Hawaiian Holdings Inc (HA) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings, Inc. Fourth Quarter Fiscal Year 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Mr. Daniel Wong. Thank you. You may begin.

Thank you, operator. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' financial results for the fourth quarter and full year of 2017.

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, and 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 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 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 on the Investor Relations page of our website.

Before we begin, we'd 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 on the factors that could cause actual results to differ materially from those projected in any forward-looking statement, we refer you to Hawaiian Holdings' recent filings with the SEC, including the most recent annual report filed on Form 10-K as well as reports filed on forms 10-Q and 8-K.

And with that, I'd like to turn the call over one last time to Mark.

Thank you, Daniel. Aloha, everybody, and thank you for joining us today. We're delighted to report record earnings for 2017 after our fourth quarter results capped an extremely strong year. Robust demand in all of our major geographies and moderate industry capacity growth more than offset the rising price of fuel.

For the fourth quarter, adjusted net income came in at $57.5 million or $1.10 per share. For the full year, adjusted net income grew to a record $301.1 million or $5.64 per share. Our adjusted pretax margin came in at a healthy 13.6% for the quarter and 17.6% for the full year.

Also of note was that according to Airline Weekly for the 12 months ended the third quarter, Hawaiian had the second-highest operating margin globally. By these and other measures, 2017 was an outstanding year.

Operating revenue grew 10% to a record $2.7 billion. We carried a record 11.5 million passengers, our 13th straight year of passenger growth. We initiated a quarterly dividend. And we took delivery of our first of 18 Airbus A321neo, the aircraft ideally suited for our midsized West Coast to Hawaii markets.

In each of these quarterly earnings calls, it's been my custom to thank my colleagues in the business from those on the frontline to those who support them. Their tireless dedication provides us the special formula that separates us from our competitors. I thank them one last time. This isn't the place to belabor my feelings of gratitude for what they've done over the years, but perhaps it suffices to say that when all is said and done, they've made me the proudest employee of Hawaiian Airlines.

As we shared with you at our Investor Day, 2017 marked the beginning of the final phase of our decade-long plan to transform our airline. The introduction of the A321neo will, in one fell swoop, make us the most potent competitor in the midsized West Coast to Hawaii markets. The same combination of superior service, superior unit revenue-generating capability and competitive cost structure that we enjoy between the West Coast and Hawaii today are now fully available to us on all of the slightly smaller routes in this geography.

And while the news headlines of the day largely concern the domestic part of our business, our international business has taken a significant step forward in 2017 with the forming of our Japan Airlines relationship. The first codeshare flight will operate this quarter. And from here, we expect to see further significant opportunities emerge. We believe we are weeks away from signing the joint venture agreement. And from there, we will follow the regulatory path, hopefully culminating in the grant of antitrust immunity.

I'd like to take this final earnings call opportunity to thank you for your support of Hawaiian and of me. I'm almost embarrassed to acknowledge that I've known several of you for a tad shy of 30 years. Throughout the 15 years at Hawaiian and the years prior, you've always been open, honest in your assessments and available for sharing the perspectives that are otherwise not heard in the day-to-day running of an airline. Hawaiian is a better business for your contributions.

Most of all, I'd like to thank you for the friendships we've formed over the years, which I hope will endure beyond March. As I retire from Hawaiian and leave the business in the hands of Peter and the team, I will draw your attention one last time to the potential that still lies ahead. We are the best at what we do. We are better equipped to compete than at any time in our past. We have a superior understanding of our customers, the optimal fleet and aircraft configuration, the right cost base, and most importantly, we have a frontline team much better engaged than are those of our competitors. We have markets for our brand as of yet, untapped. Asia beckons, the future of global air travel is leisure and the future of leisure travel is Asia.

The Hawaiian of tomorrow will be the standard-bearer of U.S. carrier participation in these markets. Closer to home, over the next couple of years, the midsized West Coast to Hawaii markets also provide fertile growth opportunities.

So the future is bright and with that wringing in your ears, I'll turn the call over to Peter.

Thanks, Mark, and aloha, everyone. I think I speak for everyone at Hawaiian when I say, it's an honor to have served this airline under Mark's leadership, and we bid him the warmest aloha as he moves into retirement.

Fourth quarter unit revenue performance came in near the high end of our upwardly revised guidance with system RASM improving 3.3% and PRASM improving 2.7% over the same period last year. Strong domestic close-in bookings, continued strength on our international routes and record cargo results drove this performance.

For the full year, we posted RASM and PRASM gains of 6.4% and 6.5%, respectively, marking the second consecutive year that we have comprehensively outperformed any other carrier in the United States in year-over-year revenue improvement. My sincere thanks for this goes out to the commercial team that has done an outstanding job as they strive for higher and higher levels of performance and to our frontline team that continues to set the industry standard for operational performance and hospitality.

Domestic PRASM, which includes North America and Neighbor Island services, was up 1.6% this quarter compared to a very strong fourth quarter in 2016 on moderate industry capacity growth.

