Hawaiian Holdings, Inc.
Q2 2013 Earnings Call Transcript

Published: 24 Jul 2013

[Operator:]

Greetings, and welcome to the Hawaiian Holdings Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ashlee Kishimoto, Director of Investor Relations for Hawaiian Holdings. Thank you Ms. Kishimoto, you may now begin.

[Ashlee Kishimoto:]

Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' second quarter 2013 financial results. On the call with me today are Mark Dunkerley, President and Chief Executive Officer; and Scott Topping, Chief Financial Officer. We also have Peter Ingram, our Chief Commercial Officer in the room, for the question-and-answer session. To get in is many questions as possible during the Q&A, please limit yourself to one question and a brief follow-up. By now, everyone should have access to the press release, which went out at 4

[Mark B. Dunkerley:]

Well, thanks, Ashlee, and thank you for joining us on the call today. I hope you've seen the results that we issued earlier today. I say hope because we understand there's some difficulty with PR Newswire getting the results out on time. They were posted with the SEC, and of course, on our website. We understand that they're now out and about, getting the thumbs up from PR Newswire that they went out. Anyway, for the second quarter, we recorded adjusted net income of $0.24 per share. The overall results for the quarter were better than expected as a consequence of our operating costs having been lower than anticipated. Meanwhile, we matched our revenue expectations. So it was a good quarter during which we continue to implement our strategy of growing into new markets to diversify and strengthen our franchise. With so much going on in our business, you'll not be surprised to hear that there've been a number of cross currents pushing and pulling our results in different directions, which we're going to endeavor to explain during this call. Before we get into the numbers, let me highlight some of the significant developments in our business since our last earning's call. We secured funding for our next 6 A330 aircraft which deliver through the end of 2014, at very favorable interest rates, under a $445 million EETC financing. This was the first time we've used a EETC. In June, we launched 3x weekly service to Sendai, which is our fifth destination in Japan. And just 2 weeks ago, we launched 3x weekly service to Taipei, in Taiwan. With the launch of service to Taiwan, we also announced new code share and interline arrangements with China Airlines. China Airlines complementary route network gives us the opportunity to sell Hawaii as a destination, in all of the significant Asian countries, on a one-stop basis. This represents a substantial enlargement of the catchment area for our services. In May, we also implemented a major change to our revenue management system. That this is the first time that you're hearing of it, is an accomplishment in itself, since these sorts of major systems cutovers can badly disrupt operations if they go wrong. This cutover went almost without a hitch. The new revenue management system gives us increased flexibility in allocating inventory across differing booking classes which, in turn, should enable us to increase PRASM at the margins. Since all of these systems use prior booking history with which to make forward projections, it'll take time for the benefits to be realized. With that introduction, let me turn the call back over to Scott to review the results in more detail.

[Scott E. Topping:]

Thank you, Mark. As mentioned earlier, for the second quarter the company reported adjusted net income of $12.6 million or $0.24 per share. This compares with adjusted net income of $11.7 million or $0.22 for the same period last year. Our return on invested capital for the trailing 12 months was 12.3% pre-tax, and 7.4% on an after-tax basis. Operating revenue for the second quarter was $534 million, a 10.2% increase year-over-year, while passenger revenue increased 9.9%. Load factor for the quarter decreased 3.1 percentage points, to 80.9%, while yield decreased 5.6%. Combined, this produced decreases in RASM and PRASM of 8.9% and 9.2% respectively. Similar to last quarter, please note there are substantial impacts on our unit revenues from the changing mix of international flying and currency headwinds. Looking at the same store comparison, assuming that in the second quarter we flew the same routes we had in the second quarter of last year, mix reduced PRASM by about 5.5 percentage points. Currency headwinds contributed to another 2.5 percentage points to the decline. So, looking at this on a same-store basis and removing the effects of exchange rates, our overall PRASM would have been down just 1%. As you all know, about 30% of our passenger revenue relates to international services. To further break this down, about half of our international sales are in yen, 1/3 in the Australian dollar, 10% in the Korean won, with the balance coming from various other currencies. To update you on our foreign exchange hedging activities, in addition to the yen and the Australian dollar, we've added hedges for the Korean won and the New Zealand dollar. Details on amount hedged and pricing can be found in the press release. Now turning to expenses. Aircraft fuel cost increased $18.8 million or 12.5%, driven by increased consumption. Here are the year-over-year comparisons

