Hawaiian Holdings, Inc.
Q3 2014 Earnings Call Transcript

Published: 22 Oct 2014

[Operator:]

Greetings, and welcome to the Hawaiian Holdings Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) I’d now like to turn the conference over to your host, Ashlee Kishimoto, Senior Director of IR. Please go ahead.

[Ashlee Kishimoto:]

Thank you, Operator. Welcome everyone and thank you for joining us today to discuss Hawaiian Holdings' financial results for the third 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 revenue performance and Scott will follow with a discussion on costs, the balance sheet and guidance. We will then open the call up for questions, and then Mark will make some 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 statements, 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. With that, I’d like to turn the call over to Mark.

[Mark Dunkerley:]

Thank you, Ashlee. Aloha everyone and thank you for joining us. For the third quarter, we posted a record breaking adjusted net income of $0.79 a share, a $0.10 increase year-over-year. This was in line with guidance and consensus and represents another good quarter of results. These good results have come from enjoying strong demand in each of our geographies, the fruits of making network changes, the maturing of developing routes, growing our ancillary revenue, attractive fuel prices and ardent cost control. Assuming these conditions remain in place and allowing for the uncertainties of competitive behavior, we should see positive trends continue in the fourth quarter. Let me fill you in on some of the more significant goings-on since we last spoke. In early August, the state of Hawaii found itself in the path of hurricanes Iselle and Julio, with businesses and government agencies across the state suspending activities. I’m pleased to report that throughout we operated largely without interruption and did so safely, thanks to the hard work and professionalism of my wonderful colleagues. In total, we canceled just 30 neighbor island flights and did not sustain damage to any of our aircraft or equipment due to the inclement weather. While nimble operational decision making limited the impact on our schedule, our financial results did not escape unscathed. As a result of the two storms, passenger cancellations cancellation and disruptions to the normal pace of bookings cost us approximately $5 million in the third quarter. This past weekend another close shave with Hurricane Ana will likely have a similar impact on our fourth quarter financial results. Building on the success of our services from all three Bay Area airports, we announced new nonstop service from San Francisco to Maui beginning in November. This is one of the largest nonstop only markets between the Western United States and Hawaii that we have not previously served. By year’s end, we will be offering six daily frequencies between the Bay Area and Hawaii, with nonstop flights to both Honolulu and Maui from San Francisco, Oakland and San Jose. On the international front, Delta’s virtual abandonment of its Haneda/Seattle service this winter has led us, along with American Airlines, to petition DOT to reopen the route proceeding. The last day for replies is in a week’s time and we will then see how DOT rules on this matter. Lastly, I should mention that in a few days’ time Hawaiian Airlines celebrates its 85th Anniversary. We’ve come a long way since our humble beginnings providing passenger service among the Hawaiian Islands. 85 years on, our fleet consists of 50 aircrafts, many white bodies and we operate 240 daily flights. We are the economic, social and cultural link between the Islands of Hawaii. And with service to 11 U.S gateways, Japan, South Korea, China, Australia, New Zealand, American Samoa and Tahiti, we are the backbone of Hawaii’s tourism economy. I’m extremely proud of the hard work of our 5,000 plus employees and of the reputation for quality that their hard work has won us. With that, over to Peter.

[Peter Ingram:]

