Hawaiian Holdings Inc (HA) 2016 Q2 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings second quarter 2016 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). I would now like to turn the conference over to our host, Ashlee Kishimoto, Director of Investor Relations.

Thank you Operator. Welcome everyone, and thank you for joining us today to discuss Hawaiian Holdings financial results for the second quarter of 2016. On the call with me today are Mark Dunkerley, President and Chief Executive Officer,Peter Ingram, Chief Commercial Officer, and Shannon Okinaka, Chief Financial Officer. Mark will begin with some overview comments. Next, Peter will take us through revenue performance. Shannon will follow with a discussion on costs and the balance sheet. We will then open the call up for questions, and Mark will end with some closing remarks. By now, everyone should have access to the press release that went out at about 4.00 Western 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'll refer at times 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, or in 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, including statements about our future plans and potential future financial and operating performance, and management may make additional forward-looking statements in response to your questions. These statements are subject to risks and uncertainties, and 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 would like to turn the call over to Mark.

Thank you Ashlee. Aloha everyone. Thank you for joining us today. For much of the last 12 months, we have enjoyed the consequences of strong demand for travel to Hawaii, moderate industry capacity growth throughout much of our network, and lower fuel prices. This continued in the second quarter, which along with the lapping of last year's yen depreciation, meant that we posted record numbers today. Our adjusted net income nearly doubled to $1.21 per share. The adjusted pre-tax margin grew 7 points to 17.7%. And our pre-tax return on invested capital rose to 31.9%, for the trailing 12-months ended June 30th. I want to thank all of my colleagues working on the ground and in the air, for the outstanding job that they do each day in delivering excellence and warm hospitality to our guests. Earlier this month, travelers recognized our customer service's staff for their excellence, earning us top honors at this year's Sky Tracks World Airline Awards. At the same time my colleagues on the front lines of our business are taking such good care of our guests, they're also getting airplanes away on-time. We're once again firmly atop the operational leader board. As you can see, my colleagues really do a remarkable job, and they have my thanks. We're reaping the financial benefits from the investments that we made in our business over the last five years. Our cash flow is solidly positive, allowing us to pursue our capital allocation program. In the second quarter, we have further strengthened our balance sheet with $101 million of scheduled principle payments, and early debt retirements. At quarter's end, our leverage measured on an adjusted debt to EBITDA basis, decreased to 2.2 times, and we maintained strong cash position of $622 million. We began funding our pension plans this quarter at a rate in excess of the minimum required for the year, with Increasing numbers of unencumbered aircraft, and strengthening balance sheet, Hawaiian is well recognized for long-term success recognized by Fitch and S&P, which have both recently upgraded our corporate rating. Lastly, we remain opportunistic buyers of our shares. In the second quarter, we returned $8 million to shareholders under our stock repurchase program. Let me now share some highlights since we spoke back in April. Yesterday's tentative decision by the US DOT to award us one of the five route authorities which have been in play was welcome. If confirmed, the daylight Haneda to Honolulu flight will join our already-approved nighttime Haneda flight, leaving with us 11 frequencies a week between Haneda and Honolulu, and three frequencies a week between Haneda and Kona. Tomorrow we'll be launching a new daily Honolulu to Narita service. All told, before the year is out, we'll have three daily services from Tokyo, in addition to our existing flights from Osaka and Chitose. Our entry into the Hawaii to Japan markets has been a tremendous success. It has been six years since our first flight to Tokyo, and in this period, Hawaiian has grown four-fold. With our impending new services, we are firmly the number two airline in capacity terms behind only JAO. Meanwhile other US carriers have reduced their presence in the US to Japan market, by an average 27%. We have built a valuable brand in the minds of Japanese consumers, and have seen our unit revenues grow continually in yen terms since we began. I am excited about our future flying between Honolulu and Japan, which is after all, a larger international market than any other, from the United States bar New York to London. Off the US west coast which represents the largest source of visitors to Hawaii, we continue to see strong demand for a Hawaii vacation. We are the carrier of choice in this market, with an industry-leading seat share of 29%. Our unparalleled hospitality combined with product and scheduled tailored to the leisure traveler, consistently earned us a unit revenue premium over our competitors on these routes. In June, we expanded our seasonal summer services from Oakland and Los Angeles, directly to Lihui and Kona, giving our guests more options for travel to Hawaii. The strong performance that we delivered in the first half of the year distinguishes us from the rest of the industry. Robust demand for a Hawaii vacation, moderate industry capacity growth throughout the majority of our network, and the continued lapping of foreign exchange in fuel surcharge headwinds, drove our strong second quarter results. Looking ahead, we expect these positive trends to continue through the remainder of the year, and they underpin our confidence that we will enjoy margin expansion and earnings growth for the full year. Peter is now going to take you through the revenue picture.

