Hawaiian Holdings, Inc.
Q4 2014 Earnings Call Transcript

Published: 30 Jan 2015

[Operator:]

Greetings, ladies and gentlemen and welcome to the Hawaiian Holdings Fourth Quarter 2and Full Year 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] As a reminder this conference is being recorded and it is now my pleasure to turn the conference over to your host, Ms. Ashlee Kishimoto. Thank you, you may begin.

[Ashlee Kishimoto:]

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 2014. On the call with me today are Mark Dunkerley, President and Chief Executive Officer; Peter Ingram, Chief Commercial Officer; and Shannon Okinaka, Chief Financial Officer. Mark will begin with some overview comments. Next, Peter will take us through revenue performance. Shannon will follow with a discussion on costs and the balance sheet. We will then open the call up for questions, and Mark will 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 and Aloha everyone and thank you for joining us today. Before we begin I'd like to welcome Shannon Okinaka as our Chief Financial Officer following the departure of Scott Topping a couple of weeks ago. We wish him the very best and we thank him for his contributions to Hawaiian these past several years. Some of you may be familiar with Shannon who has held positions of increasing responsibilities since she joined Hawaiian in 2005 and has served most recently as Vice President and controller since 2011. We all look forward to her leading the finance team and to you getting to know here better in the coming months. For the fourth quarter our adjusted net income grew to $26 million or $0.40 a share. These results are in line with consensus estimates and represent another quarter of very strong results. For the full year adjusted net income grew to $97 million or $1.55 per share making 2014 a much better year than 2013. The year ended much like the quarters which preceded it. We enjoyed strong demand for travel to and within Hawaii. The benefits of network changes that we made earlier in the year, the impact of our developing routes continuing to mature, healthy growth in non-passenger revenue, lower fuel prices, and continuing cost control. By the numbers, in 2014 our unit revenue grew 5.6% year-over-year, comfortably outpacing the performance of our peers. Our pretax ROIC grew to 16.3%. Adjusted net income increased 108% and the adjusted pretax margin grew to 6.9%. Hawaiian's amazing employees deserve the credit for all that's gone well. Their dedication to our customers and to the company as a source of tremendous strength. Their individual efforts offset the advantages that our competitors derive from being so massive. Without the goodwill of our ʻohana or family, we would not have had survived for over 85 years and more recently have prospered. Our business is getting better and stronger. The strategic direction we adopted over the past several years is now bearing fruit. Looking to the year ahead, our outlook for 2015 is positive and subject to usual caveats oil prices, demand and competitor behaviour we would expect expanding margins, a significant improvement in earnings, a large decrease in capital expenditures, positive free cash flow and the strengthening of our balance sheet. The decline in the price of oil has been in important catalyst. If the current forward curve plays out over the next 12 months our fuel bill will be $240 million lighter net of hedges than it would have been otherwise. Despite the good fuel environment in the short term we have no intention of straying from our long term corporate strategy. So to be clear, we will not be making capacity or network decisions motivated by the state of today's oil markets. If you followed us for a while, you will also know that we have never used our fuel and currency hedging programs to speculate on the future direction of fuel and currencies. Instead we've always sought to use hedges to reduce the volatility in our financial results and to manage economic risks associated with fluctuations in the market. This approach will not change in the current environment and more about this later in Shannon's section. Since we last spoke, there have been a number of developments worthy of mention. As part of our existing capacity plan, we announced the return of seasonal flying between Oakland and Los Angeles on the West Coast and Kauai in the Big Island beginning in May. In addition, we announced the second daily seasonal flight between Los Angeles and Maui starting in June. We recently filed an application with DoT to begin daily nonstop services this summer between Tokyo's Haneda Airport and Kona on the island of Hawaii. This was prompted by DoT's decision last month to review its award to Delta of a route right to fly between Seattle and Haneda. Our continued interest and additional rights underscores our confidence in Japan and in our ability to prosper there despite the recent strengthening of the U.S. dollar against the yen. Our strong operational performance continued. We carried a record number of passengers in 2014 and continued to lead other airlines in on time performance. Other measures of operational performance, also shows comparing favorably to our peers. At our Investor Day, late last year we shared with you our balance sheet strategy. So let me update you on where we stand in this respect. We ended the year above our 23% to 25% liquidity target allowing us to allocate capital in the fourth quarter. We extinguished some A330 debt and repurchased 18% of our convertible notes. The repurchase of our converts is noteworthy in that it serves the dual purpose of removing debt from our balance sheet and elimination 1.9 million shares of common stock from potential dilution. At year end our adjusted debt to EBITDA stood at 4.2 times and by the end of the first quarter we expect to be slightly below four times crossing the upper boundary of our target range. Our free cash flow in 2015 is set to run ahead of what we projected as little ago as Investor Day. As a consequence we have more to work with in terms of managing our balance sheet and maximizing long-term shareholder returns. We will continue our approach of being opportunistic buyers of the convertible notes and in addition we will also be looking at other forms of capital allocations. 2014 was a good year for us. Even setting aside the beneficial impact of less costly fuel towards year end our underlying business strengthened and margins improved. For 2015 we expect the positive trends of an improving underlying business and lower fuel prices to result in even stronger performance so long as the world is we are experiencing it today does not change. Now over to Peter, to discuss our revenue performance and commercial initiatives.