Thanks Mark. Operating revenue for the third quarter grew to $639 million, a 6.7% increase year-over-year, with passenger revenue increasing 4.4%. Load factor improved 0.8 percentage points year-over-year to 84% while yield improved 1.3%. Combining these results, PRASM increased 2.2% year over year while the faster growing category of other revenue contributed to raising overall RASM by 4.4%. These results were right in line with guidance that we provided at the beginning of the quarter. Continuing with prior practice, I will go over the results by region, starting with North America to Hawaii which counted for 51% of our passenger revenue in the quarter. Our North America passenger revenue increased 13.3% with PRASM declining 2.1% on a 2.9 percentage point decrease in load factor relative to a strong third quarter in 2013. These results reflect the negative impact of hurricanes Iselle and Julio which totaled approximately 0.5 percentage point of the year over year PRASM change. The results also reflect capacity increases on our part with a combination of more peak season flying and some year round scheduled additions in Los Angeles and the Bay Area following the network adjustments we announced in the first half of the year. Demand remains strong as we move into the fall and holiday season and we’re pleased that the capacity we shifted has been profitably absorbed. Industry capacity on our North America routes to Hawaii was up 9% this quarter and we expect it to grow by approximately 11% in the fourth quarter. Our neighbor island routes generated 23% of passenger revenue this period and continue to provide a steady contribution to the network. Like North America, PRASM in this geography declined year over year, in this case by 1.9% on a 3.7 percentage point decline in load factor. Absent the storm impact that Mark mentioned, PRASM would have been essentially flat, again compared to a good prior year result. Going forward we continue to see strong and stable demand and we expect to see the continuation of good results. International routes accounted for 26% of our passenger revenue this period, with PRASM up 11.5% on a 5.9 percentage point increase in load factor, reflecting a continuation of the improving trends we spoke about last quarter. The improvements reflect a full quarter’s impact of our networks adjustments and the maturing of many of our relatively new international routes. The recent strengthening of the U.S dollar did not materially affect our results this quarter as much of the movement was late in the period. Of course it could have more of an impact on our results in upcoming quarters if the U.S dollar remains elevated against foreign currencies in general, and the Yen and Aussie dollar in particular. Despite the strong dollar and absent any significant movement, we continue to expect year-over-year PRASM increases in our international business. Before concluding the revenue discussion, I'd’ like to highlight a couple of other bright spots in the quarter which helped to boost our revenue performance. On August 1 we introduce extra comfort seats on all of our A330s which expanded the number of extra leg room seats in the main cabin of the A330 fleet from 24 to 40 per aircraft without changing the overall aircraft seat count. We are selling extra comfort at a higher price point than the previous preferred seat offering, which reflects some additional product feature that create a very compelling customer value preposition. As we’ve mentioned on previous calls, we hit the $1 million a month mark for preferred seat sales in March. And we are pleased to announce that we moved beyond the $2 million per month threshold in both August and September with the launch of extra comfort. These results exceed our previous expectation and provide a meaningful tailwind to revenue performance going forward. We also continued to benefit this quarter from the successful launch of our new Hawaii miles credit card at the beginning of the year, which contributed to the growth in the other revenue line of our income statement. And our cargo team posted another excellent quarter, which is consistent with the improving trends we’ve seen over the past few years now. Cargo revenue increased 21% year over year to $19.9 million. Notably, this marks nine consecutive quarters with a 20% or higher increase in cargo revenue year over year. As we’ve mentioned before, we see continued expansion cargo revenue, albeit at a more moderate rate than we’ve had in the past couple of years as our fleet growth and network – our fleet growth tapers and network expansion slows down. Obviously core passenger revenue performance will continue to dominate our revenue picture. But the success of these other revenue items illustrates the accretive opportunities we see to generate earnings growth from non-traditional sources. We are keenly focused on continuing to exploit this opportunities and expand our product list in the periods ahead. And with that, let me turn the call over to Scott.

[Scott Topping:]