Thanks Mark. Aloha everybody. Second quarter of revenue performance exceeded our initial expectations, highlighted by robust demand throughout our network, particularly in North America. And a sequential improvement in our international results, as we continue to lap the headwinds of a stronger US dollar, and lower international fuel surcharges. Operating revenue was $23 million higher on a $2.5% increase in capacity, with RASM and PRASM improving 1.6% and 1.2% respectively. Based on published reports, we anticipate that our performance will outpace the unit revenue change of all other US carriers for the quarter. Domestic PRASM reflecting North America and neighbor island flights combined was up 2.6% on strong demand. These excellent results were driven by our North America routes, which posted a third consecutive quarter of year-over-year PRASM increases. The breadth and depth of our schedule, optimally configured aircraft, our leisure-oriented product, and the award-winning hospitality of our front line employees, distinguishes us from the many domestic competitors we face. Coupled with the efforts of our commercial team, we have consistently delivered a unit revenue premium on the routes we serve between Hawaii and the US mainland. And in the most recent periods for which we have DOT data available, our revenue premium has been expanding. In addition, industry capacity between North America and Hawaii was flat year-over-year, which contrasts notably to the same time last year, when a 10% capacity increase pressured unit revenues. Also contributing to the strong domestic PRASM results is improved revenue production from our premium cabin, which has been an area of focus for us over the past year. Given our leisure orientation and the infrequent travel of so many of our guests, we approach the front cabin differently than the business-focused network carriers. Frequent flier upgrades to the premium cabin are a low proportion of our front cabin loads. With advanced first class sales and cash upgrades constituting the vast majority of premium cabin traffic. More dynamic pricing of these seats from our revenue team has further bolstered these load factors over the past year, with a positive impact on the top line. And at the end of the second quarter, we introduced a new product called Bid Up, that allows main cabin guests to bid for upgrades a few days before departure to take better advantage of the inventory that is not sold in advance. Given the success we have already had growing front cabin advanced sales, the revenue impact from Bid Up will be more evolutionary than revolutionary. But as we have seen with our successful extra comfort product, there are meaningful opportunities available, if we can deliver a range of choices to our guests to customize their travel experience with Hawaiian.

