Hawaiian Holdings, Inc.
Q4 2017 Earnings Call Transcript

Published: 30 Jan 2018

[Operator:]

Greetings and welcome to the Hawaiian Holdings Inc. Fourth Quarter Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Daniel Wong. Thank you, you may begin.

[Daniel Wong:]

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 of 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 about 4

[Mark Dunkerley:]

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 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 end of measures 2017 was an outstanding year. Operating revenue grew 10% to 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 A321 Neo, 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 front line to those who support them. Their tireless dedication provides us a 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 have done over the years, but perhaps it is 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 A321 Neo will in fell swoop make us the most potent competitor in the mid sized West Cost Hawaiian markets. The same combination of superior service, superior unit revenue generation 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 co-share 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 anti-trust 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, we'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 tenderness 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 and at any time in our cost 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 yet untapped. Asia beckons. The future of global air travel is leisure and the in 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 Hawaiian markets also provide fertile growth opportunities. So the future is bright and with that ringing in your ears, I'll turn the call over to Peter.

[Peter Ingram:]

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 increase 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 A321 Neo into our fleet. On January 8th we celebrated our first regularly scheduled A321 Neo 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 A321 Neo 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 three quarters of 2017. International PRASM was up 8.3% this quarter over the same period last year on solid year-over-year gains and 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 couple of 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 code sharing 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 two $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 A321 Neos 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. In so far 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'll 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 $13.58 cents. Under the new revenue recognition standard our restated first quarter 2017 RASM is $13.4 cents and both those were RASM numbers not PRASM. Against this restated baseline we expect Shannon Okinaka 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 two outstanding years of revenue performance, but inevitably this performance sets us up for challenging year-over-year comparisons. North America RASM 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 capital 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 A321 Neos 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 is 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.

[Shannon Okinaka:]

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 benefit 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 0.05 percentage point was related to A321 pilot training and about 0.05 percentage point was due to the timing shift of certain expenses into 2017 that were originally expected in 2018. As tax payers, the timing shift of expenses from 2018 into 2017 has a net positive economic impact accretive to our CASM ex fuel growth for the fourth quarter. On the topic of taxes, as a result of tax reform we revalued our deferred assets and liabilities and recognized a one-time benefit of $104.2 million in the fourth quarter of 2017 which is not reflected in our adjusted EPS. From a 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 on our main hub in Honolulu. We've grown tremendously over the last decade and these improvements will modernize our operations to increase productivity and allow more efficient through put 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 [ph] million in cash, cash equivalents and short-term investments. While slightly below our $500 million target we did feel 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 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 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 costs 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 out a gain position, net of premiums 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 nine additional A321neos and will have retired all of our 767. In line with our plan to retire our 767 fleet we have entered into an agreement to purchase three of our 767s which we currently lease and will subsequently sell them. We expect to take a one-time 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 standards we're adopting. As originally reported, CASM excluding fuel and special items was $9.39 in the first quarter of 2017. Under the new accounting standards our restated first quarter 2017 CASM ex-fuel and special items dropped to $9.29. As reported in our results earlier today, excluding the impact of the new revenue recognition standards, full year 2017 CASM ex-fuel and special items was $9.20. And under the new standard our full year 2017 CASM ex-fuel and special items is $9.19. 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 A321neos pilot training costs, totaling 1.1 percentage points, other increases in wages and benefits totaling 1.4 percentage points of which 0.5 a percentage point is due to increases in healthcare costs and another half 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 for our flight attendants union. We expect our first quarter CASM increase to be the highest of the year, due to the timing of costs that create tougher year-over-year comparisons and improvements in the latter quarters from our initiatives to improve our operational and organizational efficiencies and lower third party contractual rates. 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 be amendable contracts 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 investments in turn growing shareholder value and we expect nothing less in 2018. In closing, 2017 was a great year. We focus 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 pressures, 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.

[Daniel Wong:]

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 up the line for questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question is from Hunter Keay from Wolfe Research. Please go ahead.

[Hunter Keay:]

Hi, thank you, hi everybody.

[Mark Dunkerley:]

Hi Hunter.

[Hunter Keay:]

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

[Mark Dunkerley:]

Over to you, Peter.

[Peter Ingram:]

Hunter, we give guidance, as 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 recognized as I said in the prepared remarks, so it’s a different environment this year than last but we’re encouraged by how the year is starting and we expect to perform well throughout the year.

[Mark Dunkerley:]

Yes and I've just, tell that 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 is being understood that that’s based on the schedules that are published today.