Okay, thank you, Peter. As mentioned earlier and to recap the quarter, we reported adjusted net income of $49.5 million or $0.79 per share, a good improvement compared to last year adjusted net income of $36.8 million or $0.69 per share. Our earnings per share this quarter reflected the dilution of 8.3 million shares under the convertible notes and related warrants due in March of 2016. Our return on invested capital for the trailing 12 months ended September 30 was 14.5% on a pre-tax basis and 8.7% on an after tax basis. Third quarter total operating expenses, excluding fuel, increased $7.5 million, resulting in a 0.3% increase in CASM ex-fuel year-over-year. This was better than the guidance issued at the beginning of the quarter primarily due to lower expected benefit cost and project cost savings on the other expense line. Our non-operating expenses increased $40.8 million year over year, primarily due to the losses on our fuel hedging line this quarter. As a reminder, our fuel hedges did not qualify for effective hedge accounting treatment and any mark-to-market changes, realized gains or losses and premium paid, all run through the non-operating expense line, which totaled $28 million this quarter. Here is the break down. Cash paid for realized losses on settlements from premiums totaled $5 million, and the unrealized losses totaled $23 million on our open hedging positions that go out through the end of next year. Turning to the balance sheet, we ended the quarter with %582 million in unrestricted cash, cash equivalents and short term investments. We’ve also been busy documenting and preparing to close a new revolving credit facility that is backed by commitments of $175 million. This will replace the former facility that was terminated last month. We expect to close the facility in the next week or two. Our CapEx in the quarter was approximately $34 million, which included $30 million related to payments for aircraft and aircraft related items, including upcoming deliveries. During the quarter, we accelerated and completed our minimum required pension contributions for the 2014 plan year, contributing $2 million. A final item affecting the balance sheet was the pretax payment of debt on the outstanding A330 in early October using cash on hand. Let me switch gears and move to the outlook for the fourth quarter. Year-over-year ASMs are expected to be up 1% to up 3% in the quarter. Regarding movements in our fleet, we took delivery of one A330 early this month and plan to retire one 767, ending the year up three wide body aircraft net with five A330 deliveries and two 767 retirement. In terms of financing, the October A330 delivery was the finally aircraft to be financed by our prefunded EETC. Also we’ve executed term sheets for the sale and lease backs of our first two A330 deliveries in 2015 and we are working on plans to fund the final A330 delivery scheduled to join our fleet in the fourth quarter of 2015. Turning to the top line, revenue is expected to increase year-over-year in the fourth quarter, with RASM of 4.5% to up to 7.5%. This guidance reflects our current assessment of the impact of Hurricane Ana this past weekend. We continue to expect our full year cost to be up 3% to up 5 percentage points. Our costs will be elevated in the fourth quarter and we expect CASM ex-fuel up 5.5% to up 8.5% year over year. Let me take a moment to discuss our fourth quarter costs, classifying the discussion into two categories. The first thing, onetime cost and the second category relates to a shift in our underlying cost structure. Together these are driving our unit costs, excluding fuel higher year over year. The one-time items total I.5 percentage points of the year over year increase and include maintenance costs related to the extra comfort product and infrequent cycle driven check on our 717 fleet. The shift in the underlying cost structure, accounts for about 2.5 percentage points of the year over year increase. The divers include an increase in incentive compensation and profit sharing, operating costs for Ohana by Hawaiian turboprop service launched this year, which fall on the other expense line, wage costs associated with additional pilots hired as the result of the new pilot rest rules, and lastly a change in our Japanese commission structure, which increases costs but will be associated with more than an offsetting revenue increase. Together, these items totaled 4 percentage points of the expected year-over-year increase in CASM ex-fuel cost. 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 to our normal practice, we are not going to give fuel price guidance at this time, but we expect our fuel consumption to be up 1% to up3% year over year for the fourth quarter. At current prices, we’re expecting to see a meaningful year over year decrease in our aircraft fuel cost for the fourth quarter, including realized losses for our hedges, premiums and increased consumption. Given the large drop in fuel prices, I’d like to review some detail about our hedging program that changed at the beginning of this year. The new hedging strategy provides a low cost hedge with a tenure of 12 months and uses swaps and out-of-the money puts to limit potential losses. The program is supported by counterparty balance sheets conserving cash as prices fall. In fact, we’ve had no collateral postings during the recent sell off due to this feature. Compared to our program in place last year, we will save $13 million in premium costs. For the full year we expect the program cost savings to offset the majority of the realized loses depending of course on how the oil market settles at the end of the quarter. So despite some hedging losses which are common with the massive decline in fuel prices, we remain satisfied with our overall strategy which has worked as designed. Lastly, we expect our full year CapEx to be slightly lower now and in the range of $450 million to $455 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 now.

[Operator:]

(Operator Instructions). Our first question comes from John Godyn from Morgan Stanley.

[John Godyn:]

Thank you for taking my question. First of all, I just wanted to follow up on last quarter’s commentary about a movement towards capital returns going forward. Obviously we didn’t get a high profile announcement today, but I’m just curios if there’s any update on the thought process as well as any balance sheet metrics, liquidity levels, leverage ratios, any way to think about the balance sheet as we just think about modeling this movement towards capital returns going forward.

[Mark Dunkerley:]

John, thanks for the question. I’m going to reserve a lot of that for Investor Day on December 3rd. But we are in the end stages of this project and what we plan to address would be all the things that you mentioned. We are going to talk about our liquidity targets. We are going to talk about what we think our optimal capital structure should look like and how we are going to get there. And last but not least, what are our capital allocation options. I think we could broadly say that our path on this won’t be too terribly different than what others have done.