North America to Hawaii PRASM was up in the mid-single-digit range this quarter, our ninth consecutive quarter of year-over-year PRASM gains in North America. Our capacity was up approximately 3% while competitive capacity was up about 5%.

Premium Cabin performance led the way, while stronger year-over-year yields overall were able to more than offset a modest decline in load factor to a still robust level around 90%.

Looking ahead, it's well-documented that U.S. Mainland to Hawaii routes will see increased service levels in 2018. We expect industry capacity on our North America routes to grow approximately 14% in the first quarter. And based on published schedules, we expect the second quarter to be around the same, followed by growth in the high-single digits in the second half of the year. Both load factors and yields are holding up nicely in the face of this additional capacity even as we are comparing to a strong last couple of years of PRASM improvements. Notably, 1Q '17 PRASM was up in the mid-double digits over the same period in 2016.

Peak period bookings are strong, including March, where we benefit this year from an earlier Easter on top of normal spring break strength. During trough periods, such as the back half of January, the extra capacity is creating a bit more of a challenge, but overall, we are managing the new environment well.

For our part, we continue to execute against our plans by tailoring our fleet, network, schedule and product to the needs of the Hawaii traveler. An integral element of that plan is materializing right now with the entry of the A321neo into our fleet.

On January 8, we celebrated our first regularly scheduled A321neo flight between Oakland and Maui. And not long after that, we added new service with the NEO between Portland and Maui. And in the second quarter, we'll expand that list to include routes between Oakland and Kauai, Los Angeles and Kona and Long Beach and Honolulu.

As we discussed at length during our Investor Day presentation, the A321neo is ideally suited to these midsized origin and destination markets. And the aircraft's economics and configuration are superior to any other narrow-body aircraft for West Coast to Hawaii operations.

Our product investments also give us reason to be confident in our long-term success. With our A330 seat modification program approaching completion, we are better positioned to monetize our lie-flat product and the expanded Extra Comfort seat inventory on our large North America markets.

Now let me turn to the Neighbor Islands. PRASM was down in the mid-single-digit range in the fourth quarter. Results were varied throughout this period with the revenue weakness moderating late in the quarter following Island Air cessation of service, which occurred in mid-November. Most of the impact of this event was reflected in higher load factors in the last half of the quarter. And in fact, we added a number of extra sections over the peak holiday travel period to ensure that the local market was well supplied with capacity during the busiest periods.

Following Island Air shutdown, we expect Neighbor Island industry capacity to be more moderate in the first quarter, which we expect to lead to a more stable yield environment than we experienced during the back 3 quarters of 2017.

International PRASM was up 8.3% this quarter over the same period last year on solid year-over-year gains in yield. Australia and New Zealand posted strong PRASM improvements, spurred in large part by notable Premium Cabin gains. We expect favorable trends to extend into the first quarter of 2018.

Japan continues to be a source of strength for us even as we enter a tougher period of year-on-year comparisons as we lap our own growth in Tokyo and see competitive capacity increases on the Tokyo to Kona and Osaka to Honolulu routes.

As Mark noted, we're progressing with the implementation of the first phase of our partnership with Japan Airlines, which includes a broad codesharing relationship and allows our flights to be marketed through Japan Airlines' in-house travel distributor, JALPAK.

Value-added revenue grew to $24.74 in the fourth quarter, up $0.84 from last year. Extra Comfort revenue continues to grow strongly, bolstered by the expansion of Extra Comfort capacity on our A330s to 68 seats from 40 in conjunction with our lie-flat remodeling. We posted our first 2 $6 million revenue months at the end of the year and see even more growth ahead for this product in 2018 as we complete the lie-flat remodeling, add A321neos to our fleet with a similar proportion of Extra Comfort seats and improve our third-party distribution capabilities, which will be particularly helpful to sell the product on our international routes.

Cargo turned in a record quarter, topping $25 million in revenue, an improvement of 22% over last year. These results were broad-based across our domestic and international geographies and the result of both improved yields and increased tonnage. We expect the environment to remain strong into the first quarter of 2018.

Now turning your attention to the first quarter and full year for 2018. We expect our capacity to grow 3% to 5% in the first quarter and 5% to 8% for the full year, which is unchanged from the guidance we provided at our Investor Day.

Before I comment on the first quarter revenue outlook, I think it's important to take a moment to remind you that at our Investor Day in December, Shannon outlined the new revenue recognition standard that we are adopting. Insofar as it pertains to unit revenue, the new accounting will affect the valuation, timing and classification of certain revenue-related components. Beyond the Frequent Flyer accounting impact and other timing changes, this new standard will also reclassify flight-related fees, including bag fees and change fees, as passenger revenue.

As part of adopting this new standard, we will be restating our 2016 and 2017 results as if the new standard had been in place. With that as background, as first reported, our first quarter 2017 RASM was $0.1358. Under the new revenue recognition standard, our restated first quarter 2017 RASM is $0.134. And both those were RASM numbers, not PRASM. Against this restated baseline, we expect RASM to be between down 0.5% to up 2.5% year-over-year in the first quarter.