[Mark B. Dunkerley:]

Thanks, Scott. During the quarter we experienced a range of influences, some positive and some not so, which are obscured in our summary statement that the revenues came in as expected. Broadly speaking, our Neighbor Island business continues to perform well, and our North America business is on an improving trend, as capacity headwinds are waning. Internationally, factors affecting route performance are too diversed to allow a simple, broad characterization. It's largely understandable, but nonetheless, disappointing result. So let me address each of the market geographies individually. Our North America routes accounted for 47% of our passenger revenue. In this segment, PRASM declined 2.1% on a flat load factor. This is a credible result in the context of our having faced a 5% increase in overall industry capacity. The level of industry capacity growth matters a great deal in this part of the business. Last year's fourth quarter saw industry capacity growing 13%, while we saw our unit revenues decline by 10% as a consequence. In the first quarter, these numbers were 11% and 6%. So a 2.1% decline in unit revenue, in the face of a 5% industry capacity growth, is a good result. I can also report that our North America PRASM continued to strengthen throughout, the period to finish with a year-over-year PRASM increase of 2.7% in June. We're looking forward to the coming quarters when industry capacity is set to decline by 1% in the third quarter and 5% in the fourth. As some of the speculative capacity that came into the market, in the last year, is being withdrawn. Bookings for the third quarter have been strong to date, with relatively minimal need for us to discount from our structured fares. We are on track to register strong year-over-year revenue performance in this geography for the back half of the year. For North America, therefore it's been a 12-month period where we've seen extraordinary capacity additions from competitors. Through the struggle that's ensued, we've demonstrated the superiority of our product, the competitiveness of our cost base and the value of having a better understanding of the market. Major island routes account for 23% of our passenger revenue in the second quarter and we saw much improved results from this area of our business. We did a good job of tailoring capacity by market and by date to the demand for travel. As a consequence, PRASM increased 10.4% on a 4.9 percentage point increase in load factor. Supply and demand are now in good balance. Load travel is healthy and the Neighbor Island routes remain an important aspect of our business. Let me move on to our international routes which accounted for 30% of our revenues in the second quarter. The big developments in this part of our business have been the strengthening of the U.S. dollar against most of the foreign currencies in which we trade, some market-specific industry capacity pressures and the natural process of new routes maturing over time. These big 3 impacts mean that the 20.1% year-over-year decline in international PRASM, which mirrored our expectations at the beginning of the quarter, needs some closer analysis. So I'm going to go market-by-market. Japan is the largest of our country markets, making up roughly half of our international revenues. Japan has been, and we're confident will continue to be, a great success for our business. We are firmly established in the market and have built our reputation and our brand more quickly than others might have expected was possible. We believe we have the best cost structure of any competitor in the market. The yen has naturally weakened our U.S. dollar denominated revenue. But absent this important effect, which amounted for $12 million in the quarter, Japan's overall contribution to our results remained constant year-over-year. This is despite our having started flights to 3 new cities since the beginning of last year's second quarter. Perhaps anticipating a question, let me say that we never built our Japanese business on the expectation of JPY 80 to for the dollar. It was nice while it lasted, but the change hasn't shaken our underlining contentment with having made Japan, which remains Hawaii's single largest source of international visitors, an integral part of our business. It is also the case that, despite the weakening yen, we have not seen any market impact that looks or feels like a softening of demand for the Hawaii vacation. Sydney was a different story. Over the past 3 years, Hawaiian and the other market participants have been throwing 20% plus capacity increases at the route, which, until this last quarter, had been easily absorbed by the burgeoning demand. We all discovered that the 19% year-over-year industry capacity increase in the second quarter was a bridge too far. The long booking curve for Australia, and frankly, our being a little slow to sense the moment when the capacity wouldn't be absorbed by the market combined to undermine our results for this route. Repairs have been underway for some time, and we anticipate good Australian dollar denominated unit revenues, for this route, in the third quarter. They'll be offset by the growing impact of the strengthening U.S. currency to leave us still better off than we managed in the second quarter. I'm pleased to say that Brisbane is maturing faster than our expectations and our service to Auckland, launched in March, is on track. In Korea, demand is building, but not as fast as we'd like to see. Capacity year-over-year is up 21%, to which we contributed 1/3 as both Hawaiian and one of our competitors established daily operations last year in this growing market. The excess capacity is beginning to be absorbed but not as fast as we'd like, so we continue to look for improvement in this market. The U.S. dollar was close to flat against the won, so there wasn't much of an exchange effect on these results. With our new services to Taiwan just inaugurated, we have reached a hiatus in new international route launches. Our international flights have grown fivefold since 2010, and over the past 9 months we have launched flights to 5 new cities. This has been according to our plans, as is now the pause of 9 months without a new city coming online until Beijing starts in April of next year. Our near-term agenda in our international segment is to mature this clutch of new routes, a process for which we have always planned. In the next 12 months, we will take delivery of 5 new A3200 and see 4 Boeing 767s leave our schedule, which substantially slows our rate of growth. Looking ahead, in our international business, the strengthening of the U.S. dollar will take a bite out of the progress we will make on other fronts, namely the maturing of the recently launched services and the rebalancing of the market-specific over capacity. With that canter through the geography of the Pacific, let me turn the call back over to Scott to give us a window into the upcoming quarter.