[John Godyn:]

Okay. Fair enough and we’ll listen for that at the investor day. Also I appreciate the history of not giving guidance on fuel for the upcoming quarter. We do have a little bit more of a mismatch here than we normally do in the sense that we have RASM guidance from you. At least versus my numbers it came in quite strong. We also know that the FX and fuel markets have been moving very rapidly of late and that there’s a natural correlation between the two. I was hoping that somebody could perhaps dive a little bit deeper into the assumptions underlying fourth quarter RASM guidance just so that we understand where we are mark-to-market in terms of the economic environment and as we watch things evolve throughout the quarter, we know how we should be making the natural adjustments to our model.

[Mark Dunkerley:]

John, just to make sure that I understand your question correctly, obviously we’ve given some RASM guidance that’s based on the back of strong demand patterns in all of our geographies. So that much remains constant. With respect to fuel, I think in the short run we don’t see a traditional relationship between the price of fuel and our revenues largely because a lot of our sales have been sold in advance of whatever the current macro situation is. Is that what you were getting at or have I missed the point?

[John Godyn:]

Yeah. No, I mean Mark and that might be part of the answer that you just view Hawaiian as far less sensitive to that dynamic than maybe some of the airlines are for the reason that you outlined. But I just do feel like there are a lot of macro variables moving quickly. Fuel is one of them. FX is one of them. So I’m basically just trying to understand a bit better the sensitivities in the fourth quarter and what the guidance is based on. But your answer might be that you view that number as very achievable and not sensitive to macro.

[Mark Dunkerley:]

Yeah. I think we think that particularly for the long haul flying, we get a fair degree of visibility into the future. I think on the -- as I said, typically -- the relevance of fuel is that it also is a competitive environment, how bullish or bearish people feel about their next plans. It is as a result of the competitive environment that we see big changes and can see big changes in affairs. So at the moment we are not seeing any changes in the competitive environment. There’s an important caveat about that by the way in my prepared remarks. But subject to there being no changes in the competitive environment, we think the pricing environment stays the same. With respect to FX, all of our international destinations have very heavy points of sale at the other end of the route because we are predominantly carrying people from those countries into Hawaii. So, we are very much exposed to changes in FX. We’re priced in local currencies, not in US dollars. And so sooner or later we’ve got some hedging obviously to help reduce the impacts to it. But sooner or later FX has pretty direct consequence on us. Peter, did you have anything to add to that?

[Peter Ingram:]

John, I think in terms of the fuel correlation, I think it does exist, but perhaps with a bit of a lag and not a perfectly direct correlation. And as Mark said, it is the feature of our long haul flying in particular, but there is a relatively long booking curve in a lot of the places that we serve. And as a result of that, we’ve got decent enough visibility that could give you guidance we’re confident in for the quarter. At short haul, the booking curve is shorter, but you are also talking there about flying that is fuel is a lower percentage of the overall cost structure and so it doesn’t have as direct an impact there.

[John Godyn:]

Got it and if I could just follow up on one more nit just on this idea of the longer booking curve. Needless to say I think the RASM guidance indicate a very strong holiday season as we look out towards the end of the quarter. Is that true or is there any color you can add there?

[Peter Ingram:]

I think as, the nature of a quarterly forecast is of the month that you have the least visibility on is the last month of the quarter. So I would say we are confident about the holiday season. We see some good signs, but there is still a degree of uncertainty about that. But overall we are bullish about a good holiday season this year.

[Operator:]

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

[Helane Becker:]

Thanks very much, operator. Hi everybody. Thank you so much for the time. So I just have two questions. One; can you say exactly what you are paying for fuel today?

[Mark Dunkerley:]

Helane, I think just on a raw spot price what we are paying today, no fuel hedging accounting, just if we are paying for fuel today and we looked at an invoice, including taxes would be around 2.79.

[Helane Becker:]

Okay, that’s hugely helpful. Thank you very much. And then my other question is with respect to RASM guidance for the fourth quarter. I guess I was a little surprised that it was going to be as strong as it is. So A, assuming that includes the other revenue line when you talk about operating revenue per seat mile, and that’s just not passenger only. And then the other thing, is there any way -- so that’s like A of my question, is that correct, and so is that assumption correct? And then B of my question is how much of the RASM increase is related to the new comfort product?