Much is changing in our environment as the calendar turns into 2018. We've enjoyed 2 outstanding years of revenue performance, but inevitably this performance sets us up for challenging year-over-year comparisons. North America PRASM will be challenged by the additional industry capacity I discussed earlier, especially in our seasonally most challenging first quarter. And while Neighbor Island capacity is stabilizing after substantial growth in 2017, I'd note that Island Air's expansion really began in earnest at the tail end of the first quarter.

Despite these headwinds, we're encouraged by our performance to-date against a more challenging capacity environment, and I'm profoundly confident in our team's ability to continue to execute well against the challenging landscape.

In summary, our fourth quarter results capped a year that included record revenue results fueled by: investments in our product that have enhanced and will continue to enhance our potential revenue; expansion of our fleet and network, highlighted by growth in Tokyo and the arrival of our first new A321neos and a fantastic team of frontline employees who deliver the only authentic Hawaiian travel experience in the industry rooted in the hospitality of our islands.

It's for these reasons that we have succeeded in the face of aggressive competition before and why we will continue to succeed. Our formula is tested and proven, and we look forward to meeting the opportunities and challenges of 2018 head-on.

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 was $57.5 million or $1.10 per share and for the full year, adjusted net income grew to a record $301.1 million or $5.64 per share. Our adjusted pretax margin was 13.6% for the quarter and 17.6% for the full year. Although excluded from our adjusted results, during the fourth quarter, we recorded a $4.6 million reduction in the charge related to the partial settlement of the postretirement medical benefit we originally recorded in the third quarter.

CASM, excluding fuel and special items, grew 6.9% over the same period last year, which was at the higher end of our revised range for the quarter. Of the total increase, about 5.5 percentage points were due to increases in wages and benefits, of which about 3 percentage points were attributable to our pilot contract. Nearly 1 percentage point was due to moving and transition costs associated with our new Honolulu maintenance and cargo hangar. About 0.5 percentage point was related to A321 pilot training and about 0.5 percentage point was due to the timing shift of certain expenses into 2017 that were originally expected in 2018.

As cash taxpayer, the timing shift of expenses from 2018 into 2017 has a net positive economic impact, though accretive to our CASM ex-fuel growth for the fourth quarter.

On the topic of taxes, as a result of tax reform, we've revalued our deferred tax assets and liabilities and recognized a onetime benefit of $104.2 million in the fourth quarter of 2017, which is not reflected in our adjusted EPS. From cash tax perspective, we anticipate paying $68.8 million for 2017 federal taxes. Under the new legislation, this amount would have been $41.2 million.

Further, the near-term benefit we receive under this new legislation will be used in part to work with the State of Hawaii on airport infrastructure improvement at our main hub in Honolulu. We've grown tremendously over the last decade and these improvements will modernize our operation to increase productivity and allow more efficient throughput in the lobby, which is essential for current and future growth and will also allow us to provide a better experience for our guests.

Lastly on taxes, we expect our 2018 effective tax rate to be in the range of 24% to 26%.

Turning to the balance sheet. We closed the quarter with $460 million in cash, cash equivalents and short-term investments. While slightly below our $500 million target, we did so purposefully, capturing an opportunity to improve our cost structure and grow shareholder value. More specifically, we prepaid $75 million to a maintenance vendor in exchange for a reduction in maintenance costs beginning in 2019. We paid $6.3 million in a quarterly cash dividend, initiated as an indication of our confidence in our business. And we repurchased $49.5 million of our stock during the quarter. We expect to be back at our $500 million cash target by the end of the first quarter of 2018 and remain there throughout the year.

Our share repurchase activity during the quarter closed out our initial $100 million program. Under this program, we repurchased a little more than 2.5 million shares in 2017, which has reduced our outstanding share count by 4.6%. To put this into perspective, had we repurchased these shares at the beginning of 2017, adjusted EPS would have been 3.8% higher for the year. Also during the quarter, our board authorized an additional $100 million share repurchase program in effect through December 2019.

Now looking ahead to 2018. Like our peers, we expect fuel cost to increase. Based on the fuel curve as of January 16, we expect our economic fuel cost per gallon for the first quarter to be between $1.90 and $2, an expected increase of nearly $30 million over the same period last year. For the full year, our economic fuel cost per gallon is expected to be between $1.97 and $2.07, which is an increase of about $120 million from last year.

As of December 31, we have hedged approximately 35% of our projected fuel consumption for 2018. We expect our fuel hedges to settle at a gain position, net of premium, of about $13.5 million based on the forward curve as of January 16. As always, we remain committed to a disciplined approach to our hedging program with a focus on decreasing operating and economic risk.

We expect our full year 2018 CapEx to be in the range of $375 million to $425 million as we take delivery of new aircraft and invest in our business.

From a fleet standpoint, by year's end, we will have taken delivery of 9 additional A321neos and will have retired all of our 767s. In line with our plan to retire our 767 fleet, we have entered into an agreement to purchase 3 of our 767s which we currently lease and will subsequently sell them. We expect to take a onetime charge in the first quarter as a result of this transaction.