[Peter Ingram:]

Thanks Mark. Before diving into our revenue performance, I too would like to thank all of Hawaiian's terrific employees for the great job they do taking care of our guests. Operating revenue in the fourth quarter grew to $575 million an 8.1% increase year-over-year. PRASM increased 3.1% from last year while RASM grew even more up 6.1%. This strong result was right in line with the guidance we provided at the beginning of the quarter. Solid revenue performance in the second half of the year led to a full year increase in PRASM and RASM of 3.5% and 5.6% respectively. This unit revenue improvement outpaced all of our U.S. competitors for 2014 and gives us on a fabulous foundation on which to build in 2015. I'll go through the results by geography. Our neighbor island routes generated 24% of passenger revenue and continue to provide a steady contribution to the network. PRASM in this geography increased 2.1% on a 1.7% decrease in load factor and 8% more capacity. Going forward we continue to see strong and stable demand between the islands of the state and we expect to see the continuation of solid results. North America to Hawaii represented just under half of our overall passenger revenue growing 10.4%. North America PRASM declined 3.3% on a 1.9 percentage point decrease in load factor in the face of double-digit industry growth and tough comparisons to a strong end of 2013. The capacity outlook has not changed much since we last spoke. Based on published schedules industry capacity between North America and Hawaii will be at record levels in the first half of the year with year-over-year growth leveling off a bit in the third quarter. As you know, our network adjustments in 2014 contributed to this growth and we remain extremely pleased with the results of those changes. As 2014 drew to a close our book load factor for the first half of 2015 came under some pressure. And the challenging booking trends continued into the early part of 2015. We've seen some recovery more recently, but we have some ground to make up on strong prior-year results. In this context, we've adjusted our planned schedule in the second quarter by pushing back the start date of some of our seasonal services to focus the extra capacity on peak season. Despite the tough competitive environment, the financial performance of our North America routes remains very good. International routes accounted for 27% of our passenger revenue with PRASM up 11.4% on 5.8 point increase in load factor. These improved results reflect the continuation of encouraging trends. Good demand, the benefit of network adjustments in the first half of 2014 and the maturing of our relatively new international routes. The strengthening of the U.S. dollar net of hedges resulted in a $5 million offset to our results this quarter. Moving forward, the U.S. dollar is further strengthened against foreign currencies in general and against the yen and Aussie dollar in particular. We continue to hedge our foreign currency exposure with the use of forwards and for 2015 we have hedged approximately 45% of our yen and Australian dollar exposure at better levels than the current exchange rates. Compounding the ForEx headwinds from a revenue perspective is the reduction in fuel surcharges most notably on our Japan and Korea routes. While there is obviously a silver lining on the fuel line to this revenue cloud, the combined impact of these factors has also expecting US dollar denominated PRASM on our international routes to move downward in the first quarter, despite foreign currency denominated improvements. Turning away from passenger revenue for a moment, in the fourth quarter sales of value added products were $21.86 per passenger, an increase of $7.45 or 52% year-over-year. Those of you who attended our Investor Day in December may remember, that we introduced this metric at that time and I would refer you to our Investor Day commercial presentation for a reminder of the components of revenue that are included. For all of 2014, we generated $19.72 per passenger, up $5.03 or 34% year-over-year. These improvements were driven by strong performance from the sale of HawaiianMiles, most notably through our co-brand credit card relationship and the launch of Extra Comfort in August. HawaiianMiles sales boosted the other revenue line by $12 million in the fourth quarter and $40 million for the full year. Meanwhile, our Extra Comfort and preferred seat sales, which we record on the passenger revenue line, averaged $2.9 million per month in the fourth quarter this year compared to only $800,000 per month in last years fourth quarter. In December, we set a new high watermark for these new products with revenues of over $3 million. The success of these non-fair revenue items illustrates the accretive opportunities we see to generate earnings growth from non-traditional sources, more keenly focused on continuing to invest in these opportunities and expanding our product list in the periods ahead. A key contributor to this will be the launch of our new website later this year. Our cargo team also posted another excellent quarter, which is consistent with the improving trend we've seen over the past few years now. Cargo revenue increased 18% year-over-year to $21.4 million. Lower fuel surcharges will tamper this growth going forward, but we expect to continue to expand our cargo business in the periods ahead, albeit at a more moderate rate. Let me switch gears to the outlook for the upcoming first quarter. Year-over-year ASMs are expected to be up 3.5% to 5.5% in the first quarter and for the full year up 3% to 6%. The full year expectation is a bit lower than we talked about at Investor Day, because of the second quarter schedule adjustments I mentioned earlier. As noted earlier, a number of factors that are affecting revenue was removed into the New Year. The US dollar is stronger and fuel surcharges on some of our international routes will be substantially lower. These two items alone combine for a 3 percentage point reduction in RASM performance for the system in the first quarter. As discussed earlier, North America bookings are affected by the record capacity to Hawai. All told, these factors have us anticipating a system RASM decline of 3.5% to 6.5% in the first quarter. We are extremely confident in the strong positioning of our network and resilient demand for Hawai vacations and we'll leverage these strengths to overcome whatever environmental challenges we face in the period ahead. And with that, let me welcome Shannon to a new role and turn the call over to her to discuss our cost and balance sheet.