[Scott E. Topping:]

Thank you, Mark. Looking at the third quarter, as Mark mentioned, our growth was slow and we expect capacity on an ASM basis to increase between 7.5% and 10.5% year-over-year. As we've previously discussed, the slowing growth in the second half of the year is due to the delivery schedule of our A330s that was front-loaded in the first half of both 2012 and 2013. By the end of this year, we will have grown by 1 net widebody aircraft for the year. In the back half of the year, we will be adding 1 A330, while returning and retiring 3 767s. Load factor for the quarter is expected to -- in the range of up 1 to up 3 percentage points. Yield is expected to be down 2.5% to up 0.5%. Combining these numbers, we expect PRASM and RASM to be in the range of down 0.5% to up 2.5% year-over-year. Turning to costs, for the third quarter we expect CASM, x fuel, to range from up 2.5% to up 5.5% year-over-year. Now this is somewhat elevated due to some unevenness quarter-over-quarter. In last year's third quarter, we had large favorable items on the maintenance and compensation lines totaling $7 million. This tough year-over-year comp, combined with cost rolling from the second quarter to the third quarter inflated our CASM, x fuel guidance, by about 3.5 points. For the full year, our ASMs are expected to increase 12.5% to 15.5% year-over-year. This is a slight decrease from the prior guidance we've provided due to scheduling changes. Also, for the full year, we continue to expect CASM, x fuel, to be down in the low single-digit range. In the third quarter, our CapEx should decrease to the $55 million to $65 million range, as we take a break from aircraft deliveries. Our full year CapEx is expected to be within the $355 million to $365 million range. Our full-year effective tax rate is expected to be in the 39% to 41% range, and we do not expect to pay federal cash taxes until 2015 at the earliest. Regarding fuel, and sticking with our normal practice, we are not going to give guidance at this time, but we expect our fuel consumption to be up 7% to 10% in the third quarter as a result of capacity increases. With that said, we've reached the conclusion of our prepared remarks. I'd like to thank all of you for being with us today and for your continued interest in Hawaiian Airlines. I'll turn the call back over to the operator now to open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Mike Linenberg from Deutsche Bank.

[Michael Linenberg:]

A couple of questions here. I want to go back to when you had mentioned about the demand, to and from Japan, despite the weakness in the yen. You had said that there was no indication of any sort of demand softness. As the currency has weakened against the dollar and the fact that a lot of those tickets are priced in Japanese yen, how does that fare change? Do you end up getting lower revenue over time or maybe actually rather quickly does it adjust with the exchange rates, such that you price it in a higher end total? How quickly can that be made up?