Before I turn to our 2018 cost outlook, I'll revisit Peter's earlier remarks regarding the revenue recognition standard we're adopting. As originally reported, CASM excluding fuel and special items was $0.0939 in the first quarter of 2017. Under the new accounting standard, our restated first quarter 2017 CASM ex-fuel and special items dropped to $0.0929.

As reported in our results earlier today, excluding the impact of the new revenue recognition standard, full year 2017 CASM ex-fuel and special items was $0.0920. And under the new standard, our full year 2017 CASM ex-fuel and special items is $0.0919. The impact in the first quarter is larger than the full year impact due to the seasonality of sales, as the most significant impact to CASM is the deferral of certain sales-related costs until lift. We plan to provide more quarterly restatement information later in the first quarter.

That said, we expect CASM ex-fuel and special items for the first quarter of 2018 to increase between 3.5% and 6.5% as compared to the restated first quarter 2017 results primarily due to: A321neo pilot training costs totaling 1.1 percentage points; other increases in wages and benefits totaling 1.4 percentage points, of which 0.5 percentage point is due to increases in health care cost and another 0.5 due to contractual rate increases; and the timing of selling and advertising costs totaling 1.1 percentage point. This estimate excludes any assumptions relating to the amendable contract with our flight attendants union.

We expect our first quarter CASM increase to be the highest of the year due to the timing of cost that create tougher year-over-year comparison and improvements in the latter quarters from our initiative to improve our operational and organizational efficiencies and lower third-party contractual rate.

As a result, we expect our full year 2018 CASM ex-fuel and special items to be down 0.5% to up 2.5% year-over-year, which again excludes any assumptions relating to the amendable contract with our flight attendants union. This is lower than the range we provided at Investor Day as we refined our capacity growth for the year and benefited from the timing shift of certain expenses into 2017 from 2018 that I mentioned earlier.

As you can see, we have a number of moving parts in 2018. That said, we have a proven track record of getting strong, profitable returns from our investment, in turn growing shareholder value, and we expect nothing less in 2018.

In closing, 2017 was a great year. We focused on reducing costs, we've invested in our future, and we've grown shareholder value while creating a solid, sustainable and resilient business model that has shown, throughout varying levels of competitive pressure, no other airline is better suited to compete and win in Hawaii than Hawaiian.

This concludes our prepared remarks, and I will now turn the call back to Daniel.

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. (Operator Instructions) Operator, please open up the line for questions.

(Operator Instructions) And our first question is from Hunter Keay from Wolfe Research.

What are you guys putting in the budget for revenue growth in 2018?

Over to you, Peter.

Hunter, we give guidance -- it is our practice to give guidance a quarter at a time. So you've got the number. That's in there. I think we recognize, as I said in the prepared remarks, that it's a different environment this year than last, but we're encouraged by how the year's starting, and we expect to perform well throughout the year.

Yes. And I'll just embellish that a little bit. Peter, in his prepared remarks, did point out that the impact of capacity on our business is most pronounced in the first quarter, in the second quarter and will reduce over the remainder of the year. It being understood that, that's based on the schedules that are published today.

Okay. And then what's the RASM, CASM spread between 321neo to the West Coast and the 767? And if you want to answer that in a different way like let me know like what the trip costs are, I can make my own revenue assumptions or maybe even like the margin differential on that. And obviously, you're going to have to hold a lot of things constant, but is there any way you can help us sort of think about, if we were to build sort of a bottoms-up analysis on the accretion to margins by phasing out the 67s and phasing in the 321neos that we can use? I know you've showed us charts in the past, but they haven't had axes -- labels in the axes. Any number you can give us around the sort of economics of these things, even if it's cost only?

Sure. I can't give you the numbers. Frankly, I don't have them in front of me and off the top of my head. What I can, however, do is talk in general terms. In terms of operating cost, in terms of cost per seat, the 321neo is more efficient than even our 330s over that particular sector length. It's not by a lot, but it's considerably more efficient than the competing narrow-bodies that are currently flying. From our perspective, it gives us the same operating cost advantage that we get on the wide-bodies, but on the narrow-body routes. In fact, it actually will be even a little bit better than that. On the unit revenue front, I think we get benefits in a number of different ways. In the markets that are currently operated by 767s, the -- having less -- those that are going to go to 321neos will have less sort of capacity pressure on RASM, so we expect RASM probably, all other things being equal, to float up as a result of that. But I think also very importantly is that the highest individual RASM routes into Hawaii tend to be those midsized routes from the -- into the Neighbor Islands from the U.S. West Coast. And those are routes which, by and large, we have not participated in or rather we have participated in on a one-stop basis. But once we get into being able to serve them nonstop, I think there is a difference in the RASM that you'd expect to see there. And if you notice, over the last several years, we've actually put some wide-bodies into some of these midsized markets. And what really has helped sustain those has been the fact that the yields there have traditionally been higher than they have been coming into Honolulu.

Our next question is from Helane Becker from Cowen and Company.

Mark, I'm going to miss you.

Likewise, Helane, likewise.