[Shannon Okinaka:]

Thank you, Peter. As Mark mentioned earlier, and to recap the quarter, adjusted net income 117% to $26.1 million or $0.40 per share. Adjusted net income this quarter excludes non-cash impact of unrealized losses on outstanding fuel hedges totaling $21 million on a pretax basis, and the loss on the early retirement of debt totaling $4 million pretax. Our earnings per share this quarter reflect the dilution of 11.3 million shares under the convertible notes and related warrants due in March 2016. Moving to cost. Our fourth quarter total operating expenses, excluding fuel, increased $22.5 million from the prior year, resulting in a 4.9% increase in CASM ex-fuel year-over-year. These results were better than the low end of the guidance range we gave at the beginning of the quarter, primarily due to a decrease in frequent-flyer expense, driven by lower than expected future fuel prices and permanent savings from various projects. Lower fuel prices led to a decrease in our fuel expense of $12 million year-over-year, which reflects offsets from realized losses on our hedges and a 2.6% increase in consumption. Economic fuel cost per gallon for the quarter was 284 as compared to 313 in the prior year quarter, a decrease of 9.3%. Our non-operating expenses increased $53.2 million year-over-year, primarily due to the fuel hedging losses. Let me remind you, our fuel hedges do not qualify for effective hedge accounting treatment and our mark-to-market changes, realized gains or losses and premiums paid, run through the non-operating expense, which totaled $35 million this quarter. Here is the breakdown. Cash paid for realized losses on settlements in premiums totaled $14 million, which included a $5 million offset from our put options which were in the money. The unrealized losses on our open positions that go out through 2015 totaled $21 million following the substantial move in fuel prices. The put options which have been a feature of our programs for some time are notable in this period as they have meaningfully reduced hedge losses and allowed us to more fully participate in falling prices. Turning to the balance sheet, we ended the quarter with $524 million in unrestricted cash, cash equivalents and short term investments and an additional $175 million available under our revolving credit facility, which resulted in a liquidity ratio of 30%. Full year CapEx totaled approximately $440 million, which included $319 million related to payments for aircraft and aircraft related items, including upcoming deliveries. As Mark mentioned earlier, we extinguished with cash $69 million face value of outstanding debt, which included the prepayments of A330 bank debt of $54 million and the repurchase of $15 million or 18% of the convertible note principal balance outstanding, for a financial leverage result of 4.2 times on an adjusted debt to EBITDA basis. Looking ahead to 2015, CASM ex-fuel is expected to increase 1.5% to 4.5% year-over-year in the first quarter, and for the full year we continue to expect CASM ex-fuel to be up in the low single digit range over the prior years. As we mentioned last month at Investor Day, we have several cost challenges in 2015 and in the first quarter the specific drivers of the year-over-year increase is on the wages and benefits line. Due to higher pension costs resulting from a decrease in discount rate and change in mortality assumptions totaling $4 million. And an increase in our variable performance based compensation resulting from a positive outlook for 2015 totaling another $4 million. We also expect an increase in aircraft rent, due to anticipated lease return cost of $2.5 million for the two 767s going back in 2015 at the end of their lease term. We continue to expect our full year effective tax rate to be in the 38% to 40% range and based on our current outlook, we expect to become cash tax payers in 2015, as our net operating losses related to the bonus depreciations for the A330 aircraft repurchase are expected to be fully utilized during the year. As Mark mentioned, we will continue to maintain a disciplined approach to managing our fuel and foreign currency hedging programs, focused on decreasing risks and reducing volatility in our financial results. If we believe that serving these aims can be accomplished by changing the way in which we execute our hedge programs, we may do so. However, nothing in the current field outlook is tempting us to do so at the moment. Today, we have approximately 40% of our 2015 fuel requirements hedged, using heating oil swaps to provide protection if fuel prices rise and put options that limit our downside risk. Based on the forward fuel curves as of January 21, we expect our first quarter economic fuel price per gallon, including tucks and hedges to be in the range of $2.05 to 215 and for the full year to be between $1.90 and $2. Our hedges is expected to settle in the first quarter, are currently at a loss of $13 million. but as a result of the put options, first quarter hedge losses will not vary materially from this if fuel prices fall further. We expect our fuel consumptions to be up 2% to 4% year-over-year for the first quarter and up 1% to 4% year-over-year for the full year. Based on the current outlook, we expect fuel savings, net of hedges of $15 million in the first quarter and $240 million in 2015. We expect our full year CapEx to decrease significantly from 2014 to a range of $45 million to $55 million, as our aircraft commitments decreased and we take delivery of our last three A330 this year, which are planned to be financed under sale and leaseback agreement. In conclusion, our outlook for 2015 is positive, benefiting from lower fuel prices and the strategic investments we've made over the past few years. We anticipate expanding margins, continuous earnings growth and lower capital commitments, all contributing to increasing free cash flow which we will commit to reduce our financial leverage and increase long-term shareholder value. This represents the end of our prepared remarks. But before I turn the call over, I too would like to thank all our Hawaiian employees for their tremendous efforts for a terrific 2014. And with that, I'll turn the call back to Ashlee.