North America capacity from the cities we serve is expected to be up 2% in the third quarter, and flat in the fourth quarter based on public schedules. With stable demand, we expect PRASM results to continue to improve versus the prior year, albeit at a slightly more moderate pace as we have lapped the most challenging. In the neighbor islands, year-over-year PRASM was slightly lower than last year, as we faced a bit more competitive capacity with our largest neighbor island competitor reorienting its schedule this quarter, and adding capacity to a couple of our core routes. Specifically, returning to the Lihui to Honolulu route from which they departed last June, and more recently adding new service between Honolulu and Kona. Looking ahead to the third quarter, we expect similar year-over-year performance. As we move into the fall, we're fine-tuning our schedule by further focusing our flying during peak periods, and trimming some off-peak flights. In addition, we have a number of other initiatives under way to ensure that we're tailoring our offerings to best serve all of our neighbor island guests. Our competitive position in the neighbor islands remains extremely strong, with nearly 90% seat share, the broadest and deepest schedule, outstanding on-time performance, and award-winning hospitality. On top of this, the neighbor island network complements our long haul schedules by allowing us to deliver convenient and reliable connections throughout the islands. With an eye to further improving our neighbor island connectivity, we're planning to add two additional 717s to our fleet, that we expect to place into service early next year. We do not intend to proportionally increase our capacity with these additions. Rather they will allow us to further flex up our schedule during the peak midday connection window, and on the highest demand days throughout the year, with offsetting reductions outside of the peak. Additionally, while our 717s still have a lot of life in them, our neighbor island fleet is now averaging 15 years of age, and in the coming years these additional aircraft will provide us more flexibility to address the maintenance requirements of slightly older aircraft. PRASM on our international routes improved sequentially again this quarter at down 5.5% from last year, as we hadn't quite lapped the foreign exchange and fuel surcharge impacts that have affected our results over the past several quarters. Foreign exchange and fuel surcharge headwinds decelerated from the first quarter to about 2 points of year-over-year system RASM impact in the second quarter, and excluding these impacts, our international PRASM would have been up from last year. Contributing to the moderation of these effects is the benefit of a stronger Japanese yen, which partially offset the impact of a stronger US dollar year-over-year versus most of the other currencies we trade in, and fuel surcharges in Japan that went to zero in April. Among our international routes, Japan was an area of notably stronger performance, above and beyond the beneficial effect of year-over-year exchange rate changes. Now in our sixth year of serving Japan, we've clearly established a strong presence, and the most important source of international visitors to Hawaii. And as Mark mentioned earlier, we're looking forward to further leveraging this position with our service to Narita starting tomorrow, and additional Haneda service before the end of the year. Looking ahead, industry capacity growth has some puts and takes internationally. But on an overall basis, seats to Hawaii on the routes we serve are expected to be up a modest 1% for the back half of the year. Not included in this capacity data is the additional year-over-year capacity between Australia and New Zealand and the US mainland. While we don't serve these markets directly, we do carry some connecting traffic between the OS and Oceania, and the promotional fares associated with the new capacity provide a degree of destination competition for leisure travel from the region. Overall, we remain very well-positioned internationally with a balanced supply of capacity in mature and developing markets, and we expect a continuation of sequential year-over-year improvements in the back half the year. Our value-added revenue per passenger was $23.25. A $0.30 increase from last year. The success I mentioned earlier of our advanced purchase premium cabin sales this quarter, was partially offset by a reduction in the value-added revenue generated by upgrades. Offsetting this however was the growth of other successful products like extra comfort and the sale of Hawaiian miles. Look ahead, we expect continued growth in our value-added revenue per passenger, as we continue to offer new products that deliver a range of choices for our guests. Conditions in the air cargo industry remain challenging in the second quarter, with cargo revenue coming in $2 million lower than last year, due to lower fuel surcharges, and weakness in outbound cargo markets in Asia. Cargo shipments between the islands of Hawaii remain a bright spot in the quarter, but this is a smaller part of our overall business so it wasn't enough to upset the global cargo headwinds. Let me switch gears to the outlook for the third quarter. In line with our scheduled plan for the year, we are expecting ASMs to grow a little more in the third quarter than what we saw in the first half of the year. Reflecting the delivery of our 23rd A330 last month. Our capacity guidance for the third quarter is a year-over-year increase of 4.5% to 6.5%, and for the full year, we are narrowing the guidance range to up 3% to 5%. Third quarter RASM is expected to be positive year-over-year at the midpoint of our guidance range of down 1% to up 2%. These expectations reflect positive domestic results, and another quarter of sequentially improving international results. Which incorporates foreign exchange tailwinds, offsetting reduced fuel surcharge impacts, and expected losses from our yen and Australian dollar hedges. We expect moderate gains in our value-added product revenue and continue to incorporate the challenging cargo environment in our expectations. We're not giving full-year RASM guidance, but we continue to target positive growth from last year which would likely lead all US carriers for the full year. In conclusion, strong second quarter unit revenue results enhance our confidence in our business going forward. Demand for travel to Hawaii is solid. Our network is balanced, and we are growing our capacity in markets where we enjoy strong customer preference. We are well positioned with products and services tailored specifically for our guests, exceptional service, and outstanding hospitality. 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. To recap the quarter, adjusted net income grew to a record $65 million, and our adjusted earnings per share nearly doubled to $1.21 per share. Adjusted pre-tax margin was an outstanding 17.7%, a 7-point increase from last year, which with likely compare favorably to most of our peers. Total operating expenses for the quarter were down $4 million as the decline in fuel costs completely offset cost headwinds we faced from wage increases, higher profit sharing expenses, and purchased services. CASM ex-fuel increased 4.1% from last year, which was better than our initial expectations at the beginning of the quarter, due to continued cost savings throughout the company. The non-operating line was a tailwind this quarter with lower interest expense, and the benefit from the conversion of our Japanese yen denominated balance sheet accounts to the US dollar for reporting purposes at the end of the quarter. For the full year, we expect interest expense savings of $19 million from last year, due to early debt retirement over the past year. As we mentioned in our first quarter earnings call, in April, we early retired $89 million of debt and lowered our overall debt to $586 million, which further decreased our leverage to 2.2 times on an adjusted debt to adjusted EBITDAR basis. In contrast and to illustrate how far we've come with our delevering, a year ago our outstanding debt stood at $947 million, and leverage was 3.4 times. In addition to the debt prepayments, we continued executing our capital allocation plan, and began funding our pension plans in excess of the minimum funding requirement. In the second quarter, we contributed $11 million to our pension plans, doubling the minimum requirement for 2016. The contributions in excess of minimum requirements provide several important benefits, including tax savings, and lowering our future funding obligation. This quarter we continued to maintain a strong cash position, with $622 million in cash, cash equivalents, and short-term investments. For 26.4% of trailing 12-month revenues even after funding the early debt retirement and pension contributions this quarter. We continue to forecast positive free cash flow, allowing us to continue our balanced capital allocation programs, which includes further deleverring of our balance sheet, opportunistically repurchasing our shares, investing in our business, and funding our pension plans in excess of required contributions. Beyond 2016, we expect to continue generating positive free cash flow, which we plan to use to contribute to the investments in our A321 Neos that begin delivery in 2017.