Yes. So I just have like 3 really easy questions. One is from a modeling perspective, do you have the restated RASM number for the full year for 2017?

Shannon?

You know what, Helane, we do. I don't have it in front of me. We can take it offline. I can give that to you offline, but we do have it.

Okay. Good. And then the other thing is, are fuel surcharges starting to come back into the -- back into the pricing structure on the international routes?

Yes, they are, and Peter's got something to...

Yes, the answer is yes. They are in -- right now for ticket selling in Japan, for example, we've got a fuel surcharge that when converted over to U.S. dollars equates to about $35 per segment. As we go into tickets that are ticketed in February and March, that number goes up to about $55 based on the changes in fuel prices in recent periods. So we're starting to see that. We saw it a little bit the end of last year. And as the fuel prices have continued their move, we're into the execution of that curve, basically.

And in several of the countries involved, you actually look back at the prior period's fuel price in setting the fuel surcharge going forward. So this tends to -- the benefit of this tends to lag slightly.

Correct.

Right. Got you. But that's included in your guidance?

It is indeed.

Okay. And then my other question is, are you guys set up to accept alternative currencies like Bitcoin and cryptocurrency?

No, we're not.

Yes. And it's not something that is really on our radar, Helane. I think accepting the currencies that we accept today has been adequate to meet the needs of the market.

Our next question is from Joseph DeNardi from Stifel.

Peter, sorry for the RASM questions here, but just piggybacking on Helane's question, can you just kind of talk about how much of a benefit fuel surcharges were in the fourth quarter and then how much of a tailwind they are in first quarter?

Yes. In fourth quarter, it was pretty marginal impact. That would be less than 1%. In the first quarter, it's about 1 percentage point in aggregate based on our expectations right now.

Okay. And then just on the first quarter RASM guide, I think it's actually pretty good and you kind of talk to the fact that it's your seasonally weakest quarter and Neighbor Island is still going to be a drag. Kind of implies that you think things will get better into 2Q. So is that right? Is that your expectation that RASM trends improve in second quarter or is that not what you were trying to say?

There's a couple of things that's pushing in different directions as we go into the second quarter. One is, the Neighbor Island environment is different. And so it was really in the second quarter and then into the third and fourth that you saw Island Air building up last year. And so we get into a somewhat easier year-over-year comparison on Neighbor Island as we get into the second quarter. So that's a tailwind for us. On the other hand, one of the things that's helping us in March this time, we talked about, is the timing of Easter, which moved some of the peak holiday traffic into the first quarter. Easter is right at the end of March, beginning of April. Last year, that was fully in April. So that's a negative on the second quarter. So you have those things pushing in different directions. And I think from a North America standpoint, one of the things that's going to be most interesting to see play out and we're still early in the booking curve on that period is just in April and May, you've got sort of a fairly extended shoulder period up until Memorial Day when things start to peak up for the summer. So a little bit of the dynamic will be how things perform in the second quarter. Capacity, as we said, North America capacity is about the same increase year-over-year on an industry basis in both first and second. As we get into the third quarter, fourth quarter, as Mark mentioned to Hunter's question earlier, we see a little bit of a tapering of the growth rate of the competitive capacity. Hopefully, that gives you some color.

Our next question is from Mike Linenberg from Deutsche Bank.

Mark, it's been a good run. And to echo Helane's point, yes, you will be missed so job well done.

Thank you.

Two quick questions here. Peter, you gave us kind of the FX or excuse me, the fuel surcharge impact in the fourth quarter and you said it would be about 1 point in the March quarter. What about FX? I mean, we've seen a big swing in the dollar. How much did that help you on the A3 PRASM in the fourth quarter? And what are you anticipating or maybe incorporating in your forecast for the March quarter, the FX piece?

I don't have the numbers in front of me. I would say you're absolutely right. We have seen both for the yen and for the Australian dollar that are sort of first and second most important foreign trading currencies. We've seen improvements, particularly over the last month or so relative to the dollar. It is -- I said I don't have the number. I think we'll get it for you offline, but my guess is it's going to be less than 1 point.

Okay. Okay. That's helpful. And then back to interisland, do you feel like that now with Island Air out of that market that, that market now has a sufficient amount of capacity? Or do you feel like that market may be now needing some additional capacity? And does it make any sense where the A321neos maybe as tag flights? You run them between markets or does it just kind of mix up the product too much that it just won't make any sense?

Yes. It's a -- there's a couple of things in there. One, I think, overall, we think there's a good level of capacity. And if you look at the sort of volume of seats that Island Air was flying before they shut down, it was less than the empty seats that we would have on an average day. Now while that is true on an average day, there are certain peak periods around holidays and busy family travel periods where that's not the case, and that was part of the reason in the fourth quarter. I think we had about -- especially around Thanksgiving and Christmas, I think we had about 87 extra flights we ended up putting in to bolster the capacity during the peak periods. And we'll continue to sort of micromanage the capacity to make sure we're adequately serving the demand. In terms of the A321's opportunity to fly some of those tag flights, it is something that is not featured in our schedules right now. But as we were originally envisioning the opportunities for that aircraft, it is one of the uses that, I think, we will look at over time to see if there's an ability to add a little bit of extra capacity, get some extra utilization out of the aircraft. So it is an opportunity. I think we want to get comfortable with operating the aircraft first before we get into that. So probably perhaps not in 2018, but it's something that we will have another arrow in our quiver going forward.

