacity come from North America, both by Hawaiian and by other carriers. And the demand has absorbed that capacity. And we are very confident in the resilient demand of Hawaii as a vacation destination.

Okay, got it. And then one last housekeeping question relative to the pilot contract. So have you exchanged -- I kind of missed the amendable date. Have you exchanged openers? Is that in ongoing negotiation now?

Yes, we are in ongoing negotiations and there will be meetings taking place at the end of the month. I can't remember if this is round two or three or even four, but we've got negotiations at the end of this month.

Great. Thanks very much for your help. I Appreciate it.

Hunter Keay, Wolfe Research.

Thanks. Real quick, I don't think you gave us the fourth-quarter PRASM for international and North America, if I'm not mistaken. If you could provide that, that would be helpful.

And then as it relates to the flattish PRASM guide in the first quarter, can you maybe help us to understand what's driving that strength? I know you gave us the competitive capacity by region, which is helpful, but can you give us a sense for sort of maybe the puts and takes that you are seeing maybe in the intra-island as it relates to one of your competitors blowing down capacity?

Let me answer the first part of your question. I think we gave the North America year-over-year but I'll just give that again. It was up 2.8% in the fourth quarter. International was down about 18% and, as we commented, entirely driven by the ForEx and fuel surcharges. And I think that's a pretty similar number to what it looked like in the third quarter. And we should start to see some of the ForEx and fuel surcharge impacts diminishing as we go into the first quarter. And maybe as we are getting that, I lost a bit of the thread on the second part of your question, so maybe if you could rephrase that second part, that would be great.

Sure. Thanks. What sort of -- are you able to hash out sort of the mix between the competitive capacity good guy in the Neighbor Island stuff with the seat reconfiguration, which is presumably a PRASM bad guy. How do those two sort of wash out in terms of how they offset each other or in terms of the contribution to PRASM in the fourth quarter? (multiple speakers)

It's hard to parse that out. There's a lot of moving pieces, as you suggested. We have a little bit more capacity in the Neighbor Island primarily driven by the reconfiguration. I think there are some differences in schedules to specific islands that we look at. There is a bit of a mix of connecting traffic versus local traffic, so there's a variety of factors.

I would say the overall theme of the Neighbor Island business is that it is a stable business. It's not a piece of the business that is going to grow substantially in the years ahead, but it is a very important part of our network, an important contributor to our long-haul network in terms of the connections it provides us. So we would expect that to perform consistently over the long-term.

Okay. And then just sort of one for Mark. Is it fair to say that last year's share buyback level is a good baseline to assume going forward for 2016? I know you said you would be opportunistic, but is implicit in that, if the stock works really well, that you would buy less?

I'm not going to get drawn on that particular question. What we mean by opportunistic buy of the stock is when we see a circumstance that we like, we will take full opportunity to buy back the stock.

I think in general what we are looking at is strengthening our balance sheet. We've got an opportunity for capital allocation. We think buying back stock is an important part of that, but certainly not the entire framework. And not knowing exactly where our share price is going to move in this year, it's a bit hard to answer your question as directly as I'd like to.

Okay. Thanks guys. Appreciate it.

Michael Linenberg, Deutsche Bank.

I have two here. Shannon, I don't know, maybe you said this and I missed it, just how your CapEx, how that looks this year and maybe into next year as you maybe ramp up a little bit with the A321neos, just the PDPs?

So we are looking -- yes, I think I did give some CapEx guide for 2016. For the full year, we are looking at $160 million to $170 million, which does include about $80 million of PDPs for our 321s. Then we've got some other aircraft modification projects like the A330 life lot and premium economy seats.

Okay. Is that in the $160 million to $170 million, or that's incremental?

It's all included in the $160 million to $170 million.

Okay, so I heard you right. So that includes the $80 million of the PDPs tied to the 321s.

Correct.

Okay, good. And the second question just for Mark. I guess we've seen some headlines out there that I guess the US and Japan, they have reached a deal, maybe a tentative deal, on Haneda daytime slots. I'm just curious, thoughts on that. And just given your markets in fact that most of the flights out of Asia or Japan into the US usually are through the night, would daytime slots, would that even help you? Is that something that would even be useful to Hawaiian? Anything that you know on that front that you can share would be great. Thanks.

Sure. An agreement between the United States and Japan hasn't been reached, and the nature of agreements is you can never say it's going to be reached or it's not going to be reached. (technical difficulty) negotiation to go.

But generally speaking, we support an incremental liberalization of the restrictions on the use of Haneda as an airport, both in terms of the number of permitted operations and the flexibility in using the daytime slots and nighttime slots.

The current restriction on nighttime slots, which incidentally is more a feature of US desires and policies than it has anything to do with Japanese desires and policy -- is something that limits the utility of those slots only a small number of US destinations through just given the way the curfews and the times and so on work. So, I think opening that up will make more communities in the United States sort of eligible in an economic feasibility sense for service to Haneda. How that changes the dynamic, how many new routes are authorized and how that changes the dynamic of the service patent from Haneda to the US remains to be seen. But on the face of it, East Coast and central parts of the United States will have some schedule possibilities into Haneda that make economic sense where heretofore the nighttime stop regime has proven that that isn't the case.

