Hawaiian Holdings, Inc.
Q1 2014 Earnings Call Transcript

Published: 23 Apr 2014

[Operator:]

Greetings, and welcome to the Hawaiian Holdings First Quarter 2014 Earnings Call. At this time all participants are in a listen only-mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Ashlee Kishimoto, Senior Director of Investor Relations for Hawaiian Holdings. Thank you, Ms. Kishimoto, you may now begin.

[Ashlee Kishimoto:]

Thank you, operator. Welcome, everyone and thank you for joining us today to discuss Hawaiian Holdings' financial results for the first quarter of 2014. On the call with me today are Mark Dunkerley, President and Chief Executive Officer; Peter Ingram, Chief Commercial Officer; and Scott Topping, Chief Financial Officer. Mark will begin with some overview comments. Next, Peter will take us through the revenue results, network and capacity. Scott will follow with a discussion on costs, balance sheet and guidance. We will then open the call up for questions, and then Mark will make a few closing remarks. By now, everyone should have access to the press release that went out at about 4 o'clock Eastern Time today. If you have not received the release, it is available on the Investor Relations page of our website, hawaiianairlines.com. During the course of our call today, we will refer to adjusted or non-GAAP numbers and metrics. A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found in our press release. Before we begin, we’d like to remind everyone that the following prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. For a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statement, we refer you to Hawaiian Holdings’ recent filings with the SEC, including the most recent annual report filed on Form 10-K, recent quarterly reports filed on Form 10-Q, as well as reports filed on Form 8-K. And with that, I’d like to turn the call over to Mark.

[Mark Dunkerley:]

Thank you, Ashlee and thank you, all for joining us today. As you can see from the press release we issued a short while ago, we recorded an adjusted net loss of $0.02 per share for the first quarter, the result was ahead of last year’s and the consensus estimates. Coming in the weakest quarter of the year, they represent a further strengthening of our business and an encouraging start to 2014. The main drivers of our business remain as before, continued good cost control. While on the revenue side, recovery in our domestic markets offset to some degree by the twin impacts of unfavorable exchange rates in the relative infancy of new international routes. These two impacts should become progressively less meaningful as the year goes on. The first quarter impact of Easter falling earlier last year than this was noticeable, but small. Therefore revenue is strong suggesting that what level was lost in the first quarter will come to us in the second. Ahead, other drivers of our results are also set to improve. So, caveating for the unforeseen and novel potential impacts of the price of fuel, exchange rates and competitive behavior, 2014 looks, continued to look like a year of better results. The highlight of the quarter was the start of operation by ‘Ohana by Hawaiian from Honolulu to Moloka'i and Lana'i where we enjoyed heartfelt warm receptions from these two communities. We also made or announced the number of adjustments to our network since our last call. Thrice weekly Honolulu-Beijing service started last week. We announced the suspension of services to Taipei and Fukuoka, as these two routes were underperforming. We used the aircraft time freed up from these changes to enable us to put our larger A330 into interim five times a week to better match supply with the very peaky nature of demand on this particular route. Lastly we increased our frequency to Brisbane by adding a fourth weekly flight. Since our last call, we’ve also announced changes to our domestic network. These include the bolstering of our [year around] LA-Maui service with the addition of a second daily flight during the peak summer. And to take advantage of improving Bay Area trends we’re bringing back daily San Jose, Honolulu, which we dropped at the beginning of the year. As ever my colleagues from end-to-end in our company have done the terrific job. Our operational pre-evidence in the industry remains intact, while the level of service that they delivered to our guests on board and on the ground is second to none among our competitors. Thanking them is a task of which I never tired. Peter is going to delve into our revenue performance next, while a little later Scott is going to analyze our cost. But before I hand the call over them, I’ve got to mention the extraordinary story involving us which unfolded over the weekend. As you will have seen that teenagers stowed away in the real world of one of our aircrafts flying between San Jose and Maui, beyond the basic facts already in the public demand we don’t intend to use (inaudible) further into this matter. It needs me only to express the sentiments shared throughout our company, but we are thankful to hear that the boy is well following this dangerous stethoscopy. Peter.