[Ashlee Kishimoto:]

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. As a reminder, please limit yourself to one question and if needed one follow up question. Operator, please open the line now for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Michael Linenberg with Deutsche Bank. Please proceed with your question.

[Michael Linenberg:]

How are you guys? Just a couple of questions here…

[Mark Dunkerley:]

Sure, Mike.

[Michael Linenberg:]

Hey, Mark. I think when Peter was walking through some of the pressures on unit revenues and he talked about the fuel surcharges going away. And you know, the question is, a lot of times as energy prices come down and fuel surcharges go away, a lot of times airlines will replace them with an increase in the days fare. And I guess just from Peter's commentary it sounds like that maybe the market isn’t strong enough to do that. The demand isn’t there or maybe it’s just the weakness in the foreign currency which is forcing you to overall take down the fares, at least in dollar terms. What's – can you give a little bit more color about what's really going there, what the dynamic is, is it all demand or are there other factors involved?

[Peter Ingram:]

Yes. Thanks, Michael. It’s Peter. The fuel charges that if you are referring there are really specific to Japan and Korea where the environment is fairly mechanical calculation of the fuel surcharge based on a reference to a trailing fuel price. We certainly always look for opportunities to improve our base fares when demand and competitive pressures will allow it. In this case, we're really not seeing the opportunity to offset that fully, but we're – we certainly are looking for opportunities to increase our fares. But some of that of course, is as you say it’s a foreign currency impacts and we are seeing in – if you look at base fares and if you look at revenue performance, including load factor with the – in foreign currency terms, we're seeing improvements, but it does get eroded by the foreign currency.

[Michael Linenberg:]

Okay. Perfect. And then, just when I look at your capacity for the quarter, up 3.5 to 5.5 seems fairly reasonable. But then I think that the mix somewhat volatile and I think like if I look North America to Hawaii, it looks like, maybe Europe 15% in the March quarter and maybe 13% in the June quarter. And so, you talked about it being at a historical high. How much of that is being contributed by Hawaiian and I guess conversely, I guess your international PRASM is going to be down a bit, I mean, is that fair, is that – am I doing the numbers correctly?