[Mark B. Dunkerley:]

Well, a couple of sort of questions in there and good ones, so let me kind of parse them out a little bit. The impact of exchange on us varies according to the booking curve market-by-market. So, Japan, it actually books early but it tickets very late because, as I think as we've explained on this call before, there is some domestic law that allows customers to wait until till 28 days before departure before they book -- before they actually part with their money, rather. So it is relatively immediate that we see changes to exchange rate reflected on our dollar numbers. Contrast that with Australia, where one of the things I think we would signal to you is that we've had a fairly big move in the Australian exchange rate. We haven't felt much of it at this point, because in Australia people ticket when they book, and so there is a quarter and longer lag to the impact of exchange. The actual local currency denominated pricing has much more to do with the competitive dynamic than it has to do with any -- there's no currency surcharge or what have you. We price them in the local currencies, when currency moves against us it affects our revenues, it affects our cost and so we have a natural desire to see pricing firm in this case. But we can only do so to the extent that the competitive dynamic allows us to do so.

[Michael Linenberg:]

Okay, good. Thank you for that. And my second question, I just want to touch on the inter-island market. Sort of 2 parts. One, how has the turboprop operation, how has that been ramping up? Is it on plan and how do you see that business growing? Number one. And then number two, typically, if another player comes into the inter-island market, I normally don't pay too much attention, given the fact that you have a sizable presence. But when the person who buys that airline also buys an island, I always get a little concerned that you may be going up against, potentially, an irrational competitor. I'm just curious about how the competition has changed, possibly, since that carrier was acquired by someone else.

[Mark B. Dunkerley:]

Okay. Well, to answer the first of your questions, Ohana is sort of badly behind at this stage, to do with the fact that the FAA has told us that they're not prepared to resource that certificate activity necessary for us to move forward. It's a pretty hopeless situation. I don't know if I can add beyond that. We don't know when it will break. It's clearly unsatisfactory. As to what the new owner of Island Air there will do, I mean, that obviously remains to be seen. One of the things that certainly has changed over the past several years is that while we always felt, in years gone by, that we had the better competitive situation in a pretty fragmented market, our competitive situation, I think, has improved over the last several years. And we like our blend of service and cost. And in an environment where people are interested in participating in a market and they have cost and revenues of their own, we are not worried about anybody being able to make money and have us lose money. We think we're in the pretty good shape.

[Operator:]

Our next question comes from John Godyn from Morgan Stanley.

[John D. Godyn:]

Mark, you gave a lot of great color by region on PRASM trends and demand trends. l was hoping that we could get a little bit of color on what is on the PRASM guidance by region. And I guess what I'm really getting at is North America versus international and perhaps any color that you have on what you're baking in for FX impact, just so that we know how to sort of adjust our numbers and think about how things are trending from here.

[Mark B. Dunkerley:]

Okay, let me set up and I'll pass it over to Peter, whom you all know, to answer a little bit more specifically on this. Candidly, we're a small company, and so for competitive reasons we do keep some level of this competitive information to ourselves. But, with that understood, let me hand it over to Peter to provide a little more color on what we expect for the third quarter.

[Peter R. Ingram:]

Yes, hey, John. I think the way I would characterize it is -- I think if you look at -- we don't guide by geography, but generally speaking, what I would say is, Neighbor Island, I think we're seeing a continuation of the improving trends. A lot of the actions we put in to the market late last year and earlier this year, with adjusting the schedule by day of week and some of the timings of flights, we think those trends are going to continue to accrue to some good results in the Neighbor Island. North America, I would expect the trends we have seen, of improvement over the last couple of quarters as the capacity growth is changing, to continue into the third quarter as we actually get into a favorable capacity environment on a year-over-year basis. And as we look into the booking curve they're already, the better part of a month into the quarter. We see a positive trend in the North American numbers. As Mark said, when he went through the results on the international, it is a bit more of a mixed bag of developing routes, the currency effects that are on the negative side, although some of those developing routes were now starting to lap the calendar and so we're going into a little bit of a different comp environment there. And I think where we are looking to go with that part of the business is getting into a mode of really, with the hiatus and some of our new routes startups being able to mature, some of those developing routes be able to manage the capacity environments and currency, will remain a bit of a wildcard. I can't predict where exactly that'll go, and as Mark said, there's some lag effects in how that'll affect us.