[Hunter Keay:]

Okay, thanks for that. And then what is the RASM, CRASM cabin spread between 321 Neo 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 have to hold a lot of things constant. But is there any way you can help us sort of think about if you were to build sort of a bottoms up analysis on the accretion to margins by phasing out the 6, 7 and phasing in the 321 Neos that we can use and you've showed us charts in the past, but I've haven’t had access labels in the access, any number you can give us around sort of economics of these things even if it’s cost only?

[Mark Dunkerley:]

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 costs, in terms of cost proceeds the 321 Neo is more efficient than even our 330s over that particular sector line. It’s not by and large 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 on the narrow body we are in fact it’s actually 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 having less - those that are going to go to 321 Neos 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 mid-sized 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 sell the non-stop I think there is a difference in the RASM that you would expect to see there. And if you noticed over the last several years, we’ve actually put some wide bodies into some of these mid-sized markets and what really has helped sustain those has been the fact the yields that have traditionally been higher than they have been coming into Honolulu.

[Hunter Keay:]

Thank you very much.

[Mark Dunkerley:]

You bet.

[Operator:]

Our next question is from Helane Becker from Cowen & Company. Please go ahead.

[Helane Becker:]

Hi everybody, thank you for the time. Mark, I’m going to miss you.

[Mark Dunkerley:]

Likewise Helane, likewise.

[Helane Becker:]

Yes, so I just have like three really easy questions, one is from a modelling perspective do you have the restated RASM number for the full year of full 2017?

[Mark Dunkerley:]

Sure.

[Shannon Okinaka:]

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

[Helane Becker:]

Okay, good. And then the other thing is our field surcharges starting to come back into the back into the pricing structure on international risk.

[Mark Dunkerley:]

Yes they are. It looks like that.

[Peter Ingram:]

Yes the answer is yes, they are in right now for ticket selling in Japan for example we got a fuel surcharge when converted over to U.S. dollars it 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 are into the execution of that curve basically.

[Mark Dunkerley:]

And in several of the countries involved you actually look back at the prior periods, fuel price and selling the full surcharge going forward. So the benefit of the lag is slightly correct.

[Helane Becker:]

Right, got it. But that is included in your guidance?

[Mark Dunkerley:]

It is indeed.

[Helane Becker:]

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

[Mark Dunkerley:]

No we’re not.

[Peter Ingram:]

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.

[Helane Becker:]

Okay, that's great, thank you and Mark keep in touch.

[Mark Dunkerley:]

I certainly shall, thank you Helane.

[Operator:]

Our next question is from Joseph DeNardi from Stifel. Please go ahead.

[Joseph DeNardi:]

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

[Peter Ingram:]

Yes in fourth quarter it was pretty marginal impact that would be less than a percent. In the first quarter it is about 1 percentage point of aggregate based on our expectations right now.

[Joseph DeNardi:]

Okay, thank you. And then just on the first quarter RASM guide I think it’s actually pretty good and you kind of talked to that the fact that it is just seasonally weakest quarter and Neighbor Island is still going to be a drag. Kind of implies you think things will get better into 2Q, so s that right, is that your expectation that RASM trends improve in second quarter is that now what you were trying to say?

[Peter Ingram:]

You know that are a couple of things that are 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 there 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 is a tailwind for us. On the other hand one of the things that is helped us in March this time, we talked about is the timing of Easter which moves some of the peak holiday traffic into the first quarter, Easter is right the end of March beginning of April. Last year that was fully in April, so that is a negative on the second quarter. So you have those things pushing in different directions and I think from a North American standpoint one of the things that is going to be most infesting to see play out and we're still early in the booking curve on that period, just in April and May you've got a 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. So as we get into 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.

[Joseph DeNardi:]

Yes very helpful.

[Operator:]

Your next question is from Mike Linenberg from Deutsche Bank. Please go ahead. I’m sorry Mike your line is lost.

[Mike Linenberg:]

Yes can you hear me now?

[Peter Ingram:]

Yes, we can, thanks Mike.

[Mike Linenberg:]

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

[Mark Dunkerley:]

Thank you.

[Mike Linenberg:]

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 a 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?

[Peter Ingram:]

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 our 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 will get it for you offline but my guess is it's going to be less than a point.

[Mike Linenberg:]

Okay, that's helpful. And then back into Island, 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, that market maybe now needing some additional capacity and does it make any sense where the A321neos maybe as tag flights, you run in between markets or does it just kind of mix up the product too much that it just won't make any sense?

[Mark Dunkerley:]

Yes, there's a couple of things in there. One, I think overall we think there's a good level of capacity and if you looked 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 that well 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 specially around Thanksgiving and Christmas I think we had about 87 extra flights we ended up putting in to bolster the capacity during the peak period. And we'll continue to sort of micromanage the capacity to make sure we're adequately serving the demand. In terms of the A321s opportunity to fly some of those tagged 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 that some back 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.