[Peter Ingram:]

Thanks Mark. Operating revenue for the first quarter was $525 million, a 6.9% increase year-over-year, while passenger revenue increased 6.4%. Loan factor in the quarter was 80%, a one percentage point decrease year-over-year, while yield increased by 0.7%. Combined this resulted an improvement in RASM and PRASM of 5% and 4.4% year-over-year respectively, which was at the better end of the revised expectations we’ve set at the beginning of March. I will go through the results by geography starting with North America, which provided 47% of our passenger revenue and posted another quarter of good results. PRASM was up 11.3% despite a 1.6 percentage point decrease in load factor continuing the better trends we’ve seen over the past three quarters. Industry capacity declined by 0.5% in this quarter and looking ahead it’s expected to be up a modest 2% in the second quarter and slightly more at 6% in the seasonal peak third quarter. Based on current bookings, we expect the trend of strong yield performance to continue into the second quarter, with demand strength sufficient to absorb the increase in supply. Our Neighbor Island routes, which accounted for 25% of passenger revenue this quarter, also continue to post good results. We recorded our fifth quarter in a row of year-over-year PRASM increases in this area of the business; specifically PRASM was up 8.5% on a 0.7 percentage point decrease on load factor. Mesa Go! operation, which has competed for Neighbor Island business since 2006, seized operations at the beginning of April. Though it reduced its operations to (inaudible) in recent periods, while our other main competitor has expended service on a couple of the Neighbor Island routes. The net result of these adjustments is a trimming of industry capacity to the Neighbor Island routes up 3% and 2% over each of the next two quarters respectively. Demand for local travel remains strong and we have the flexibility if appropriate to increase capacity. Also as Mark mentioned earlier, we successfully launched our ‘Ohana by Hawaiian turboprop operations, welcoming back Moloka’i and Lana’i to our network. ‘Ohana by Hawaiian represents less than 5% of our total Neighbor Island capacity. So the overall financial impact on our business will be small, but this service is important as it rounds out what is by far the most comprehensive network portfolio of any airline serving Hawaii. Our international routes contributed 28% to our passenger revenue and continue to be negatively impacted by a number of new routes still in their infancy. This resulted in a PRASM decrease of 7.1% on a 0.2 percentage point decrease in load factor. Foreign currency headwinds totaled approximately $9 million net of hedges. Absent currency effects, including the offsetting hedge benefits, PRASM would have been down approximately 1% year-over-year in this area of our business. Looking ahead, the year-over-year effects of currency impacts will ease absent a further deterioration of the yen and Australian dollar. Combined with the maturity of recently added services and the network adjustments Mark mentioned earlier, we expect PRASM declines to ease in the period ahead and turn positive as we progress throughout the year. Also I wanted to remind you of several commercial initiatives that we discussed at our investor day back in October. First, our cargo business continues to perform well with revenues up $2.8 million year-over-year or 20% this quarter. Future increases will be challenged by a slower growing network and our international network changes since Taipei was the solid contributor on the cargo side and our opportunity in Incheon, another strong source of cargo will be moderated by the reduction in frequencies. We remain encouraged however by our ability to build cargo operations into a more substantial contributor to our business over the past few years and continue to seek opportunities throughout the network. Second, our preferred seat revenue, which is recorded in the passenger revenue line is on track to exceed the goal we shared at investor day of doubling the run rate of preferred seat revenue by the end of 2014 relative to the $6.6 million we brought in for the 12 month period ending September 30. Third, in January, we successfully launched our new co-brand credit cards that is expected to improve our third party sales of Hawaiian miles in upcoming period. Since about two-thirds of this is recorded as deferred revenue on the balance sheet and amortizing into the income statement through passenger revenue over time, the EPS benefit of this tends to be lagged, but we are nonetheless thrilled to have a great new card product available to our loyalty program members and expect to build on this launch throughout the year. In summary, our domestic business North America and Neighbor Islands continues to post strong financial performance. Our international business is on an improving track, a process which we will be bolstered by our network changes and the continued maturing of our new routes. With that I will turn the call over to Scott to discuss our cost performance, balance sheet and provide an insight into the second quarter of 2014.

[Scott Topping:]