Yes. And I would just ride on that, that the time that we would use the A321neo, the gap we would have in terms of the schedule that we tend to operate to the West Coast would actually allow us to add that capacity right at the point of the day when it's needed. So it's quite an elegant opportunity for us.

Our next question is from Kevin Crissey from Citigroup.

And congratulations, Mark, and best of luck in the future.

Thank you.

Peter, one of the things that I really think you all have done a nice job with your 10-year plan, you talk about going into though kind of the last phase here. Are you thinking about -- in a new role, are you thinking about the next 10-year plan? And is that something that we should be on the lookout for?

Yes, probably not something that we'll be rolling out on the 1st of March, but I think we're always mindful of needing to evolve the business for the realities of tomorrow and adapting to competitive environment, to customer needs. Right now, we've got a fairly full plate ahead of us with the A321neos coming in, making sure we get that right from an operational standpoint and making sure we take care of the important commercial opportunities that opens up for us. So I'm sure we'll have more opportunity to discuss the plan going forward, but you shouldn't be expecting that there is some radical departure from the path that we've been on that is going to happen miraculously on the 1st of March.

The next question is from Rajeev Lalwani from Morgan Stanley.

Just first a RASM question for you Peter. What is the actual impact that you're seeing from Easter and whatever other holidays in the first quarter?

It is maybe in the range of 1 to 2 points on a system basis. It's really more of a North America, Neighbor Island phenomenon than anywhere else. And that sort of shifts between the quarters, but it is somewhat hard to tease those numbers out because you do have other dynamics going on.

Yes, that's fair. And then Shannon, a question for you. As far as the CASM guide for 2018, can you just provide a walk from old to new, what you had at the Investor Day? And then what you're talking about today? And then the other thing you mentioned in your prepared remarks, post-tax reform looking at some infrastructure investments, I was curious what impact that has on CASM or CapEx going forward?

Sure, Rajeev. Yes, the old guidance, I believe at Investor Day, we had the mid-single digits. And now I'm guiding a range that's closer to low single digits. And that's really just a matter of firming up our budget process, firming up ASMs for the year as well as building in a little bit more some of our cost initiatives, some lowering of rates later in the year, building in some productivity improvements we expect to see from some of our investments as well as we talked about shifting some 2018 cost into 2017. So those are the main drivers of the lower year-over-year guide. On the infrastructure piece that we talked about, a lot of that's going to be capital, so that's not really going to -- I don't anticipate a lot of that flowing into our 2018 OpEx. We have some built in there. We've always got -- we always have budgeted and planned a level of OpEx and CapEx for investment into the company, and that will go in there. But a lot of it's estimated to be CapEx at this point, so not a lot of '18 OpEx impact.

Our next question is from Andrew Didora from Bank of America.

Shannon, I'm just going back to the accounting change. Can you tell us how much 2017 net income changes because of this? I'm just trying to get a sense of what the baseline should be for my 2018 model out. I would assume it's lower than what you just reported.

Yes. I believe the 2017 is -- I don't have it in front of me. Someone just put the RASM number for Helane in front of me. So on a -- for RASM, our original full year 2017 number was $0.1418 and the restated will be $0.1407, but I don't have anything else in front of me. Andrew, we can get back to you on that.

Okay. But it is fair to say that net income would be revised down just because of the -- more of the deferred revenue going into out-years, right?

Yes, that's correct. So the 14 -- the RASM, you just saw it decrease. CASM stays relatively flat for the full year.

The pretax margin on a restated basis, I think, goes from about 17.6% to closer to 17%. So that gives you some sense of the overall bottom line impact. And that's adjusted numbers.

Okay. And then lastly, Shannon, with your hedge -- how effective your hedges are in 2018, can you give us a little bit of -- some sensitivities? What would your gains look like at Brent north of, say, $75 per barrel?

Yes, I'm really sorry, Andrew, I don't have those numbers in front of me.

Okay. We can take it offline then.

Yes. We can run some for you, some sensitivities for you.

Our next question is from Dan McKenzie from Buckingham Research Group.

Mark, again, one more congratulations. Well done over your tenure here.

Well, thank you, Dan. Thank you.

A few questions here. And I'm always the guy to kick the dead horse. So I'm just wondering if you can talk once again about revenue and maybe helping us put some brackets around the tailwinds and the headwinds. So at least as I think of it or I'm thinking of it, and please correct me, on the tailwind side, you've got international overall. I'm just kind of wondering if you kind of look at RASM, how many percentage points is that contributing as we look at the first quarter outlook. And then, of course, you got premium seating, Extra Comfort, lie fat -- lie-flat, pardon me, that has to be contributing a certain amount of percentage points. And then, of course, you've got the competitive capacity. And I think if you could just help frame that a little bit further. That would, I think, help investors get a little bit more comfortable. I'm not sure what you can say.