[Peter Ingram:]

Yes and I would just right 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 quite an opportunity for us.

[Mike Linenberg:]

Oh, great. That's great to hear. Thanks for all the color gentlemen.

[Mark Dunkerley:]

You bet.

[Peter Ingram:]

Thanks.

[Operator:]

Our next question is from Kevin Crissey from Citi Group. Please go ahead.

[Kevin Crissey:]

Hi, thanks for the time and congratulations Mark and best of luck in the future. And Peter, one of the things that I really think you all have done a nice job with your ten year plan and you talk about going into kind of the last phase here, are you thinking about in a new role, are you thinking about the next ten year plan and is that something that we should be on the lookout for?

[Mark Dunkerley:]

Yes, probably not something that we'll be rolling out on the first 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 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 we've been on that is going to happen miraculously on the 1st of March.

[Kevin Crissey:]

Okay, thanks. I'll leave it there.

[Mark Dunkerley:]

Okay, thanks Kevin.

[Operator:]

Our next question is from Rajeev Lalwani from Morgan Stanley. Please go ahead.

[Rajeev Lalwani:]

Hi, thanks for the time. 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?

[Peter Ingram:]

It is maybe in the range of 1 to 2 points on a system basis. It's really more of a North America and 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.

[Rajeev Lalwani:]

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 for a multi new which out of 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.

[Shannon Okinaka:]

Sure, hi Rajeev. Yes, the both guidance I believe at Investor Day we had that mid single digit, so now I'm guiding a range that's closer to low single digits and that's really just not a firming up our budget process firming up ASM for the year as well as building in a little bit more of some of our cost initiatives, some lowering of rates, later in the year, building and 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 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.

[Rajeev Lalwani:]

Thanks and best of luck Mark.

[Mark Dunkerley:]

Thank you.

[Operator:]

Our next question is from Andrew Didora from Bank of America. Please go ahead.

[Andrew Didora:]

Hi, everyone. Thank you for the questions here. Hi, Shannon 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. I would assume if lower than what you just reported.

[Shannon Okinaka:]

Yes, I believe the 2017 as I don't have that 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 14.18 and the restated will be 14.07, but I don't have anything else in front of me. Andrew we can get back to you on that.

[Andrew Didora:]

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?

[Shannon Okinaka:]

Yes, that’s correct. So the RASM you just saw it's decreased.

[Andrew Didora:]

Yes.

[Shannon Okinaka:]

CASM is relatively flat for the full year.

[Mark Dunkerley:]

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, not adjust numbers.

[Andrew Didora:]

Okay, thank you for that and then lastly Shannon with what your hedged, how it's like to be your hedged - in 2018, can you give us a lot of some sensitive, what would your gains look like at Brent North of say $75 per barrel.

[Shannon Okinaka:]

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

[Andrew Didora:]

Okay, we can take offline then. That's all I had.

[Shannon Okinaka:]

Yes, some sensitivity for you.

[Andrew Didora:]

Thank you.

[Mark Dunkerley:]

Thank you.

[Operator:]

Our next question is from Dan McKenzie from Buckingham Research Group. Please go ahead.

[Dan McKenzie:]

Oh, hey thanks guys for the time here. Mark again, one more congratulations, well done over your tenure here.

[Mark Dunkerley:]

Well, thank you, Dan, thank you.

[Dan McKenzie:]

Just a few questions here and I'm always the guy to kick a dead horse, so I'm just wondering if you can talk once again about revenue and maybe helping us put some rackets around the tailwinds and the headwinds. So at least as I think or 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 you look at the first quarter outlook and then of course you've got premiums ceding extra comfort life that, life that pardon me, that has to be contributing 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.

[Mark Dunkerley:]

Yes, Dan and let me take the first crack at that, I mean I think you framed up a number of things that are pushing in different direction. We will - we obviously have 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 life flat products. So those things are going to help us and in particular some of the initiatives I've 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 in the international markets, I apologize. Having said all of 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 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.

[Dan McKenzie:]

Okay. I guess just the follow up. I’m wondering if I could just kind of dig into international a little bit further here, that the value of the co-chair 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 co-chair has been particularly material and I guess in the case of Hawaii and 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?

[Mark Dunkerley:]

Yes we're already working with JALPAK, so we effect 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 the place like Tokyo where it’s a sort of big thick market with and we would fly fairly full and we’re not going for traffic at all. I think there is 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 of that 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 big frequent flyer base to drive revenue in that. So that is 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 gel 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.