Thank you, Peter. As mentioned earlier and to recap the quarter, the company reported the adjusted net loss of $0.9 million or $0.02 per share. This compares with an adjusted net loss of $14.8 million or $0.29 per share for the same period last year. Our return on invested capital for the trailing 12 months ended the first quarter was 13.4% before tax and 8% on an after tax basis. First quarter total operating expenses excluding fuel increased $15.5 million, resulting in a 2.8 increase in CASM ex-fuel year-over-year. These results were $3 million better than the midpoint of the revised guidance range we issued at the beginning of March and to further break this down $2 million is rolling into the second quarter due to timing and $1 million represents permanent savings. As a reminder, our costs were elevated in the first quarter due to several projects in one-off items, together these items totaling approximately $9 million or 2.6 percentage points explain nearly all of the year-over-year increase in CASM ex-fuel this quarter. From liquidity standpoint, we ended the quarter with $479 million in unrestricted cash, cash equivalents and short term investments and $79 million available under our undrawn revolving credit facility. Our CapEx in the quarter was approximately $170 million which included $160 million related to payments for upcoming aircrafts and engine deliveries. Also during the quarter, we contributed $3 million to our other post retirement plan. Let me switch gear and move to our outlook for the second quarter and full year. Year-over-year ASMs are expected to be up 0.5 to up 2.5% in the second quarter and remain and up 1% to up 4% for the full year. Recall that our full year ASMs were revised downward in early March and reflected network changes mentioned earlier. By replacing long-haul flying with shorter flying to the West Coast, we’ve marginally decreased our still very good wide body utilization. Let me remind you of our fleet delivery schedule for 2014, where we’re effectively up just one incremental aircraft for the year. We took delivery of two A330s this quarter that essentially replace two aircraft that left our fleet in late 2013. In the second quarter, we will take delivery of two A330s and retire one 767. There are no deliveries or retirements in the third quarter and finally in the fourth quarter, we take delivery of one A330 and retire one 767. In terms of financing, we have pre-funded all of the remaining A330s this year to EETCs which were issued in May of last year. The A330 remains an asset in high demand among the different sources of capital, giving us an attractive range of options as we look to fund our last three A330s next year. Turning to the topline for the second quarter. Our revenues are expected to increase year-over-year with RASM expected to increase between 4.5% and 7.5% and PRASM expected to increase between 3% and 6%. On the cost side, we expect CASM ex-fuel to be up 4% to up 7% in the second quarter, as we’ve mentioned our costs would be inflated in the first half due to a number of one off items in projects before receiving in the second half of the year. Those one off items include startup costs for 'Ohana by Hawaiian our new turboprop operations, maintenance related costs due to cabin modifications for our extra comfort economy products, 717 paying costs and additional labor costs related to F.A.R. 117 time and duty rules for pilots. Together these one off items total approximately $9 million or 2.5 percentage points of the year-over-year CASM ex-fuel increase in the second quarter. A lot of this one off activity comes to an end this summer leading to much better cost performance in the second half and to such a degree that we are not improving our full year cost guidance. For the full year we have now expect our CASM ex-fuel to be up 2% to up 5%. We continue to expect our 2014 full year effective tax rate to be in the 38% to 40% range and we do not expect to pay material cash taxes until 2016. Sticking with our normal practice we are not going to give fuel price guidance at this time, but we expect our fuel consumption to be flat to up 2% year-over-year for the second quarter. We continue to expect our full year CapEx to be in the range of $465 million to $475 million. As mentioned, we have financings in place for all our A330 deliveries in 2014, totaling approximately $370 million. That's the end of our prepared remarks. With that, I'll turn the call back to Ashlee.

[Ashlee Kishimoto:]

Thank you, Mark, Peter and Scott. 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. As a reminder, please limit yourself to one question and if needed one follow up question. Operator, please open the line up for questions.

[Operator:]

Thank you. Ladies and gentlemen, we'll now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of John Godyn with Morgan Stanley. Please proceed with your question.

[John Godyn:]

Hey, thanks for taking my questions. I wanted to follow up a little bit about the cost guidance here. You mentioned that you good guys -- a good guy in the first quarter, you mentioned some favorable trends in the second quarter, we saw the reduction of full year guidance. But the range hasn't narrowed for full year guidance even though we now have what seems like more confidence on cost and two quarters of visibility. It seems like when we put all this together, you should be on the favorable end of the cost guidance for the full year, even though the range hasn't narrowed. But am I interpreting kind of what I'm hearing the right way?

[Mark Dunkerley:]

Yes. John I think, it's still moving around a little bit. We are very confident with the guidance that we have given ticking it down slightly. We have lowered the full year guidance, if you go back and look at what we said in early March by 0.5%, so we have trend that and that to reflect in our increased confidence in being able to get there.

[John Godyn:]

I guess, what I am getting at is just what are the scenarios that takes you to the top end of the unfavorable end of cost guidance, let’s put it that way, given all of the favorable trends we have seen and the increase confidence that we now have?