[Peter Ingram:]

As we’ve said in the remarks – let me answer the second part first, the extra comfort is selling well and we’ve got pretty good visibility because we do sell that in advance. So we are confident that the trends we saw in August and September are going to continue through the end of the year and that’s a multi-million dollar bump versus what we did from preferred seats last year. In terms of the other revenue line, I think you answered part of your own question Helane with the reference to the Hawaiian miles credit card. That’s been a boost to the other revenue line throughout the year, including in the third quarter and that will continue through the fourth quarter.

[Helane Becker:]

Okay, great. And then I just have one last question and that’s -- I think you said in your prepared remarks that there was a pretty significant increase in west coast -- I don’t know how you described it, U.S west coast let’s say to Hawaii capacity. How much is your capacity increase versus the industry? How much of the industry number is yours maybe?

[Mark Dunkerley:]

So the industry number is up 9% and looking forward it's up 11% for the quarter and we probably represent of that roughly about 40% of the total, maybe a bit more.

[Operator:]

Our next question comes from Michael Linenberg from Deutsche Bank.

[Michael Linenberg:]

Hey everybody, just a couple here. Mark or Peter, can you talk about just what the competitive capacity looks like in the international markets? I did see I think a day ago Korean looks like that they are going to scale back Seoul, Honolulu. Are you seeing any of that in any of your other markets, what are competitors doing in the international?

[Mark Dunkerley:]

Yeah, it’s the mixed bag. We’ve seen some good -- helpful changes in Japan. You’ve mentioned a helpful change in Korea. We’ve got some competitor capacity increases coming in Australia. So it’s a bit of a mixed bag. Overall I think we are pretty pleased with the competitive environment on our international routes.

[Michael Linenberg:]

Okay, good. And then just my second question to Scott, in your non-op area, the other, I mean you highlighted the fuel derivatives. There was another, looked like a loss of about $5 million or so. Is that tied to FX? What is that?

[Scott Topping:]

Yeah, it is. Those are our balance sheet accounts in foreign currency and at the end of the period if the dollar is stronger that’s going -- those are converted and those translate to a loss. If the dollar weakens it goes the other way. So this line can flip back and forth.

[Michael Linenberg:]

Okay. So it’s just noncash?

[Scott Topping:]

Yeah, exactly.

[Operator:]

Our next question comes from Fred Lowrance from Avondale Partners.

[Fred Lowrance:]

Hey good afternoon everybody. Just a quick question on the network changes you’ve made. Obviously some pretty major ones here that you made over the last five or six months with Taipei and Fukuoka going away, capacity changes pretty meaningful ones on Seoul and JFK. But I’m just wondering as we look forward, how do you characterize for us maybe call it the opportunities that you might have to make further meaningful adjustments that optimize the network. Are we -- with no more growth coming, are we in a static environment here with the network or do you really see more meaningful opportunities out there to move capacity around the margins?

[Mark Dunkerley:]

First thing I’d say, Fred is I think we are pretty pleased with the performance of the routes that we’ve gotten our portfolio after the network adjustments that we made. I think we’ve characterized over the last several quarters the fact that we had a couple of very acute issues that we needed to deal with. We’ve dealt with those and what’s left I think we are pretty pleased with. We do have some growth in store for next year. We’ve got three aircraft coming and I believe two leaving the fleet. It all depends which month of the year you look at. But it is going to be a year of modest ASM growth and with that we’ve got some choices as to where to deploy that extra capacity. And I think as we have been in the past, I think we are relatively spoiled for choice. We’ve got some good opportunities both in some of our traditional markets to increase the amount of capacity that we are operating and some attractive looking new routes. We are still in the process of determining what we are going to do for next year. But right now we are not looking at any acute network issues that make us feel that we’ve got to make any big decisions.

[Fred Lowrance:]

All right. And then Scott, a quick question for you and you might answer this with we’ll save it for the investor day, but as you look at what you’ve said in the past about CASM ex-fuel into next year hoping to manage that to flattish. With the introduction of Ohana services, some of the changes, some of those Asian markets being terminated with capacity shifted to shorter haul, presumably higher CASM markets. Would you care to comment on how you are currently thinking about that flattish target on 2015 CASM ex?