Switching gears to the third quarter and full-year outlook, we expect CASM ex-fuel for the third quarter to increase 2% to 5% from last year, as we continue to make investments in our people and our business. We expect headwinds totaling about 3.5 percentage points of the expected year-over-year increase to come from profit sharing accruals, and an increase in the value of stock-based compensation totaling one point. Wage increases primarily driven from the execution of the new labor agreements, and other contract increases totaling one point. Purchased services includingstart-up costs for our new neighbor island cargo freighter operations launching later this year, and investments in IT and other infrastructure as we continue to grow our business totaling one percentage point. And aircraft rent totaling half a point with the delivery of our 23rd A330 under a six-year lease. For the full year, we expect our CASM ex-fuel to increase 2.5% to 4.5% over the prior year period, which does not include any assumptions about the amendable contract with our pilot's union. We are happy to announce that we have reached a tentative agreement with the TWU, which represents our dispatchers. Our guidance includes the potential implications of ratification of that agreement. Negotiations with our pilots are progressing, and we look forward to reaching a settlement, and if necessary, we will update our expectations after an agreement is reached. We expect year-over-year CASM ex-fuel headwinds to be similar to the first half of the year, totaling about three percentage points coming from the following. Wages and benefits totaling about 1.5 points, primarily from higher profit sharing and the ratification of the new labor agreements. Maintenance expense due to an increase in heavy checks on our A330s and B717s totaling half a point. Purchase services totaling half a point for investments in our business, and aircraft rent totaling half a point for the A330 that we took delivery of last month, and the two additional 717s delivering in the fourth quarter. An update from last quarter, the completion of our new Honolulu cargo and maintenance facilities has been pushed from the third quarter of this year to next year. The costs are now expected to be recognized next year, with the important productivity gains that we discussed back in April to follow. We continue to look for ways to minimize our controllable costs, and identify productivity savings opportunities to offset increasing costs. Based on the fuel curve as of July 12, our economic fuel cost per gallon for the quarter and full year is expected to be in the range of $1.50 to $1.60. As of June 30th, we hedged approximately 50% of our projected fuel requirements for the remainder of 2016 with heating oil swaps. And our fuel hedge is expected to settle in the third quarter are currently at a loss of $0.5 dollars. We have not changed our program, and will continue to maintain a disciplined approach to managing our program. And are focused first and foremost on decreasing operating and economic risk. For the third quarter, we expect our fuel consumption to increase in the range of 4% to 6% from last year, and for the full year, we narrowed the range to 2.5% to 4.5%. Based on the current outlook, we continue to expect fuel savings from last year, net of hedges and volume increases, of about $20 million in the third quarter, and $110 million for all of 2016. We continue to expect our CapEx this year to be lower than the peak in 2014, but higher than 2015. As a reminder, in the second quarter, we added one A330 under a six-year operating lease, and in the fourth quarter, we'll be adding two 717s under six-year leases that we expect to begin service early next year. With these strong second quarter results, we're excited about the outlook for the remainder of 2016. We are well-positioned for the long term suggestion of Hawaiian. With the positive free cash flow we're generating, we remain committed to our balanced capital allocation programs, and intend to further strengthen our balance sheet, make investments in our business and our people, and continue to enhance long-term value for our shareholders. 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 the 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 up now.

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions). One moment please while we poll for questions. Our first question comes from Helane Becker from Cowen and Company.

This is actually Conor in for Helane. How are you?

Good. And you?

Good. So assuming you guys win the daytime flight for Haneda, where will you be sourcing that aircraft, or are you going to be looking in the market to potentially purchase another plane?

We have that aircraft from our internal resources. Again we took an airplane in June as we mentioned, our 23rd and last A330-200, through the balance of 2016 and into the beginning of 2017, we'll likely have to slim down our schedule a little bit on certain days of the week. Just to make sure we can operate the full Japan schedule. But it really will not be particularly noticeable. We have the resources.

Okay. And then I know that you're still negotiating with your pilots. Is there an update there on timing, or kind of where the bid/ask is right now?

Not beyond saying that we're in the processes laid down by the National Mediation Board. We're in mediation. We're going to look forward to reaching an agreement with the pilots under the egress of the mediator.

Okay. That is it for me. Thank you.

Thanks.

Our next question comes from Hunter Keay from Wolfe Research.

Hi. Thanks. How are you guys?

Good, thanks. How is that?

Good, Mark. So I think this is a new one, now if I'm not mistaken about some additional 71s. If I recall you guys added a few extra 71s a few years ago. I think you tried to hug Maui and turned out that you actually end up overcapitalizing the neighbor island business a little bit. Obviously you included the remark about keeping it somewhat capacity-neutral, but what did you learn from a few years when you did that, versus what you're doing now in terms of what you might do differently to make sure you don't encounter the same mistakes again?