[Mark B. Dunkerley:]

Yes. I'd summarize by saying that, pretty much in every geography that -- in every country geography to include the domestic, we will see in local currency improvements. The real question is how much of it is going to be taken away by some of the currency effects that we've mentioned?

[Scott E. Topping:]

And the mix effects will...

[Mark B. Dunkerley:]

Yes, correct, and mix as well.

[John D. Godyn:]

Great. And I know there are a lot of moving parts that have sort of complicating the modeling. But I think one of the overhangs on the stock over the last years has just been that we've been in a year-over-year margin decline kind of environment. But if I'm interpreting what I'm hearing correctly, a lot of inflecting trends, it sounds like we might soon be in a margin expansion kind of environment. Of course, ignoring any macro shocks or huge moves in FX. Is that the way that you guys are thinking about sort of the end of this year and maybe 2014? Is that the right general framework?

[Mark B. Dunkerley:]

I would say, to call it absolutely very strongly that -- so setting FX aside for one second, and obviously fuel, which will move in whatever way fuel moves. But setting those aside, I think all of our sort of core indicators are moving very strongly in positive directions. So, certainly, in local currency terms, they're moving in a positive direction. The question for us is how some of these big things are going to either help us, we hope, or unstitch some of the positive moves we made. But in kind of route by route, local currency terms, everything is on a very, very much of an improving trend, looking to the back half of this year and early into next year.

[John D. Godyn:]

That's really helpful, and just one last question. A little bit of kind of a random question. But over the last few months, I've just noticed a lot of news releases with different employees being hired into -- or I guess promoted in some cases, into different roles, and we saw a director in Japan get hired. Just anecdotally more than I remember in the past, certainly no sea-level changes. But is this just the time of year for that or is there some broader changes that are going on that you can shed some light on?

[Mark B. Dunkerley:]

It's a coincidence of when we've brought people on board. I don't think there's no sort of great managerial reorganization, that we've had anything like that. Clearly, as we've grown, as the business has become more complex, as we participate in more geographies, it's important for us to get some additional expertise and heads to help us manage this. That's part of the natural process and we are moving on down that road.

[Operator:]

Our next question comes from the line of Hunter Keay with Wolfe Research.

[Hunter K. Keay:]

Okay, so I'm looking over your balance sheet right now, and over the last couple of years, 2.5 years specifically, your debt has tripled but your shareholder equity is down and your stock price is down. And looking at the order book right now, over the next few years, and there is a lot of debt coming. So I guess the real question here is, how do we make sure that the next 2.5 years are not a repeat of the prior 2.5 years?

[Mark B. Dunkerley:]

You know from a management perspective, it's important that we deploy these assets in a way that is sensible, is building the strength of our franchise, is improving our sort of core strength, just as a business, and we do so profitably. Your implied frustration is our actual frustration, in terms of the way the share price has moved. At the end of the day, we believe that if we continue to pursue sensible growth, diversifying our business, making us more secure as a franchise, the equity markets will take note. It's really not for us to be able to determine exactly how the equity markets will move. We try and be very transparent about what we're doing. A number of you guys have written about the kind of long-term sense of what we're doing. Clearly, as a management team, we're running this business for the long-term.

[Peter R. Ingram:]

I will just add to that, that you see a fairly rapid pace of growth, obviously, in ASMs in the last couple of years. And I think one of the things that you would have heard in Mark's commentary in this call is that we've had, in the last 9 months, 5 new cities added to the map. Sort of developing routes being stacked on developing routes. And, per se, developing routes are not a bad thing. That is how we build the business and find profitable markets to operate in over time. But I think putting them, certainly, on top of one over another creates a little bit of a headwind for us to manage through. Over the next little bit, I think if you look at the fleet plan, we've actually got some more replacement and a slower rate of growth, not just in the back half of this year but as we head into 2014. So I think that some of the challenges that we've taken upon ourselves in the last year are not going to be there to the same extent going forward. And you can never predict where the macro headwinds will go. But I think some of those things above the -- just the pattern of our growth are going to be a little bit different going forward.