[Peter Ingram:]

Yes. I think in terms of the capacity Mike, what you're seeing is really the full year impact or the impact on the first quarter of some of the capacity changes we made last year. So we haven’t added anything new incrementally in this period. And you know, that is a bit of an increase in our service in the Los Angeles area and in the Bay area to Hawaii which being reflected year-over-year. That – those increases came in second quarter or third quarter or fourth quarter or last year. And so you'll see that percentage increase from us decline on a year-over-year basis as we go through the year. In terms of the international, since we did our network adjustment, we've seen a good improvement in international PRASM. I think if you look at this quarter, you look at last quarter and that is with a forecast for the first quarter what you're seeing is a continued reduction in the currency driving that down and the fuel surcharge impact we just talked about. So, the underlying trends have not changed beside from the items that we discussed.

[Michael Linenberg:]

Okay. Great. And just one last one to Shannon, the fuel price is that, that’s new right? You didn’t normally give us a fuel price forecast. Is that going to be – are we going to see that continue or is that just a one off because of the dramatic decline in energy prices, if you just wanted to kind of give us something as a guide?

[Shannon Okinaka:]

Hi, Mike. This is Shannon. Yes, we decided to guide on the economic fuel cost because of the changes going on in the fuel environment. But I do believe that something will continue to do going forward.

[Michael Linenberg:]

Oh! Great. Okay, thanks. Thanks, everyone.

[Peter Ingram:]

Very good.

[Operator:]

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

[Helane Becker:]

Thanks very much, operator. Hi, guys. Thanks for taking the time. Just a couple of questions and mostly…

[Peter Ingram:]

Sure…

[Helane Becker:]

Kind of housekeeping thing. So one thing as I look at your interest expense for the quarter that just ended, is that where the repurchase shows up, so that going forward that line item actually starts to decline year-over-year?

[Shannon Okinaka:]

Hi, Helane. This is Shannon. No, the losses on the extinguishment of the debt show up in the other line in non-op.

[Helane Becker:]

Okay….

[Shannon Okinaka:]

But…

[Helane Becker:]

So that number goes down, just something most like…

[Shannon Okinaka:]

Yes…

[Helane Becker:]

What it was in the – like a year ago or whatever?

[Shannon Okinaka:]

Well, it depends on what kind of transactions we have going forward there. A number of things in that other line. So things like the balance sheet show up of our foreign exchange based, foreign currency based balances will hit that other line. So there are a number of things in that other line.

[Helane Becker:]

Okay. And then, on the interest expense line, what should we be thinking about for that?

[Shannon Okinaka:]

The interest expense line really reflects the debt financing of aircraft in 2014 and going forward. So that’s pretty stable run rate.

[Helane Becker:]

Okay. And then, Mark, as we think about the increase in free cash flow, would you think about using that money to buyback stock?

[Mark Dunkerley:]

All right. I am supposing Helane, we are not announcing exactly what we are looking at right at the moment. What I would say though is that at Investor Day we laid out a leverage target which I part thanks to the current fuel price, we are going to be coming within in shorter order than we've anticipated. That’s put us in a range where we do have some ability to do some shareholder friendly initiatives, including more debt buyback and including potentially other more direct things to shareholders. But we are not at this stage committing to it. We are saying that we remain opportunistic buyers of the convert.

[Helane Becker:]

Okay. And then do you think the third time Kona will work? Third times…

[Mark Dunkerley:]

Yes…

[Peter Ingram:]

I think we've got by far in a way the strongest case for us and I have that, but frankly I felt before and I think other issues have intervened in such way that the strongest case didn’t end up carrying away the price. I certainly hope it does this time around and I am eternally confident.

[Mark Dunkerley:]

Helane, we've thought Kona would work the first and the second time, but we haven’t got a chance to prove it yet.

[Peter Ingram:]

Yes.

[Helane Becker:]

All right. I – just so I am thinking, maybe third time the charm, right, and you finally get the chance to prove it.

[Mark Dunkerley:]

Yes, we certainly had said.

[Helane Becker:]

Great, okay, well thanks for the time.

[Mark Dunkerley:]

Okay.