Yes. So I think, thank you for making reference to the point that Peter made which is exactly the right point. We are spilling passengers during our peak of the day. We have got a very sort of peaky demand throughout the day for neighbor island flying. So these two airplanes will allow us both to capture that peak of the day, and also provide more downtime for a fleet that is getting older, and spends aircraft by aircraft, a little more time in the barn every time they go in for A checks and C checks. So I think it provides us with additional flexibility. We're pretty clear on where markets can sustain capacity and where they can't. The restrictions we generally are just operating restrictions. We can't have all of the airplanes we want just at the peak, and then no airplanes during the rest of the day, because you get some sort of crew efficiencies and stuff like that. Broadly speaking, I think we would see this as being overall accretive to our results.

That's interesting, Mark. Does that mean, you're referencing the age of these 71s and there's some sort of contingency planning going on for replacing them. Does that mean as you go given the peak periods are really peaky, and the trough are really troughy, do you need a mixed fleet strategy when you replace the 71s down the road whether it is five or seven years from now, is there going to be maybe a place for like a C series 100 and a 300 or something like that, to have different type of gauge aircraft, or do you find it is better to have all of the same type and size in the event that you can schedule easier?How do you think about that down the line, the context of what you just said?

A couple of things. First of all, I don't think we're looking for a different aircraft type in the five to seven year period. We like the 717. There is no airplane in manufacture today that can do the job that we need done between the islands of Hawaii, as well as the 717. So any aircraft that is in manufacture today would actually be, I think not as suitable for our fairly unique needs as the 717. So I don't think we're looking to have a mixed fleet. We do get lots of synergies from having 18, and shortly 20 717s. We'll probably keep it that. It is more the frequency of service. Just to give you a little window into some of the kind of unique operating issues we have with them, they all come home, first of all, they're used incredibly intensively. We get 16 cycles a day out of these airplanes. They come home to Honolulu at night for maintenance. The first flight of the day necessarily goes out largely empty, because when you're leaving at 4.30 AM, there is not a terrific amount of demand to fly to Hilo at 4.30 AM. The 6.00 AM Return flight is full of commuters, and it is a very important flight for us. That has a certain impact on the number of ASMs and the amount of revenue in the market. There are some sort of curious statistical anomalies that come with the nature of the operation. In general though, it is the right airplane, and we have pretty much the right schedule.

That is good. Alright. Thanks a lot. I appreciate it.

Sure.

Thank you. Our next question comes from Julie Yates from Credit Suisse.

Thank you for taking my question.

You are welcome, Julie.

Is there any more granularity you can provide just for the sequential headwinds and tailwinds and your RASM guide in terms of currency and surcharges, the value-added products, cargo, any calendar shifts that are relevant?

Yes, let me address that one, Julie. It is Peter. I think there are a couple of moving pieces. There's not sort of one big thing that explains it. I think first of all, as I mentioned in the comments in North America, which is performing well and for which we expect strong performance in the third quarter, that the year-over-year comp is tougher as we had a pretty challenging first half last year, with a lot of industry capacity coming in, and we started to perform better consistently beginning in the third quarter, and continuing on from there last year. So that's performing well but facing a tougher comp.

Neighbor island, I think we have a couple of bits of challenge there, where we've got some extra capacity competitively that I mentioned in the remarks. And we'll be fine-tuning the schedule come the third quarter. But we expect the results there to be pretty similar year-over-year. International will be improving. Foreign exchange and fuel surcharges will still be a headwind. That headwind is decreasing. It is a system PRASM impact of 2 points in the second quarter, goes down to about 1 point in the third quarter as we sit here today. So a couple of moving pieces pushing in different directions, and that causes, at the midpoint, a little bit of a decline in the guide. I think there's still, we obviously put a range around that. There's still some variance both directions in terms of what could happen, and we're obviously pushing for the best outcome we can achieve in the third quarter.

All right. Thanks Peter. That was very helpful. And then now would the currency piece flip to a tailwind in the fourth quarter?Based on current trends?

I suspect it will probably be somewhere around flat. Especially given we have got some 4X hedge impacts in there. I don't have that number at my fingertips. I would roughly guess it to be around flat.

Okay. Excellent. Thanks so much.

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

Hey, I guess this is to Peter. The 4.5% to 6.5% capacity growth in the third quarter, how much is the new Narita route?Is that 1 point, 1.5 points of that?

Mike, let us get that number to you offline, because I don't want to just pull a number out of my head. But that is the primary change year-over-year is the Narita route is new. There's really not much else moving on the international front. We have a little bit more, a little bit bigger peak in some of our North America seasonal flying, where we've extended the flying deeper into August, closer to Labor Day than we had last year. But I would bet Narita is the single biggest piece of that, as that comes in for the majority of the quarter, and of course that's a longer haul route that produces a lot of ASMs.

Just another capacity. The fact that you're still at that 3 to 4 for the year, were you originally incorporating that you would win that additional Haneda frequency?It seems like it would be higher. I know it is coming in at the tail end of the year but was that originally in the guidance?I'm surprised it didn't bump up at all? Maybe it is just because it has only been in operation a few months?