[Hunter K. Keay:]

Sure, Peter. And to that though, I mean, as far as I can tell, tell me if I'm wrong, but I think you're taking 5 A330s next year as well. Your CapEx this year is bigger than your market cap rate now. That's pretty mind blowing statistic. And I know you can't control the price of your equity but I mean your CapEx presumably is going to be, directionally, about the same about as it is this year. I would guess, please correct me if that's wrong. So at what point do you consider -- and I know you're doing this for the long-term, but at what point do you consider potentially deferring some of this growth if the market is clearly not rewarding you for it? In terms of specifically deferring some of the aircraft orders.

[Mark B. Dunkerley:]

Well, again, we have contracts for aircraft, with which we are happy, because we believe we see a market out there for them. We see our business improving and strengthening. Clearly, we've got aircraft retiring, as we've talked about. But it can't come as a surprise to you that I can't really comment on -- the implication of your question is that you'd like us to comment on alternative capital structures. And you know, as a management team, that we can't do that in a forum like this.

[Operator:]

Our next question comes from the line of Steve O'Hara with Sidoti & Company.

[Stephen O'Hara:]

I was just curious, in terms of the number of routes you've added recently, and I know you've had a lot of growth internationally. I mean, how many of those would you deem fully mature? How many are still maturing? My guess is there's still a lot of maturation left in a lot of those markets and I guess maybe you could talk about where you see the best growth, other than the market you're in right now.

[Mark B. Dunkerley:]

Sure. I think I said 10 routes in the last 3 years, I believe. I would describe 2 as fully mature. For international routes, 2 to 3 years for maturation is what you could expect. So, obviously, you are in a steeper part of the learning curve earlier than towards that third year. But, at this stage, I would describe 2 of the new routes as being mature. And I think it's 10, I'm looking around the table to see if anybody's nodding up and down, since we starting Haneda in the fall of 2010.

[Stephen O'Hara:]

Okay, and then -- I mean, where else do you see other opportunities? Do you expect to continue in Asia?

[Mark B. Dunkerley:]

Yes, we do. Asia, we continue to think of as being the area that is going to sustain most of our growth. I think you'll have noticed, and this going to be a consequence that we're going to be, I suspect, talking about as we roll into the back half of this year and early next year is that a lot of the new routes, new cities that we put online, we've done so with less than daily frequency. That has a couple of impacts. I mean, it's the right thing to do given the size of the route. But I think quite a bit of our growth in the period ahead is going to come from building frequency. That should have, by the way, a benefit. The reason I say we're going to be talking a bit about this is that, initially, if you start services as we have done, at 3 or 4 times a week, they're quite expensive routes to operate. You have crew expenses, you've got the infrastructure of setting up an operation in a foreign country which is spread over relatively few frequencies. So, as we increase frequencies, one of the things we're hoping to see is sort of retaining unit revenues, actually growing the size of unit revenues and reducing unit costs. So I think that's going to be the kind of largest area of growth going forward. We've got Beijing starting next April, and it'll come as no surprise to anybody listening on this call, that China has the capacity to be a huge market for us here in Hawaii. Whether it will be or not remains to be seen, but we're confident that it will be. But that's, I think, going to be an area of particular focus for expansion.

[Stephen O'Hara:]

And then maybe as a follow-up, just on China. I mean, I know there's been a lot of high rapid growth in the -- after the downturn, there's been rapid growth coming back from China. What are the key barriers to kind of keep that growth growing and where does the visa waiver stand?

[Mark B. Dunkerley:]

I think we have no prospect of visa waiver to mainland China coming anytime in the foreseeable future. I think it's not even remotely on the agenda. We'd settle for a more sensible visa regime rather than the visa waiver situation. So I think that's a long ways off. China, the growth is slowing but the growth is still, in many orders of magnitude, greater than we're used to seeing in the Western world. I think, importantly, the cohort of people that are coming into that bracket, for which an international trip is a reasonable household expenditure, is growing particularly fast. And so while -- yes, we read the headlines, as everybody else does, around China growth, we're not, at this point, even remotely worried that, that is going to have a big impact on the growth about that. And we start from such a small place that we're unlikely to see a direct impact from the slight slowing of the Chinese growth rate.

[Operator:]

Our next question comes from the line of Glenn Engel with Bank of America.