[Mark Dunkerley:]

You know, I think John in the business [cycles] there are some maintenance related issues that whose timing is always uncertain. We have some engines that we expense when they need to be maintained and the amount of time that they operate before being maintained is variable. We have a plan and an assumption there but we often find the bits of maintenance move quite a bit and then the business our size a little bit of maintenance moving around can make. That’s items number one. Item number two is, for the remainder of the year we have as we always do some sort of projects in mind initiatives that we want to commence just the cadence of getting to them and getting them started and when the expenses related to those projects can be variable and that’s the reason why we continue to give a three point range, clearly as we get closer towards the end of the year, our confidence grows and that range will come down. So when you see a shift in the range down by half a point but not a narrowing of the range essentially what we are saying is there are some expenses that we have previously foreseen going throughout the year which we now believe we are going to be absorbing, that allows the shift but we still have the variability out there which explains the [two points though].

[John Godyn:]

Okay, thanks. And as we think about the derisking story here as the percentage of capacity allocated to new routes continues to fall and the margin bump that comes from that, it seems increasingly likely that the stock sort of stays up at these levels or perhaps even moves higher, I was just hoping that you could speak to the confer as well as some of the share dilution around that and thoughts around that as you guys, as the management team sort of tackles this issue.

[Mark Dunkerley:]

Yes. John we have certainly been focused on the convertible notes kind of in the context of our balance sheet and liquidity. I think the basic question for us to answer and it’s something we are working on is what are the merits of purchasing some of the notes in the open market versus our other potential uses of cash and so that’s the context that we will look at that debt versus any other debt if we have opportunities to manage that.

[John Godyn:]

Okay, thanks.

[Operator:]

Thank you. Our next question comes from the line of Hunter Keay with Wolfe Research. Please proceed with your question.

[Hunter Keay:]

Hi everybody, thank you very much. So I guess I am kind of curious what your plans are going to be for the A350 if Airbus walks away from the Dash 800 model? I guess it’s a multi part question. Has Airbus asked you to consider the 900 and would you consider that? And if not would you be comfortable walking away from the A350 order altogether if you feel like the 900 is not a variant that could serve your needs?

[Mark Dunkerley:]

You know, Hunter, there is sort of a lot of chit chatting around about the A350 800 at the moment, it’s still a live program over the Airbus. We are as we’ve always been in conversations with Airbus about future delivery streams including the A321 and the A350 and beyond some saying that we are having discussions with Airbus, we’re just not in a position to talk about that right now.

[Hunter Keay:]

Okay. That’s fine Mark. When you bought the plane what was your envision flying, is it something that you’re going to flying to Asia or just going to be East Coast U.S. and where was the original plan for that plane?

[Mark Dunkerley:]

The airplane has two attributes which would be of use to us; potentially one is that it is slightly larger than the A330 200 and therefore represents a step change in capacity for routes that operate for example a single daily service, the next increment of capacity if you have to fly with the widebody would be a 100% increase in capacity on the extra days if we double up frequencies. If you have a slightly larger airplane you can actually increase capacity while keeping a lot of your costs, goal that we’ve fixed. So it has that attribute (inaudible) and it has ranged to allow us to exploit different [Asia] than we’d be able to do with the A330 200.

[Hunter Keay:]

Okay. That’s helpful, Mark thanks. And on sort of the new service to LA-Maui and San Jose-Honolulu, can you help us think about the thought process that went in to adding service back to those? They both already have two competitors on it who are pricing that route pretty aggressively from where I can tell and I know it was a function of the routes where those planes are originally allocated not really working, but why should we not assume that those routes are not just least worth options than the routes where those planes are previously deployed as opposed to good options?

[Peter Ingram:]

Hunter this is Peter. We think both of the routes are good options, we have blown LA-Maui seasonally, it’s actually a very significant O&D in terms of the overall market size ranks, and the top four or five I think of all the O&D between the U.S. Mainland and Hawaii. LA is a place where we’ve got a strong loyalty base, we’ve been carrying passengers on our Honolulu flight for a long time and based on the strength of that seasonal route has done, we’ve been looking for an opportunity to add that route year round and in fact with LA-Maui we're going to double that up seasonally in the peak summer period. Jose is a case where we have also seen strong demand throughout the bay area, we’ve got a good position at all three of the airports with San Jose, Oakland and San Francisco and we have seen improving revenue trends in that market and really saw an opportunity here to solidify our service by having the Honolulu as well as the Maui.

[Hunter Keay:]

Thanks Peter.

[Operator:]

Thank you. Our next question comes from the line of Mike Linenberg with Deutsche Bank. Please proceed with your question.