[Scott Topping:]

I think we are working on our budget, grinding that down. I think 2014 is a bit unusual, especially the fourth quarter. We’ve had a lot of projects that are being worked on and completed. They’re accretive long term. Just a lot going on and I think as we look at 2015 I think the expectation would be something lower. We might say low single digits, but I want to have the right to update you on December third with our official full year guidance.

[Operator:]

Our next question comes from Hunter Keay from Wolfe Research.

[Hunter Keay:]

Thanks everybody. Scott, just a little bit follow up on the CASM ex-fuel question. If you ship out the one-time items in 4Q, it looks like at the midpoint the CASM ex should be up around 5%, but that’s only at about 2% capacity growth. So as those costs annualize into next year, how should we think about capacity in the content of that CASM ex-fuel being down – I guess up you said in the low single digit range.

[Mark Dunkerley:]

I think we are trying to understand the question, Hunter.

[Hunter Keay:]

Sure, sorry. So you haven’t guided on capacity growth in 2015, correct?

[Mark Dunkerley:]

Correct. That’s correct.

[Hunter Keay:]

Do you want to right now?

[Mark Dunkerley:]

Not especially. I think -- capacity growth is not going to be your rapid capacity growth. It may not be entirely different than you have seen this year.

[Hunter Keay:]

Okay. I guess I’m just trying to figure out how CASM ex-fuel is lower than like 5% if capacity growth is in that 2ish% range given the exit rate of the growth from items that you described as recurring in nature.

[Mark Dunkerley:]

Unsurprisingly we’ve got a lot of things going on in our business. We’ve got projects. We had a lot of one-time expenses this year that will hopefully -- it's our intention that they won't repeat in the coming year. And so for all these reasons, we think that our CASM ex-fuel performance is likely to be better next year than it has been this year.

[Hunter Keay:]

Okay. Yeah, that’s great. And then on CapEx, 2016 is the year where you probably have no aircraft deliveries as of today. Should we assume that CapEx is going to be maybe in the $100 million range or even less? And if that’s the case, looks like you could probably look at a couple of hundred million dollars of free cash flow pretty easily. I know you don’t want to talk right now about capital deployment and I get that. We can wait on that, but am I thinking about CapEx properly if I’m thinking about longer term opportunities in the cash side?

[Scott Topping:]

Not to give the numbers of course. We’re not going to guide 2016, but I think it's fair to say that -- well the way you can look at 2015 what we will have there with the maintenance. We’ll have maintenance CapEx of course. We’ll have three delivery payment on 2017 NEOS coming, but not nearly the type of CapEx that you’ve seen in our recent growth period.

[Mark Dunkerley:]

And I think we’ve not been shy to say that there will be likely free cash flow in 2016. In fact if you go back to our presentation at the last investor day, you’ll have seen a chart that demonstrated that.

[Operator:]

Our next question comes from Steve O’Hara from Sidoti & Company.

[Steve O’Hara:]

In terms of the changes that you made, could you just talk about in terms of -- I know you guys added a lot of capacity into the West Coast. You took some capacity out of the international. I’m just curious how much that is skewing the PRASM numbers? Maybe on a same store basis, could you talk about how PRASM reacted?

[Mark Dunkerley:]

Yes. I think the – you’ve see some really big changes to our international PRASM. A lot of that has come from mix. In other words not flying some of those routes that were causing us some acute discomfort. At the same time I think our RASM elsewhere accounting for a little a bit of exchange impact has been generally okay. Peter, do you want to add color commentary?

[Peter Ingram:]

Steve, I’d refer you back to some of the comments we made in the prepared remarks. The North America and neighbor island PRASMs were relatively flat, slightly down during this period. Both of those geography have seen really solid outside in fact RASM improvements over the past four quarters. So we’re happy to be deploying some additional capacity into a pretty good demand North America situation right now. I think obviously the routes that we removed from the network were underperforming. And so you would expect to see that lift the boat. But I think we’ve also seen some good performance, good improvements in maturity in some of the other international routes, which is exactly what we were seeking to do is we adopted capacity in Incheon, for example.