Yes. Dan, let me take the first crack at that. I mean, I think you framed up a number of things that are pushing in different directions. We will -- we obviously have a -- some changes in the competitive environment, particularly in North America. But in a couple of the international routes that we serve as well, we have a higher level of competitive capacity next year. So that's the most notable headwind that's out there. Pushing against that, I think we are -- even though we have performed very well, I think, from a revenue execution standpoint over the last few years and North America revenue premium, I can point you to a third quarter trailing 12-month number that is on the order of 10% or 11%, as an example of that. I think we still have opportunities to improve our execution, just day-to-day managing the business from a sales, marketing, revenue management perspective. So that's the first place we always look. Then you've got the expanded Extra Comfort. We've got the full monetization of the lie-flat product. So those things are going to help us. And in particular, some of the initiatives that I talked about in the prepared remarks, it's not just more inventory, but it's also some of the investments in technology that will help us distribute that better in the third quarter or in international markets, I apologize. Having said all that, we're not going to get into giving a full year guide yet. I think we have a lot of confidence in our ability to execute in the marketplace, but it is a dynamic environment and our competitors are obviously evolving their businesses as well. We think that we're really well positioned for all the reasons we've talked about, and we've got a product that resonates with the Hawaii traveler. And we're going to continue to manage our business with that in mind.

Okay. I guess just to follow-up. I wonder if I could just kind of dig into international a little bit further here. The value of the codeshare is highlighted, of course, in the prepared remarks and at the Investor Day. And the implication is that it's material. And I've heard airlines talk about JVs being materially additive, but I've never really heard an airline talk about a codeshare as being particularly material. And I guess in the case of Hawaiian, it's really the access to JALPAK that makes it such a different story. And so I guess just a couple of questions around that. First, when do you become visible in that distribution channel, first? And then secondly, what can you share about the numbers and materiality of that part of the international story?

Yes. We're already working with JALPAK so we expect that to have a positive impact starting in the second quarter. Where it will manifest itself the most and where some of the bigger opportunity lies is not necessarily in a place like Tokyo where it's a sort of big thick market with -- and we fly fairly full and we're not crying for traffic at all. I think there's an opportunity in Tokyo because you can get your traffic at a better point in the demand curve as you access different sources. But a real example that -- where we see JALPAK as being a positive for us is a place like Sapporo that is a thinner market in terms of overall demand. And we see the opportunity to leverage the additional distribution channel and the power of JAL's presence as the national carrier and a big frequent flyer base to drive revenue in that. So that's part of where we see the opportunities initially. Longer term, we don't deny the notion that there's even more opportunity beyond that in terms of joint venture. And that's why we intend to pursue a joint venture. And we've been working diligently with JAL to document that. And we hope to have a document ready to file with the appropriate regulatory authorities early in the second quarter of this year.

And if I might just embody that a little bit. I'd point out that whereas most of the other airlines that you cover that have these sorts of relationships have most of their point-of-sale coming from the United States, for us, the overwhelming point-of-sale is at the other end of the route, in Asia. And so a relationship with JAL that really transforms our competitive posture in the marketplace is apt to have a more significant impact in our case than it would do to an already strong network carrier, for example, whose point-of-sale is biased towards the United States.

Got it. Okay. And then if I could just squeeze one last one in here. As I look at the pricing data, it really seems the U.S. to Hawaii is -- the pricing weakness that I'm seeing, pardon me, is really midweek. And just wondering, how big a deal is midweek revenue? It seems to me kind of the higher-yielding, higher-revenue opportunity is on the weekend. But just a couple of questions, how do we think about that inventory at the quarter, I guess, first of all? And then second of all, is there a sense that perhaps the schedule, you may want to tweak the schedule at some point later this year on that particular exposure?

Yes. Dan, I think, first of all, revenue is important every day of the week. So we're in favor of revenue and we're in favor of it 7 days a week. It is the case that we do have different pricing in the marketplace between weekends and midweek just like we have seat pricing in terms of different months of the year and holiday periods versus what we refer to as the trough or the shoulder periods. So I think one of the things -- and I made a comment in the call about how the first quarter plays out. I think when you have more capacity as we do this year, it does tend to manifest itself in -- as an impact or a challenge more in the seasonally weaker periods of a quarter, and I think that also goes for the seasonally weaker periods of the week. But I think the markets we serve, by and large, are of sufficient size to demand and be able to be served by daily service. And daily service has a lot of other advantages, not least of which, it gives you better asset utilization and gives us better utilization of our people from a cost structure standpoint. But also because from a revenue-generating standpoint, it gives our guests the option of tailoring when they want to start the trip and when they want to end the trip. And if we were to deviate too much from that 7-day a week schedule on a lot of our routes, I think what you would see is an impact on our ability to generate revenue as well as an impact on our costs. So it's not something that I think you're going to see to a high degree. We certainly look for some opportunities to do it, but it is really going to be more on the margin than a steady diet.