[Mike Linenberg:]

Hey, good afternoon and good morning everyone. I guess just a couple of…

[Mark Dunkerley:]

Hey, Mike.

[Mike Linenberg:]

Hey. Scott you’d mentioned about that Hawaiian was not expected to be a cash tax payer I think until that 2016, how much of that -- is that just a function of past NOLs or some of that just reflect the investment that you've made in the business. And so you're benefiting from some of the timing differences there. What's driving that?

[Mark Dunkerley:]

It is mainly the NOLs, Mike. That’s the lion share of it.

[Mike Linenberg:]

Okay, very good. And then just a question and maybe this is for Mark or Peter. We look at how the Honolulu Fukuoka situation played out and look we applied you for making the right decision. We've taken the aircraft out of that market, I mean it’s just it was underperforming and there is obviously market sales where you can generate better returns. I look at a market like Honolulu Brisbane and my sense is that that's not a big market and maybe it's sort of Honolulu Fukuoka or [Osaka]. And we see even now Qantas Jetstar, they’ve announced that they’re going to go into that market. Any thoughts on just that market size and maybe its ability to support two carriers and maybe point of sales strength. Is more of the flow coming from Hawaii down or vice versa or can you get flow traffic over Honolulu from the Mainland U.S. I mean is that, is there potential risk that Honolulu Brisbane maybe becomes another Honolulu Fukuoka. What, any thoughts on that?

[Mark Dunkerley:]

Well, I don't think at any we're concerned about that. Brisbane’s been a very successful market for us. We've been very sort of surprised and impressed with the size of the market and its robustness. So, we’ve been -- if we start from the position of being very, very happy on that route. Secondly, we think our competitive strength in the marketplace is unmatched. We've got the right products, we've got a good cost base and we have many more years of experience in the distribution channels in Australia than we have in some of these other countries that are newly launched for us. So, for a combination of reasons, we think that Brisbane will be quite different. Of course anytime you are in the market and capacity increases are going to be likely to be impact, but the rough and tumble of our game, but the kind of the landscape in Brisbane is very different than we had in Fukuoka.

[Peter Ingram:]

And Mike I’d just add to that that’s obviously the first time we will have competed with Jetstar and I think there are different strengths and weaknesses each of us bring and we are pretty comfortable with our competitive situation vis-à-vis Jetstar.

[Mike Linenberg:]

Okay, great. Thanks. And just if I can squeeze in one last one, as I recall, the American agreement with their pilots, I think the initial agreement that they signed back before the merger there was the carve out for Alaska, Hawaii and then code sharing with an East Coast carrier. And then I think it was revised and you can correct me if I am wrong that the East Coast, I think they lost the option to do as much code sharing with an East Coast carrier, but I think it still preserved an opportunity to do a lot more code sharing with an Alaskan and a Hawaiian carrier. Is there anything on that front with respect to you and American, is there anything that we should anticipate, is it something we should stay tuned on or is it something that’s more for the back burner, any thoughts on that?

[Mark Dunkerley:]

Well, what I would say is first of all, we don’t entirely have to speak on the inter proceedings of that pilot contract. We have a good commercial relationship with American Airlines, obviously there have been some massive changes over American, we very much hope to be able to continue that relationship. Unsurprisingly they will have some rather [regular] general items on their plate at the moment perhaps some been us, but we would very much hope to continue the cooperation that we’ve had and that there is interest in from both carriers to expand that and of course in the interest of our shareholders we would be able to give some thoughts.

[Mike Linenberg:]

Great. Thanks Mark. Appreciate it.

[Mark Dunkerley:]

You bet.

[Operator:]

Thank you. Our next question comes from the line of Helane Becker with Cowen and Company. Please proceed with your question.

[Helane Becker:]

Thanks very much. Hi guys, thanks for the time. I just have a couple of questions here. Just in the press release where you specifically talked about the $34 million outstanding under the floating rate notes for the two 767s. So, are those planes slated to be returned or retired at some point and what happens to those notes?

[Mark Dunkerley:]

Yes. They are to be returned. The notes will be -- the plan we just need to pay those off at the maturity.

[Scott Topping:]

Helane those are aircraft we own, so they are in our fleet plan for a while. We assume they are going to be with us in the fleet through the end of the decade, but obviously they are an owned asset and so that is up to us to change that plan overtime.

[Helane Becker:]

Got you, okay. And then my other question is with respect to commissions and other selling expenses they were down 7.3% or a couple of million dollars in the quarter. Is that, I mean why is that? Is that because you are not doing as much for Japan or -- and is that a new run rate that we should think about?