Yes. We had obviously plans to take this aircraft, and obviously planned to deploy it. We had potential other routes in mind if this opportunity had not appeared. This opportunity appeared, so it doesn't really change our back of year estimates.

Mike, the incremental Haneda frequency starts in the last two weeks of December, so it is a relatively small impact on the full year.

Great. If I can squeeze one last on the pilots. When did mediation start?When did they go into, when did the NMB process kick in?How long ago was that?

The first mediated session was in March.

Oh, okay. That's fairly recent. I got the sense it's been going on for some time. Okay. That is good to know.

That was the first time we had a face-to-face meeting with the mediator.

Okay. Very good. Okay. Thanks Mark.

You bet.

Our next question comes from Rajeev Lalwani from Morgan Stanley.

As it relates to interisland competitive capacity, can you just provide a little more color as to what's going on there, and what sort of the end of the year and into next year may bring?And then the other question, just as it relates to the Haneda slots and the capacity there, how does it impact RASM overall, and just your exposures overall to the region?

Okay. Let me start with the neighbor island piece. Neighbor island capacity as we sort of look forward for the industry in the back half of the year, is up sort of mid single digits in the third quarter, and low single digits in the fourth quarter. When we talk about the competitive change we've seen at this time last year, Island Air pulled out of the Lihui market at the beginning of June last year. They have made some adjustments and they have returned to that market in the second quarter this year, and they've also added service to Kona. So of the four primary markets out of Honolulu, we compete with them in three of those markets. We continue to have a very strong competitive position in all of those markets. We have the biggest frequency share, by far the biggest seat share, our employees do a fantastic job every day of giving great service, and we think we've got the right competitive offering to provide the service that our guests demand day in and day out.

In terms of the Japan capacity, obviously our capacity is up quite a lot going into Tokyo. It is largely but not entirely offset by reductions from other players, and for the remainder of this year, the total Japan capacity is going to be flat to actually down I think in the third quarter, and just modestly up in the fourth quarter.

Great. Thank you.

Thank you. Our next question is from Joseph DeNardi from Stifel.

Thank you. Nice results. Mark, wonder if you could just talk about the west coast market and kind of the competitive capacity out there?It's obviously pretty benign over the next couple of quarters. Do you see that it is sustainable?Is there something that has changed?Do you think other airlines have learned their lesson, in terms of putting too much capacity into that market, or are we just at a point in the cycle, where you guys stand to benefit but at some point, more capacity is going to be put in?What are your thoughts there?

If you look at the history, there are some sort of cyclical sort of bouts of additional capacity coming in followed by periods of relatively modest capacity growth. We are clearly in one of those periods of modest capacity growth. The cyclical capacity growth tends to be associated with the broader strategic decisions made by individual players. And pretty much, given the sort of broad spectrum of players in the marketplace today, there probably aren't large strategic changes, not that we can see. May have to ask our competitors as to their views on that.

But one of the interesting things I think is that as we do go through these cycles, Hawaiian has been a winner through each of these cycles. As we go through them, we've seen, as Peter mentioned earlier in the call, we have a unit, we not only have a unit revenue advantage on these particular routes versus our competitors, we tend to increase it with each one of these cycles. So at the moment, we don't see any pulse of capacity on the horizon. It may come if those things do happen, we're very confident in our ability to actually sort of improve our overall position when the dust settles.

Okay. And then just Shannon, on the balance sheet and the leverage, can you just talk about maybe of some your discussions about the rating agencies, and kind of if you're on a path to investment grade at some point and what the timeline would look like there?

Yes, hi Joe. We do, we meet with them periodically, at least once or twice a year. It is hard to say what they're going to do, and whether or not we can get to investment grade. We talk about what our plans are, and they talk about what their concerns are. And I don't know if we get to investment grade, I think our business model is just, it is inherently different than a lot of our competitors. It has some advantages. It has some disadvantages. So it is hard to say. We're focused on sustainability of our current financial performance. We're focused on deleverring, and they seem to like that. Hence the recent upgrades.

Okay, great. Thank you very much.

Our next question comes from Steve O'Hara from Sidoti.

Hi. Good afternoon.

Hi Steve.

I just had a question for you, I guess there's been a lot of talk about capacity and fuel and unit revenue. And I guess, what's your feeling on whether unit revenue is kind of correlated with fuel prices?It looks like from your results, they wouldn't be, but you obviously have had maybe a better picture this year than the industry on competitive capacity. So just wondering what your take is there, and would you expect fuel prices, a rise in fuel prices to be met with a rise in fares, I guess would you raise your fares in response to rising fuel to protect your margins?