[Peter Ingram:]

And if I might just and probably that a little bit, I 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 that the other end of the route in Asia and so a relationship with JAL really transforms our competitive posture in the marketplaces have to have a more significant impact in our case than it would do to an already strong network carrier for example who's point of sale is biased towards United States.

[Dan McKenzie:]

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 mid week and just wondering how big a deal is mid week 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 inventory at the quarter, I guess first of all and then second of all is there a sense that perhaps the schedule me you may want to tweak the schedule at some point later this year on that particular exposure?

[Peter Ingram:]

Yes Dan, I think first of all revenue is important every day of the week, so we are in favor of revenue, more favor of it seven days a week. It is the case that that we do have different pricing in the marketplace between weekends and mid week just like we have see pricing in terms of different months of the year and holiday periods versus what we refer to as the trough for the shorter periods. So I think one of the things that I made the 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 and as an impact or 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 seven 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 cost. 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.

[Mark Dunkerley:]

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

[Operator:]

Very good, thanks for the time guys.

[Mark Dunkerley:]

Thanks Dan.

[Operator:]

Your next question is from Steve O’Hara from Sidoti and Company.

[Steve O’Hara:]

Yes hi, thanks for taking the question. And then Mark congratulations and obviously you've done a great job, built the pretty good team here and I think it certainly will be leaving the ship in not good hands. But just I had a quick question on the fuel burn and it looks like you are looking for a pretty good step up this year based on the guidance 1Q and I’m just wondering is that just the A321s and maybe reallocating the A330s and if you can talk about that a little bit? Thank you.

[Shannon Okinaka:]

Hi Steve, this is Shannon. Yes so I apologized in the script and our prepared remarks we didn’t know that our fuel consumption guidance for the first quarter to be up 4% to 6%. So and that is a combination. So we’re still running 767s in the first quarter and that fuel consumption efficiency you will see get better throughout the year but again, 2018 is a transition year right for 767 and A321, 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 ASM. The 767s that are still running and just it's all we've got a little bit of 321 flying in the first quarter but really not enough to impact a system wide fuel consumption rate.

[Mark Dunkerley:]

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 ASM, so we're producing ASM’s 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.

[Steve O’Hara:]

Okay and then so this is the transition year and where do you expect that to shake out, which bids longer term rate use kind of maybe ASMs per gallon or something like that when the transition is complete?

[Mark Dunkerley:]

Shannon.

[Shannon Okinaka:]

I’m sorry, can you repeat that question please?

[Steve O’Hara:]

Yes, with the transition when that's complete where does the ASM per gallon go and then obviously should go up from 2018 I assume, but I mean is there a way to think about a range should fall in when you have the fleet transition complete?

[Mark Dunkerley:]

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

[Steve O’Hara:]

Okay, all right. Thank you very much.

[Operator:]

Our next question is from Susan Donofrio from Macquarie Capital. Please go ahead.

[Susan Donofrio:]

Yes, hello everybody and yes Mark, certainly I want to echo everyone’s best wishes to you, certainly knowing you for quite a while and I'm sure you'll do great with whatever you're going to do next looking forward to seeing it.

[Mark Dunkerley:]

Thank you, Susan.

[Susan Donofrio:]

Yes, I just has a couple quick questions. One is I'm just wondering when I think of your 717s obviously they're getting a little older and in a 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?

[Mark Dunkerley:]

No, the 717 as we said before and I'll just echo it because it's really important. There is no aero plane 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 actually the aircraft. The aircraft I think is probably somewhere just over the halfway point in the natural license. So for the time being we have no plans, no exercise, no activity dedicated to figuring out what will come after 717s because it's a good ways down the track.

[Susan Donofrio:]

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

[Shannon Okinaka:]

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. It also 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, we really didn't see a reduction in labor costs but we were able to add another line of 717 a flying, so we get a lot of revenue benefit from that. So it is hard to pinpoint exactly where in the income statement, you'll see on these cost savings especially when we improve labor productivity, but some of that will be in the wages line, but it is really kind of scattered throughout the income statement. For example, another example of this as we improve labor productivity we outsource less. So I think the some of the outsourced cost is another expense, so it is scattered throughout the income statement.

[Susan Donofrio:]

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

[Mark Dunkerley:]

Well, they're already in service now. We've got one operation operating with 321 actually two, so two days ago we had the second. The second route start by the end of this year, we should have a total of nine A321s operating, so eight deliveries this year, one 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 them, bunch of announcements out there. We've got this in the month of May when we have got a couple of new routes coming on board.

[Susan Donofrio:]

Terrific, thank you.

[Operator:]

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

[Mark Dunkerley:]

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 Hawaii 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.

[Operator:]

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