Okay, great. Okay, thanks Mark, thanks for the update.

Joseph DeNardi, Stifel.

Thanks very much. Shannon, it sounds like a good amount of the free cash flow this year is going to go towards the balance sheet. I was wondering if you could just talk about what are the opportunities there from an interest expense standpoint. What is the right way to think about that number going forward? Can you just quantify maybe what some of the notes are outstanding that you would look at?

Yes, we have -- we still have some bank debt on our A330s, which I think, if we pay off, there would be about $5 million of interest expense related to that. And we are obviously still looking at our pension. We've got a fairly large unfunded amount there, which wouldn't necessarily have a big 2016 impact, but going forward, it would provide a much stronger balance sheet.

Okay. And then Peter, just on the surcharges going forward, is there any -- I'm wondering if you could just talk about how much maybe surcharge exposure you still have left in Japan, just given the step down in oil prices recently, what's left there?

Yes, the Japan surcharge right now is about JPY4,500, so it works out to about $40 per ticket. Based on where fuel prices are right now and projecting the curve forward to the next measurement period, given the formulaic nature of that, there is an expectation that that could go to zero effective April 1.

Okay. And is that step down reflected -- I guess that wouldn't hit until second quarter. But is that fair, it wouldn't impact first-quarter numbers?

That's correct.

Okay. Thank you.

Adam Hackel, Sterne Agee CRT.

Thanks for taking my call. Really good quarter and good outlook for 2016. Just a couple of quick ones. Any update on China here? Obviously a lot of headline news with that. We are about a year and a half plus now into your entering that market. How does that look?

We are still making headway. We are performing according to the sort of expectations we had for the ramp up of the service. We are learning a lot about China. We are helping encourage Hawaii as a destination for Chinese visitors, and I think in general it's going pretty much as planned.

Great. And one for Peter. You gave industry capacity growth for the first quarter and second quarter coming from North America, right? So, that's inclusive of your own?

Correct.

So how much are you guys growing on the West Coast first half of the year? Kind of strip that out, yes.

Ashlee is reaching for a specific number. It is overall reasonably modest. We have an incremental three times a week service in the Lahui LAX market this year and we have a couple of weekend frequencies in some other markets. But there is, year-over-year, there is no new service addition. Overall, for us, that adds up to about 6% in the first quarter which then starts to taper down a little bit as the comps flatten out a little more into the second quarter where we up about 3% and then flatter into the third quarter.

Thank you guys. I really appreciate it.

Stephen O'Hara, Sidoti & Company.

Good afternoon. I'm just wondering if -- hi. I was wondering if you could just talk about the impact of the Affinity and the Miles program on maybe 4Q, 1Q 2016 and what expectation is for 2016 as well?

I would say that the mileage sales were one of the positive factors that helped contribute to driving us to the good side of our RASM guidance in the fourth quarter. It's not in the tens of millions of dollars, but it was positive relative to what our earlier expectations were in the single-digit million dollar range. There will be some carry on benefit of that, particularly from the 50,000 mile promotion, which will boost our first-quarter numbers, and that's incorporated into the guidance we have in first quarter for RASM overall.

Okay. And just the impact of the fuel surcharge, if it goes to zero in 2Q, and I know, I think somebody else touched on it in terms of kind of a full-year number. But I guess maybe thinking about it a different way, if you have improving competitive capacity trends, what are the things that we should think about to maybe keep us from getting maybe a little too exuberant about our estimates on PRASM?

I'm not quite sure I know how to answer that. I think we are basing everything off -- our tone is based in very large part about the forward-looking schedules that are out there for the next essentially three quarters is pretty much what you can see. They can always change relatively close in. But I don't think we are all that surprised ourselves that having had 18 months of double-digit capacity growth, we are entering into a period of slow to slightly negative capacity growth.

And as you've heard us over the course of the last year, couple of years, we've been out there saying that we thought there was perhaps a little bit of irrational exuberance about the overall level of capacity in the marketplace in the past. So, what we're looking at at the moment feels to us more like a normal situation than it does a sort of especially constrained situation. But again, these are markets is without any real barriers to entry. Other carriers will be making their own network decisions independently. What we are sharing is the way we see it. Time will tell how they see it.

Okay. One more if you can. It seems like a lot of carriers are talking about maybe normalized margins and that kind of thing. Where do you see that longer-term? Maybe what are your goals there? I mean it looks like your margins are going to be pretty healthy in 2016 or at least in the first quarter. I'm just wondering, maybe a longer-term view on that. Thank you.

Our longer-term view is relatively straightforward. We invested very, very heavily for a period of about five years to transform our business, invest in airplanes, lots of new employees, lots of new markets that we served, and a massive increase in the contribution that we make economically to our home state here in Hawaii. That, as you would point out to us, put a burden on our balance sheet over the last few years. We think the current margin environment is a good margin environment. And what we want to do as the highest priority is to get our balance sheet back in shape and essentially to validate the very substantial strategic shift that we made over the course of the last five years.