Yes. I'm not sure that we're permitted to answer that question,as you've actually posed it. But what I would say is as follows. I think capacity drives the interplay between capacity and demand drives fares. The amount of capacity that goes into the market is in part a function of what fuel prices are, because that establishes how much as an individual carrier you're prepared to fly. So there's clearly a correlation, but it is not a direct relationship. I see it as an indirect relationship. Speaking on behalf Hawaiian here, the decisions that we're making about our network are not tied to the fact that fuel prices are lower than the historical trends today. We are making assumptions based on an expectation that over time, real fuel prices will be higher than they are today, and we're very comfortable with the decisions that we've made.

Okay. And then just maybe going back the last few quarters in let's say 2015. I mean you had some revenue weakness that year for the most part. And I mean I think some of that was your pulling of capacity out of Asia or out of Japan I guess, and maybe bringing it back to the States. I'm just wondering, in terms of where the capacity picture is right now, you're seeing I guess very little growth on the west coast. Is it just that kind of demand caught up with where the supply was, and if you maybe re-shift of some supply into Japan, and I'm not sure if that's what you're doing or if you're adding capacity, do you think that will have a beneficial impact on the supply/demand dynamics on the west coast?Thank you.

Sure Steve. It is Peter. I think you're right. You go back to 2014, 2015, we did move some capacity around our network that increased some North America capacity in some of those quarters. There were also some competitive increases of industry capacity between North America and Hawaii, and I think as mark just said in his earlier answer, increased capacity in a period can have an impact on revenue, especially if demand hasn't had a chance to catch up. I think we're in a pretty reasonably good balance right now between supply and demand and North America to Hawaii. The Japan opportunities we have, we see an opportunity to increase our presence in Japan, Narita is something we've been eyeing for some time. The new Haneda frequencies that became available in the nighttime slot that we were awarded a couple of months ago, are unique opportunities to survey a very high demand downtown airport. We think there is really robust demand. We've seen steady, robust demand from Japan to Hawaii, Tokyo to Hawaii. We've been building our share over the last six years, and we think that will work out very, very well for us.

Okay. Thank you.

Thank you, our next question comes from John Reardon from Western International.

Hi, good morning, Mark, Peter, Shannon and Ashlee, not necessarily this that order.

Thank you, John.

Anyway, I have a couple of questions. Mark, a couple of years ago, you guys switched plans from going from the A350 to the A330 which everyone applauded, including myself. However, given the rather rapid deleveraging of your balance sheet, might there be any thoughts about picking up, giving John Leahy a call, which would put Singapore, Hong Kong, internal China, and London back in play?That's question number one. Question number two is your fuel hedging still the same, where you roll it forward every 30 days?And secondly, could you briefly touch on some of the new products that Avi and his team have been rolling out?

Sure. So on the A330, A350 question, we do have some delivery positions for the A330-800, which is an A330 Neo starting in 2019. We're always in communication in this case with Airbus and frankly, with their competitor as well, Boeing, about the aircraft that they're producing and their capabilities. I think it is reasonably likely that over the course of the next 12 months, we're going to be talking to both manufacturers about a horizon that stretches into the next decade. I don't think there's anything likely to be on the short-term horizon.

With respect to fuel hedging, yes, we are a program of hedging the same portion of our future consumption continually, not trying to pick the market highs, the market lows, but simply reducing the amount of volatility on our cost base, continues to be our hedging policy. We've been rolling that forward. With respect to new products, I'll turn it to Peter.

Thanks. Hey John. During the prepared remarks, I spoke about the newest which was Bid Up, that we launched at the very end of the second quarter in which we've seen good response to so far early this year.

Some of the other real areas of focus for us is Europe and continuing to optimize, maximize the performance from some of the products we've announced over the last few years. So extra comfort continues to generate more revenue for us each quarter when we've got more seats deploying now, with the reconfiguration of our A330s, and a higher proportion of seats on our A321s going forward, than we do in our current configuration of the 330. We launched at the end of last year, you might recall, a new website that helps us to merchandise a lot of these new products better, and that includes things like selling vacation packages in line, our booking pass. It is a mix of rolling out new products as we see opportunities, and also really focusing on how we optimally merchandise them, and make sure that we're presenting them in the best way for our guests to take advantage of them, and tweaking them as we see what is most desired about those products, and what things people don't quite like as much.

Great. Sorry for making you go over something. I came in a little late on the call. Thank you all for your time.

Thank you, John.

Thank you. At this time, we will be taking questions from media. (Operator Instructions). Our next question comes from David Segal from Honolulu Star Advertisers.

Hi Mark, this is Dave.

Hi Dave.

Hi. Regarding restarting routes to Lihui and Kona, you talked about adding the 717s. Do you plan on adding frequency on only those two particular routes, or are you also looking at Maui and Hilo as well?How do you plan on allocating your frequencies as much as you can talk about right now?