[Operator:]

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

[Hunter Keay:]

Hi, everybody. Thanks for taking my question. Shannon, did you say CapEx in 2015 was going to be $45 million to $55 million?

[Shannon Okinaka:]

Yes, that's correct.

[Hunter Keay:]

That seems extremely low. I mean is that like a net number? I mean are you not counting some of the sale lease back is that going to be sort of mechanically runs the cash a bit differently? I mean, because you got what three planes coming this year I think, is that the plan?

[Shannon Okinaka:]

Right, so yeah, the plan for those three coming in 2015 are to be financed under sale-lease-back, so that is not included in our CapEx number.

[Hunter Keay:]

Okay, thank you very much. And I guess another confusion, after Scott's departure what's under review in terms of the things that fall under your purview as CFO and congratulations by the way.

[Shannon Okinaka:]

Thank you.

[Hunter Keay:]

Is there anything that philosophically you think about addressing whether it is hedging or leverage, a lot of which has already been discussed on this call today, but is there anything that's off the table in terms of something that you might address and potentially change the direction of the company and then what you do on a day to day basis as CFO?

[Shannon Okinaka:]

Well as we mentioned at Investor Day, I think our focus is largely on the free cash flow that we're expecting and how we allocate that cash. So, the team here a very strong team. We have been talking a lot about that and where we go with that, we're still in our first phase of what we call here derisking the business which includes the deleveraging plan and improving the balance sheet. And as we go into the future we'll look at our next phases of how we allocate that capital.

[Hunter Keay:]

Okay, thanks. And then last one, the North American market to Hawaii, again I think Mark probably a question for you, feel free to not address this as it is a competitive question, I will say that in advance, but the industry has gotten it is fullback, there have been some ebbs and flows of competitive capacity in the Hawaiian market in the last couple of years. I think Virgin has made it pretty clear that they're going to probably add some capacity into that market particularly from the Bay Area markets where you guys serve. How do you plan on defending your turf? How do you plan on competing? Is it going to be from a product perspective or is it going to be sort of a rental marketing campaign? Are you going to focus more on leveraging some point-of-sale traffic in Hawaii? How do you defend what's yours?

[Mark Dunkerley:]

Well, so as you surmised I cannot get into too much into what we're going to do in the future, but what I will say and your question gives me a good opportunity to reiterate it is, as we look around at the people we compete against today which is largely all of the major U.S. airlines in that particular marketplace and as we look at the plusses and minuses of potential competitors who not yet represented the market, we don't see any other operator out there that has a combination of costs and service and ability to access the market that we would trade places with. So, for us I think it's all the question of how many seats are in the marketplace and we are largely indifferent as to whether those seats are provided by brand A, brand B, brand C or whoever else.

[Hunter Keay:]

Okay thanks a lot.

[Operator:]

Thank you. Our next question comes from the line of Fred Lowrance with Avondale Partners. Please proceed with your questions.

[Fred Lowrance:]

Hey, thank you operator. Quick couple of questions for you guys with this convert how much you had in the fourth quarter. Did that also reduce your hedge position with the warrant, just thinking about how we get to our fully diluted share count for first and fourth quarter this year?

[Mark Dunkerley:]

You know there are many things that go into that position and so we cannot sort of address that very directly. I think you'd have to reach out to the people who hold these sorts of converts and ask them exactly how they would behave.

[Fred Lowrance:]

Okay and then just as another question, I know Shannon you gave us sort of the combined strong dollar, lower fuel surcharge headwind for RASM in the first quarter can you actually break that out between the two transom in the first quarter detection break that out between the two and just thinking as we move forward for the full year if we were to straight line sort of current Australian dollar, Japanese yen rates out over the rest of the year, are we approaching that 200 basis point RASM headwind that we had back in 2013? Thanks for that again.

[Mark Dunkerley:]

I think it is, you know I gave the numbers for the first quarterthat the currency and the fuel surcharge were about three percentage points of headwind on a system basis. The split there is about half and half, so the currency is in line with the sort of number that you're talking about there practically.

[Fred Lowrance:]

Okay, thank you.

[Operator:]

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

[Steve O’Hara:]

Hi good afternoon.

[Mark Dunkerley:]

Hey, Steve.

[Steve O’Hara:]

Could you just talk about what you think about, how you think about ex-fuel unit costs maybe going further out and if you see something what's kind of a normalized rate? And then also did you get the call around? How do you think about what would capacity look like in terms of growth this year? And then maybe talk about the mix in terms of how you think about PRASM kind of shifting from domestic to international and whether that is kind of a good guy, bad guy?