[Glenn D. Engel:]

The supply side, when I look at your full-year number, it implies capacity growth of flat to up 5% in the fourth quarter. Is anything running down year-over-year? What's the big differences?

[Mark B. Dunkerley:]

Our capacity, I think that is really the lapping of the point at which we hit the accelerator last year. So I think it's...

[Glenn D. Engel:]

Is it fairly flat across the board?

[Mark B. Dunkerley:]

Yes. I'm just thinking out loud. In the next 6 months we have 1 767 leaving and how many 330s coming?

[Peter R. Ingram:]

We actually have 1 330 coming in and 3 767s leaving. So what you see by the end of the year, Glenn, is we're about 1 net aircraft up for the full year. So we did have a boost, and I think Scott alluded to this in his comments in the capacity in the first half, that's actually a terrific thing for us because it gives us some extra capacity in the summer when we have the peak demand from North America and from some of our international markets. But we'll see some of those aircraft go into lease return and retirement at the end of the year, and we ended with 4Q at, effectively, a 1 airplane up.

[Glenn D. Engel:]

And, secondly, just on the market side. Has the seasonality of your business changed with all these new routes added?

[Mark B. Dunkerley:]

Yes it has. Some of the Asian routes have more pronounced seasonality to them. We're still kind of working out -- I mean, for example, Japan has very pronounced peaks and very pronounced troughs. But beyond Japan, which is the overseas market, the recently added overseas market we've been in the longest, there are going to be peaks and troughs in places like New Zealand. Australia, we know quite a bit about already, places like Taiwan. So we expect to see peaks and troughs. We have ideas because, obviously, we do some market research. But there is, really, no substitute for experience in the marketplace. And we talk about maturation, it's understanding these peaks and valleys a little bit better, that is one of the important things we're talking about.

[Peter R. Ingram:]

In general, and a general comment isn't always true, but Japan tends to amplify some of our historic peaks. The South Pacific routes are, in many times, quite different and there can be peaks based on school vacations that vary from month-to-month within a season that are quite different than what we have in North America.

[Glenn D. Engel:]

And tied to that, your competitors seem to be saying that they found the Hawaii North America market much more seasonal than they expected, and you're seeing much more, greater capacity cuts by day of weeks. So seeing a greater differentiated supply peak versus off-peak days, peak versus off-peak months. Are you going to start doing that with your international routes? Start adjusting supply much more on a day of week and seasonal basis or do you feel good about the schedules you have out there?

[Mark B. Dunkerley:]

We have already, actually, started doing that in our international routes. We've added capacity into Sydney and Brisbane during their very peak months at which we subsequently removed. We've got some extra sections going into New Zealand as well. So we are absolutely on board with the idea of varying frequencies by month. It's less day of week, it tends to be more period -- it tends to align with things like school holidays rather than days of the week like people prefer to fly on a Friday than a Thursday.

[Operator:]

Our next question comes from the line of John Reardon with Crowell, Weedon.

[John Reardon:]

I just have one question. Could you touch on your relationship with JetBlue? And, specifically, how has the feed out of New York worked? Has it lived up to your expectations? Is that something that's growing? I'd just like some color on that.

[Mark B. Dunkerley:]

Sure. We've got a terrific relationship with JetBlue. We enjoy working with them, and we certainly are enjoying some benefits, as we believe they are, of the relationship we have between the 2 of us. It's clearly an area where we see some growing connection activity and we are continuing to find ways of improving that. In general, I think we've been pleased with the connecting traffic that we've received from JetBlue, and I'm not sitting here sort of remotely dissatisfied with the nature of our relationship with that company.

[Operator:]

Mr. Dunkerley, there are no other questions at this time. I would like to turn the call back over to you for closing comments.

[Mark B. Dunkerley:]

Okay. Well, thanks everybody, again, for joining us on today's call. As we just covered, there are many moving parts to our generally good second quarter result. With so much going on, we're pleased to announce the date for our annual Investor Day, when we're going to be able to shed even more light on the strategy we've been actively pursuing. It's going to be held on October 29, in New York. So please look for your invitation to arrive shortly. And with that, mahalo for your time.

[Operator:]

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