Sure, David. It is not going to be targeted at any particular route. It is more targeted at times of the day. During the peak hours, start kicking off about 10.00 AM and ending about 3.00 PM., 4.00 PM, there are currently more people wanting to fly than we can carry, and the addition of these two 717s will help us provide more frequencies in pretty much each of the markets during that critical midday period.

Okay. And you talked about starting this early next year. Is this going to be in the first quarter next year?

Yes, we hope so. The airplanes don't actually sort of show up, they're not in our possession until November. When they are in our possession, it is the seating configuration of the existing operator, we have to put them into our existing seating configuration, and the exact timing of that has been worked on now, but we certainly hope by the end of the first quarter to have these airplanes in our fleet.

I had just one question about Narita. Obviously with the DOT decision now, you have additional capacity from Haneda, but regarding the Honolulu Haneda capacity, do you think Narita will pull passengers away from the Honolulu Haneda service, or do you think it will just serve to complement the service?

I think it will be more complementary than it will be competitive. Narita will be more complementary than competitive to Haneda. The reason we say that is Narita is a very large, established market to begin with. In fact, well over 50% of the seats flying today between Honolulu and Tokyo are going into Narita. So that's a robust market. We think there's room for our unique product and as you've seen, we've been able to grow at a time when in that market, it is a time when most of our competitors are actually pulling back.

Okay. Thank you.

You bet.

Thank you. Our next question comes from Adrian Schofield from Aviation Week.

Hey, good morning.

Good morning, Adrian.

Hi, just wondering if you can give us an update on the status of the interisland cargo operation. I think you mentioned the completion of the cargo facility has been pushed back until early next year. So does that indicate that perhaps that whole cargo operation may not start until next year?

Let me start about the cargo facility, then I'll turn it over to Peter to talk about the cargo operation. The cargo facility, we're waiting for maintenance facility and a cargo facility to be built. They are running years behind schedule. It is a source of acute pain for us operationally. We are working very hard with the state to try and get them completed. It is perhaps our single highest internal priority when we think about the things that we need to get achieved. Sadly, it is not something that we control directly. But it is, as I mentioned, an acute pressure point for us operationally. The extent to which it affects the neighbor island cargo operation, I'll turn it over to Peter.

Hi, Adrian. With respect to the cargo freighters that we're bringing into for neighbor island operations, we are still very much keen to get started on that. We are still very much keyed to getting started on that, we are going to be starting a little bit later than we had hoped.

And the timing for that is less driven by the delays in the cargo facility, than it is driven by just some of the complexities of bringing these aircraft which are previously used aircraft, and they were on foreign registry, so they weren't on the FAA registry. Given the nature of the cargo conversions on them, there's a number of supplemental type certificates on each of these aircraft, all of which have to be approved for FAA standards. It is just very methodical work that has taken us a little bit longer than we had ideally hoped. We had hoped to be up and running by this time of the year. We fully expect at this point that we are going to be up and running before the end of the year, and we have really checked a lot of the boxes off of that methodical process, and have a good view of the finish line at this point now. So we're pretty eager about getting that started, and getting the airplanes here and up and running. And we're looking forward to getting that operation started.

Great. Hey also regarding the reconfigured A330s, you've had the first one in the fleet for a month or two now, can you tell us anything about any observations you're seeing about that from customers or crew?And also do you have any clearer idea of when the next one might be entering the fleet?You may have said fourth quarter or something like that?

Yes. I think the observations from the passengers and the crew could be summed up as wow, this is great. I think it's been very well received by both employees and our travelers. As we previously announced, we were taking a hiatus over the summer for two reasons. One, we didn't want to lose the use of an aircraft for modification during our peak period, but second to give us an opportunity to see how the new first class seat works in operation.

As predicted, there are a couple of nits, and things we've got to resolve. Those are being resolved. Things like the functioning of the tray table and stuff like that. Relatively minor stuff. Those modifications will go into the second aircraft that goes into, that will be reconfigured and that aircraft starts in September and should be out three to four weeks after that.

Right. And at that point, you might be able to put it on international routes?

Yes. For us, the issue is how quickly can we get to a density of modified airplanes, so that we can reliably tell our customers that they're going to get that aircraft?I think the lie flat seats will be flying on some international routes long before we're promising, simply because we won't be able to guarantee it each and every day. I think we'll have to get to probably six months down the track, maybe just before Christmas, before we can, on a single route say you will have this product when you show up.

Thank you. That's all of the calls we have for today. I'll turn the call over to Mark Dunkerley for closing comments.

Thanks again to everyone for joining us today. We are obviously extremely pleased with our second quarter results. We are performing well. Our business is strong. We have a robust demand for Hawaii vacations, lower fuel prices, moderate industry capacity growth for most of our network, and the lacking of foreign exchange. headwinds. All of these give us confidence for the periods ahead. With that, mahalo.

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