[Mark Dunkerley:]

Okay in terms of ex-fuel unit costs going out for the rest of the year we've talked about low single digit numbers and that is the guidance we're giving for the time being. I think in that number we've got a number of things going on some of which we've already talked about in the first quarter we've got things like pension expense which is a result of changes in mortality table and the discount rates by that will tend to flow through. We look at the major areas. I think most cost elements are keeping into what I would call pretty normal range. And then we have a couple of items that have some sort of inflationary pressure we talked about some benefits of pension stuff I think some of the airport use charges, flow a little higher than kind of flaps, and we've got some lease return costs and some one time check events. But I think the roles of a slices on low single digits in terms of our overall outlook.

[Peter Ingram:]

And Steve on the second part of your question with regards to where the capacity for the Kona Haneda service would come from. I can tell you that we don’t, we wouldn’t intend for that to be incremental flying to our network so we won't be allocating any more aircraft to the network to fly that route this year. So the ASM impact to the extent there was one would really be just a function of changes in states lines as opposed to an increment of new flying allocated to the network, where exactly that capacity will come from is something I wouldn’t want a signal until we actually have the route in hand and we'll announce those decisions at that point in time. And as far as the RASM impact of that, again I don’t think we want to get into forecasting RASM beyond what we've given you for the first quarter of this year.

[Steve O’Hara:]

Okay, thank you.

[Operator:]

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

[Joe DeNardi:]

Hey thanks. Scott, if you were to look at the, I guess the fuel surcharge headwind going forward, what fuel price are those surcharges being based on right now? So if oil stays where it is do those continue to come down throughout the year or are they, I mean just what's the lag effect of that?

[Mark Dunkerley:]

I will give you an example of Japan that tends to work on about a couple of months lag. So we have clear sight into what the fuel surcharge will is today obviously and what it will be starting in February for the next couple of months. And then as we build our plans for the year we sync up our expectations on that with the fuel price and our plan but obviously that’s subject to changes you see fuel move over time.

[Peter Ingram:]

And fuel surcharges the go below zero and I think we're pretty much knocking on that door in several of these markets right now.

[Mark Dunkerley:]

That's correct.

[Joe DeNardi:]

Okay, so but if the oil stays where it is, fuel surcharges are coming down further, is that fair?

[Peter Ingram:]

That will have a one step down in the beginning of February and if fuel went down below that, the next level as Mark says is in fact real.

[Mark Dunkerley:]

So, and to put it another way Joe, we've given you guys guidance for the first quarter, which in part is based on our projection of where fuel prices are today. So fuel price and at that level at the end of Q1 essentially fuel surcharges would be all but nonexistent in the international markets that we serve, no more to be added beyond that.

[Joe DeNardi:]

Okay, that makes sense. And I'm sorry, I meant to say Peter, but Shannon, did you say you'll be a cash tax payer in 2015 or 2017?

[Shannon Okinaka:]

2015, this year.

[Joe DeNardi:]

15, okay.

[Shannon Okinaka:]

Yes.

[Joe DeNardi:]

And then Mark, a question similar to Hunter's, just in terms of kind of derisking the business model going forward, is there anything you guys can do or you think about in terms of maybe insulating yourself from competitive capacity risk?

[Mark Dunkerley:]

You know, I think the best way that we have insulated our self from risk and intend to continue to do so is by diversifying our network. If you look back to our business in 2010, we were over 90% domestic and the lion's share of that was off the West Coast. We felt that left us naturally no fault of our own if you like, but naturally very exposed to a pretty discrete market. With the growth in our international business we have lessened that exposure and it is very much part of our corporate strategy that as we grow we seek to continue to diversify our business. Again at the end of the day I think we like our position in all of our markets. There I nothing that goes to any sort of underlying competitive weakness. It is jus on a market by market capacity situation, by capacity situation basis.

[Joe DeNardi:]

Okay, thanks for the time.

[Mark Dunkerley:]

You bet.

[Operator:]

Thank you. Ladies and gentlemen, at this time there are not further questions. I would like to turn it back to Mark Dunkerley for closing comments.

[Mark Dunkerley:]

Very well, thank you everybody for joining us on today's call. I appreciate your questions today and we're looking forward to 2015 with its lower fuel prices and the successes we've enjoyed in 2014 and we think it is going to be an even better year. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.