[Mark Dunkerley:]

We had some favorability in Australia and then in the other piece of that is, it requires….

[Scott Topping:]

Helane there is a couple of things there. One, the commissions we’ve got a couple of different elements to commissions in some of different countries we serve and there is some incentive commissions that take a serving quarterly timing basis that can give us some favorability. So that will move us around a little bit. The frequent flier issue has to do with the valuation of the frequent flier liability on the balance sheet, a lot of which is related to the price of fuel. And so that gives you a little wiggle in that line sometimes, it’s not necessarily a trend you can count on. We actually like some of the commissions cost to go up, which will be a sign that our revenue is improving.

[Helane Becker:]

Right. Okay. And then just on other revenue, I am thinking that that is where the co-branded revenue comes in. Can you say how much of that increase is with the credit card versus ancillaries?

[Scott Topping:]

There is a couple of things in there. There was a portion of the revenue from the co-branded credit card goes in there. We actually under our accounting policies we end up bifurcating that between other revenue that we recognized immediately and then other piece that we defer and recognize in passenger revenue over after 22 months. You’ve also got cargo in there, which I pointed out as one of the elements of improvement and you’ve got some of the other travel products things like vacation packages and rental cars and hotels. So, there is a number of different pieces. The credit card is certainly a piece of the improving story there.

[Helane Becker:]

Okay. But you can’t say how much is the credit card specifically versus to other stuff?

[Scott Topping:]

We haven’t split it out in that detail, we don’t go into a line item detail through that typically.

[Helane Becker:]

Okay. And then my last question if I can. If I saw that Delta announced they are going to fly from JFK to Honolulu, it looks like just in December for the holiday using a 767, so little letter A, did you guys see that and B what you think about that? Thanks.

[Mark Dunkerley:]

Yes. We did see it and we wait to see our highly competitive dynamic changes, I mean (inaudible) as you rightly point out any couple of weeks in December and we’ll see if they determine to make it permanent or not. Again there are -- the market flying from the East Coast to Hawaii is huge. I mean it is second only the West Coast markets of Hawaii and even behind the East Coast is Japan, just to give you a sense of the context of the size. There are many, many, many ways getting to Hawaii from the East Coast typically involving connections in between. So, it’s hard to look at the non-stop capacity in that one city pair without taking a broader view as to the amount of connecting capacity to Hawaii in general. So, by itself it’s not particularly meaningful, it really does depend on whether airlines are going to be more or less liberal in their inventory on their segment in the low 48 to get people to gateways to fly to Hawaii.

[Helane Becker:]

Got you. Okay, great. Thanks very much for your help.

[Mark Dunkerley:]

You bet.

[Operator:]

Thank you. Our next question comes from the line of Joe DeNardi with Stifel. Please proceed with your question.

[Joe DeNardi:]

Yes, thanks. A question for Mark or Peter on the Taipei. It seems like you pulled the plug there a little bit quicker, more quickly than you normally would, less than a year old. So, can you just help me understand, I guess what drove the urgency, did you want that capacity elsewhere in the network or should we think about this as you guys kind of changing your threshold for how long you’re going to give a route to ramp up?

[Mark Dunkerley:]

Yes. Joe, I don’t think it’s either one of those things in the sense that -- let me take those in reverse order. I mean, I think we’re always looking at the routes in determining amongst the underperformers, whether there is a pathway to success. And so long when if there is one that we believe and that we think it’s worth investing in, we will keep up writing and like any investments some of them work out, and some of them perhaps won’t. In the case of Taipei, the issue was pretty [stuck]. In every other market that we had gone into shortly following the expression of that country, so U.S. visa waiver program, we’ve seen something in the order of a 51% to 100% increase in the amount of O&D traffic from that country. We gave that to Korea, which got visa waiver access in the middle of the global financial crises. Year-over-year, we saw a 100% increase in visitors of Hawaii following that. And it was against those sorts of expectations that we launched service to Taipei after they became eligible for U.S. visa waiver. In fact it ended [stimulating] the market to about 25% which was far lower than we anticipated, and made the service infeasible. At the same time, I think one of the lessons learned was that the level of recognition of Hawaii as a tourism destination in Taiwan was less than in other Asian markets, and that is something we’ll be more watchful of before we [go and get], I think Taiwan will eventually grow to be the significant market; we just didn’t feel that the costs of flying to Taiwan in the interim justify the returns we get away, so we made the straight forward business decision.