[Steve O’Hara:]

Okay. I guess -- go ahead.

[Mark Dunkerley:]

And routes are maturing. We talked about maturation of new routes and another quarter, another year under our belt we’ve got improvements out of that.

[Steve O’Hara:]

And maybe to follow up with that, in terms of the route maturation and where you are in that cycle, I think you’ve said in the past that route start out, let’s say a typical route starts at something like 65% of where you think RASM is going be and over between 18 to 36 months you get to where you think you are going to get to or obviously your expectations were wrong. But so where are we in that process and maybe what's the tailwind to RASM from that benefit?

[Mark Dunkerley:]

I think -- so first of all I’m not sure that we’ve given the 65% number. And so let me not in my answer implicitly endorse that number. But we have absolutely said that 18 to 36 months. And I think in a bunch of routes we are -- we’ve still got a ways to go. We are changing the way in which we do business in these markets. We’ve grown a lot. So I still think there’s some upside potential to be extracted from these markets. But I think the immediate benefits of just lapping the first couple of years and figuring out a little bit more about the market is largely behind this for all of the market with the exception of Beijing which is still a very new market for us.

[Peter Ingram:]

Steve, I’d just add to that is the 18 to 36 months we’ve talked about is accurate, but is also a simplification. And I think one of the things that is important to remember is that each of these countries that we operate in is different. They have different distribution networks. There’s different competitive structures. So I wouldn’t apply that timetable as a universal rule. Some of the routes we’ve entered have matured very, very quickly and are a lot further up that curves on a short time frame. Other ones take a little bit of time because of the competitive environment. But overall I think we are confident that we are getting better. We are learning as we go in. We are becoming a more known quantity in the distribution environments in these countries and we are well on the way to being a mature established force in all of the markets we serve.

[Operator:]

Our next question comes from Glenn Engel from Bank of America.

[Glenn Engel:]

Good afternoon. A couple of questions. One, when I look at the inter-isle PRASM going from plus 8% in the second quarter to flattish, taking up the hurricane in the third quarter, how much of that slowdown was the fact that the ticket tax went up about $5 on all routes, including the short haul ones?

[Peter Ingram:]

Glenn, it's a great question. It's really difficult to parse out all of the things going on. Obviously the one that we were most easily able to parse out was the hurricane impact which really hurt one week of travel at a fairly peak period in August. Clearly the change in the ticket tax which I personally think is a pretty misguided way of raising revenue for the services is something that disproportionally affects short haul travel and it comes right out of the backs of the pockets of people travelling here in the neighbor islands. We think it probably did hurt a little bit on the margin by seeing prices go up above $5 a ticket on what is typically a $70 or $80 ticket price. But it's hard to say precisely what that is. I think a bigger impact probably in this period relative to the second quarter year-over-year is that you’re just going into a period of a tougher year-over-year comp. and so I wouldn’t overstate that impact, but I think it was one of the factors that contributed.

[Glenn Engel:]

For Scott my question would be, if oil stayed at current levels throughout the quarter, what would your hedge losses be -- realized hedge losses expected to be in the fourth quarter versus the $5 million in the third?

[Scott Topping:]

I’ve got that here, Glenn. At the current market here, the realized fourth quarter would be in that 12 to 13 range.

[Glenn Engel:]

Thanks. And the final one I have is, I think there is still one more A330 coming in 2016, isn't there, or are my ears wrong?

[Mark Dunkerley:]

No. It touched up here last week.

[Scott Topping:]

Yeah, it just came.

[Glenn Engel:]

No, I'm sorry, 2016. Somebody said none, but I thought there was one?

[Peter Ingram:]

Three in 2015 and that’s the end of the …

[Mark Dunkerley:]

Yeah, three in ’15.

[Operator:]

Thank you. At this time, we have no further questions. I will turn the call back over to Mark Dunkerley for closing comments.

[Mark Dunkerley:]

Okay, thanks everybody for joining us today. Just as a reminder, our Investor Day which you heard us talk about, is going to be held in New York City on December 3 and that’s where we’re going to lay out our long term capital allocation strategy and also some of the important aspects of our 2015 outlook. So, we hope to see you there and if you’re not able to make it to New York, we will of course be webcasting all of our presentations. So with that, mahalo and aloha.

[Operator:]

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