And once you grow and you're already covering things on a daily basis, it does give you the opportunity to add capacity, and during the peak days of the week, without losing the benefits that Peter has just articulated which are important.

Our next question is from Steve O'Hara from Sidoti & Company.

Mark, congratulations. You've obviously done a great job and built a pretty good team here. And I think you certainly will leave your ship in good hands. But just had a quick question on the fuel burn and it looks like you're looking for a pretty good step-up this year based on the guidance other than 1Q. And I'm just wondering, is that just the A321s and maybe reallocating the A330s. And can you talk about that a little bit?

Steve, this is Shannon. Yes, so I apologize, in our script and our prepared remarks we didn't note that our fuel consumption guidance for the first quarter is to be up 4% to 6%. So -- and that is coming. And so we're still running 7 767s in the first quarter, and that fuel consumption efficiency you'll see get better throughout the year. But again, 2018 is a transition year, right, for 767s and 321s so it's really hard to create a baseline on fuel consumption this year with the fleet transition. But that consumption reflects the increase in ASMs, the 767s that are still running and -- just a -- it's a -- we've got a little bit of 321s flying in the first quarter, but really not enough to impact a system-wide fuel consumption rate.

But I think, Steve, if you look at the full year guidance, both for ASMs and for fuel consumption, fuel consumption is up, but on the full year guidance, it's up less than our ASMs. So we're producing ASMs more fuel efficiently, and I think that is probably a better reflection of the transition than just looking at the first quarter number in isolation.

Okay. And then -- so if -- this is a transition year, I mean, where do you expect that to shake out? What's a good longer-term rate to use kind of maybe ASMs per gallon or something like that when the transition is complete?

Shannon?

I'm sorry, can you repeat the question, Steve.

Just -- yes, with the transition, when that's complete, where does ASMs per gallon go? I mean, obviously, it should go up from 2018, I assume. But I mean, is there a way to think about a range it should fall in when you have the fleet transition complete?

Yes, I don't -- we haven't quite guided that yet, that particular stat, but it will be affected by our mix of routes. You're right in the assumption that the ASMs per gallon would increase as we phase out the 767s for 321s flying, but we haven't quite given guidance yet on 2019 fuel consumption.

Our next question is from Susan Donofrio from Macquarie Capital.

Mark, certainly want to echo everyone's best wishes to you. Certainly, we've known you for quite a while and sure you'll do great with whatever you're going to do next, looking forward to seeing it.

Thank you, Susan.

Yes. I just have a couple of quick questions. One is, I'm just wondering, when I think of your 717s, obviously, they're getting a little older and fuel spiked up. I'm just -- what, in terms of fleet replacement, are there any new thoughts on that or what can we think on that?

No. The 717s, as we said before and I'll just echo it because it's really important is, there is no airplane being built today or in design today that can fulfill the mission that we have for the 717s as well as the 717. I mean, we are firm, firm, firm advocates of the aircraft type. The aircraft, I think, is probably somewhere just over the halfway point in their natural lives. And so for the time being, we have no plans, no exercise, no activity dedicated to figuring out what will come after the 717s because it's a good ways down the track.

Good. Good. And then Shannon, as you've gone through your cost-cutting exercises, of what areas should we be focused on? It sounds like you're doing a lot of in the maintenance side, et cetera, but where should we start seeing that show up?

Thanks, Susan. Yes, it's actually all over. So we've done -- we're just -- on the third-party piece, we're looking at a lot of our big contracts. The one I talked about on this call was a maintenance contract, but we've also been working on a bunch of our contracts that affect our cost of sales area. So you'd see that in the selling expenses line. Also, what would be a little bit more hidden to you is on the labor side. As we improve labor productivity, like what we did in the maintenance area, you really didn't see a reduction in labor cost, but we were able to add another line of 717s flying. So we get a lot of revenue benefit from that. So it's hard to pinpoint exactly where in the income statement you'll see these cost savings, especially when we improve labor productivity, but some of it will be in the wages line, but it is really kind of scattered throughout the income statement. For example, another example, as we improve labor productivity, we outsource less. So I think some of the outsourced cost is in other expense. So it is scattered throughout the income statement.

Great. And then just one last quick one. For the A321s, can you just remind us when they're going to be going into flight service this year?

Well, they're already in service now. We've got 1 operation operating with 321. There are actually 2. So 2 days ago, we had the second route start. By the end of this year, we should have a total of 9 A321s operating. So 8 deliveries this year, 1 delivery in the last year. So I think during the first half of the year, you'll see announcements coming pretty thick and fast about how we're going to deploy the aircraft and where they're going to go. We've already got a bunch of announcements out there, [in particular for] those in the month of May when we've got a couple of new routes coming onboard.

This concludes the question-and-answer session. I'd like to turn the floor back over to Mr. Dunkerley for any closing comments.

Well, thank you, all, very much for joining us today. Thank you, in particular, to the nice comments that you shared with me. I certainly appreciate them and value them greatly. 2017 was a great year for Hawaiian, and the things we put in place these past several years position us for much success going forward. So thank you for joining us today and mahalo and aloha.

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