[Joe DeNardi:]

Okay. And then another question A350, I know there is a lot of uncertainty there with what Airbus is going to do also alluded to, but what gives you the confidence that that type of investment is going to pay off? because you look at 2016, it looks like the cash flow is going to improve, but based on the delivery point you guys have right now is going to turnaround pretty quickly in 2017. So can you just help me understand what gives you the confidence that you need to make that big of a bet on growth?

[Mark Dunkerley:]

Well, if you look at a couple of things, one is it’s a much more fuel efficient aircraft and the aircraft we currently have in our fleets. And we believe the returns from operating essentially, we justify the capital expenses of getting into those aircraft that is an experience that we’ve seen borne out in terms of re-fleeting that we’ve done so far. And so that clearly gives us some confidence going forward.

[Joe DeNardi:]

Okay, thanks.

[Operator:]

Thank you. Our next question comes from the line of Steve O’Hara with Sidoti & Company. Please proceed with your question.

[Steve O’Hara:]

Hi, good morning.

[Mark Dunkerley:]

Hey Steve.

[Steve O’Hara:]

I was just curious in terms of the demand environment and maybe what you are seeing that where the yen is now versus where it was and just have you seen any -- I mean it sounds like demand from your comments is still pretty good from Japan and just maybe you could add a little more color there?

[Mark Dunkerley:]

Sure yes, demand still pretty good from Japan. There is a lot of moving parts in our numbers that makes the exact parsing of them out a little bit difficult The kind of influences we have in there at the moment are as follows

[Steve O’Hara:]

Okay. And then, I was just curious in terms of the issues with the Taipei, whose responsibility is to kind of spread the word in terms of the Hawaii vacation and were there any missteps in that area? And then finally what other areas are being seeded right now that you think might be good potential opportunities down the road?

[Mark Dunkerley:]

Yes, I mean frankly I think we’ve all got responsibility, all of us in the Hawaii chosen community for not having prepared that groundwork well enough. And I think it’s going to be pretty open and reflective about those things in order to learn from them and to repeat those issues going forward. It was what was disappointing to us and something we absolutely want to rectify very important going forward. Going forward, what we’re doing is we’re sort of targeting other countries, of course China is the huge new development for us. And we’re going to be reorienting some of our promotional activity to be less directly focused on why to flight Hawaiian Airlines and more focused on why Hawaii is the destination that we want to visit. We for sure are going to be encouraging community partners here in Hawaii to redirect their resources the way that represents the potential of the future rather than history, the past. And that’s involved some discussion and negotiation here in the states.

[Steve O’Hara:]

Okay. All right, thank you.

[Operator:]

Thank you. Our next question comes from the line of Glenn Engel with Bank of America. Please proceed with your question.

[Glenn Engel:]

Just on difference in RASM and PRASM in the first quarter, RASM was about 0.5 better than PRASM, in the second quarter you are saying it’s going to be 1.5 better that seemed as odd with your comments about cargo offering less of the contribution?

[Peter Ingram:]

Yes. I think some of what you are going to see there in the second quarter Glenn is a continued building of the momentum with the new credit card program and comparing it against a period in the prior year when we were winding down the marketing of the credit card with our previous partner. So, this year we’re moving into a period of strength and growth and last year we were in a bit of slowdown period in terms of the credit card activity.

[Glenn Engel:]

A question on margins; a few years ago, I would have pointed to the international is being the highest margins in the system; is there much difference in the margins among the three regions you have now and who is the leader and who is the laggard?

[Scott Topping:]

I’d say the margins are roughly comparable, what you have in international is a much wider distribution of margins between the good and the developing routes. That’s to be expected and what we’re signaling here is not underperformance but signaling of the message that we’ve been sending that we have very consistently which is when you launch a bunch of new routes, it takes a while for them to mature. So just hoping from long term, the international probably has -- there is long term prospects, we got to mature some routes and for the time being I think things are roughly balanced.

[Glenn Engel:]

And final question I have is on fleet for 2015, I believe there is three A330s coming in. Is there still plan to be an equal number of leaving or will you be a net addition in 2015 as well?

[Scott Topping:]

We go up a little bit in ‘15 Glenn, we've got some retirements coming in ‘16 and we're still working through the specifics of how we're going manage the capacity over that two year period.

[Glenn Engel:]

Okay. So 2015 more coming in than coming out. Okay, thanks.

[Mark Dunkerley:]

Yes, thanks.

[Operator:]

Thank you. Our next question comes from the line of [Kevin Crecy] with Sky Alland Research. Please proceed with your question.