I think we would note that, around the industry, there is a feeling that three decades of the industry not being able to pay its own way in terms of meeting its average cost of capital has changed. We certainly hope that continues, and we're going to compete each and every day. And that is certainly our ambition, is to keep margins at a healthy level so we can pay off our debts.

Thank you very much.

We will now be taking questions from the media. (Operator Instructions). Rajeev Lalwani, Morgan Stanley.

Thanks. I don't think I'm part of the media but I'll ask a question anyway. In terms of your capacity growth, you provided a range for the year. Is it fair to assume that you guys maybe will be at the high end or so, just given that you are off to a good start?

And then the other question, and apologies for coming back to the surcharge side again. To the extent that surcharges go to zero, or hypothetically they went to zero in the first quarter, what would the impact of RASM have been?

Let me take the capacity question first and just say our capacity expectation is unchanged from where we were when we spoke at investor day. And I think if I was looking to make a point estimate, I would be making a point estimate in the middle of the range, not at the high end of the range.

And in terms of where would we be if fuel surcharges were at zero, what I would say is we have seen the vast majority of the fuel surcharge decline. About half of the impact in the fourth quarter was fuel surcharge. When I talked about the 4 points or so of system RASM, that was split relatively evenly between ForEx and fuel surcharges. And the incremental drop to zero is a relatively small piece on a sequential basis. It has come from much higher levels than the $40 that are in the ticket price today to where we are over the last year.

And of course we are very happy to give up the fuel surcharge based on the fact that fuel was -- the reason for it is that fuel is going lower.

Thank you gentlemen.

Michael Derchin, Sterne Agee CRT.

Thanks for taking the call. One of the unintended consequences of China weakening and the Chinese currency depreciating sharply has been the opposite happening in Japan. It looks like the yen has strengthened dramatically. It looks like the yen has become a safe haven currency for investors in that part of the world. And since looking at your PRASM declines last year in the high double-digit range internationally, largely due to the yen weakness -- so since we are seeing just the opposite, would it be crazy to look for that to totally reverse and be flat to up later this year?

I think, in terms of Japan and the yen, I think -- I'm not going to comment directly on your expectation, but I think the way that you have articulated it is basically right. If you look at international as a whole, we also have Australia in there. And just the timing on the Australia dollar, given the fact that people book many months in advance, just sort of delays the point at which we start lapping the Australian dollar impact. But your point about Japan I think is valid.

Just to reinforce that, your comment on the yen is accurate. The yen is our biggest currency exposure. And right now, we are sitting at levels that are virtually exactly where they were the first quarter a year ago. So there's not a big currency impact as we sit here today.

Okay guys. This is great news. Thanks so much.

David Segal, Honolulu Star-Advertiser.

Hi Mark. Hi everybody. Mark, I had one capacity question and one airfare question for you. Regarding the capacity question, as you know, Vigil Rivals in Hawaii for this past year set its fourth straight record. And the economists are projecting another record for 2016. So why -- so given that, why -- and I know you talked about irrational exuberance of when the capacity was higher, but why do think capacity is coming down at this time? And where do think those visitors will come from that could enable the state to set another record?

I think there is plenty of visitor demand to come to Hawaii. I think the question is for all airlines, with the exception of Hawaiian, Hawaiian is tied to Hawaii. We make our living in and out of this community. Other airlines can treat their fleets as fungible. They can move them from here; they can move into Latin America; they can move them to Europe and other domestic services.

I think when you look at which airlines are best positioned to carry that demand, Hawaiian is sort of at the top of the list. As we look at the marketplace, we see solid demand, we see issues around when people want to travel and how we can bring them here. And I think what you're going to see in the future is some improvements in the overall level of Hawaiian Airlines' market share. But I don't think we are going to see industry capacity grow like it has in the past.

With capacity going down, have you faced any pressure to reduce your airfares, especially to and from North America?

First of all, I think fares in general in the last couple of years haven't actually gone up. I think they've been flat to somewhat down. The fares that we set, we set as a consequence of the competitive dynamic out there. And I can't really give you -- I'm not allowed to give you any projections about where I think fares are going to go. So what I would say is the fares that you see are the fares that the market dictates, competitive push and pull between carriers and the given level of demand. But I would take issue with the sort of implied notion that fares have been up, because the data shows that fares have actually been flat to down.

Okay. All right.

There are no further questions at this time from any analysts or members of the media. I would now like to turn the call over to Mr. Mark Dunkerley for any closing remarks.

Thanks for joining us today. Our strong financial performance in the fourth quarter and record performance in 2015 gives us confidence as we move into 2016. We are excited about our financial outlook for an even better year ahead with robust demand, continued low fuel prices and manageable industry capacity to Hawaii.

And with that, thank you for joining us on today's call.

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