[Mark Dunkerley:]

Hey Kevin. Kevin?

[Unidentified Analyst:]

Yes, sorry. Can you guys hear me now?

[Mark Dunkerley:]

Yes.

[Unidentified Analyst:]

Sorry about that. Thanks for taking the call. On cargo, can you remind us the source, you're sourcing that freight primarily from [forwarders] do you have any folks that you think that source that freight yourself?

[Mark Dunkerley:]

It is primarily through freight forwarders.

[Unidentified Analyst:]

Okay. And can you talk again, I’ve asked you in the past I believe on hotel sales and I know there is some international markets, there is some packages and so forth that make it maybe trickier. Can you talk about where you are for selling other things other than maybe just in a broader context, things other than the flight and cargo as part of your mix? Thanks.

[Mark Dunkerley:]

Yes. We do have the vacation package business and we partner with Orbitz on that for fulfillment. A lot of that is based on our domestic network and that is primarily a result of that being through our direct channels and being able to source that through the website. So that business is growing and doing well, we’ve got hotels and rental cars and ship insurance that are smaller than overall size than that vacation package piece, but still good contributors. Obviously preferred seats, which flows up into passenger revenue has been a big growth area for us and a good incremental source of revenue. We’ve made a number of changes over the past six to eight months to really build on that and have extra comfort, our extra comfort product coming online towards the -- into the third quarter, which will be a positive for that. And I would just say one of the catalysts we are working on and we talked about again at Investor Day was the investment we are making in our website, which is going to make us that much better in terms of being able to market and promote and present these opportunities to our guests. So, we see a lot of opportunity here and really would like to have a good pipeline of other new products to come forward as we get the new website online.

[Unidentified Analyst:]

Thanks. Do you see very different buying behavior country-by-country in terms of your kind of preferred seating; you know better class of seating. Is that something you see that varies by country or is it not so much?

[Mark Dunkerley:]

I don’t know so much that it is different buying behavior. We right now performed better on those products in the North America geography, but I don’t think that is so much a case of demand as it is. We’ve got a much greater proportion of direct sales and electronic check in. And so, as we are able to present those offers more effectively to our international guests, we are seeing more uptake on them, but it’s really for us to be able to figure out the best way to present them when people aren’t coming to us through exactly the same channels we get domestically.

[Unidentified Analyst:]

Understood, thank you.

[Operator:]

Thank you. Our next question comes from the line of [Michael Burgen] with CRT Capital Group. Please proceed with your question.

[Unidentified Analyst:]

Hi, everybody.

[Mark Dunkerley:]

Hey Mike.

[Unidentified Analyst:]

I want to get some idea of how large a market do you think ultimately Mainland China will be? You just started Beijing services recently and also how dependent upon is that on bilateral and the ability to get routes and kind of just what the process is?

[Mark Dunkerley:]

The market is of such massive potential, it almost defies our ability to calculate it. It is a market which if you take by comparison the number, there are roughly today I believe something in the order of 18 daily flights from Japan to Honolulu. That is on a obviously wealthy country with about 150 million in habitants. There are already about 150 million all China’s over 1 billion citizens who have roughly the same level of wealth as the Japanese average. So that alone without even sort of stretching gets you from a place where today there are 9 flights a week to an environment where you could foresee 20 or more flights a day into sort of Hawaii. So, the real issue is that it is a developing market in the sense that foreign travel, patterns of travel, the distribution system in China are not as well-worn and solid as they are in other markets. But as that process come at jolts, there is essentially almost no limit to the amount of demand that China could spur for travel to Hawaii.

[Unidentified Analyst:]

And the bilaterals, what is that situation?

[Mark Dunkerley:]

Yes. The bilaterals at the moment would represent the limitation and as much as I think there is something in the order of about 14 unused frequencies, something in that order of magnitude. So, there is room for as much growth in the immediate future, as we could potentially foresee but over time it would be important just to see those limitations relaxed.

[Unidentified Analyst:]

Thanks very much.

[Mark Dunkerley:]

You bet.

[Operator:]

Thank you. Ladies and gentlemen, there are no further questions at this time. I’d like to turn the floor back over to Mark Dunkerley for closing comments.

[Mark Dunkerley:]

Okay thank you operator. Thanks to everybody again for joining us today. We’re starting the year as we’d expected that’s with the continuation of improving trends throughout the business. We appreciate your continued interest and support as we work toward further improvement throughout the remainder of 2014. So, mahalo and thank you and good bye.

[Operator:]

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