Hawaiian Holdings, Inc.
Q3 2013 Earnings Call Transcript

Published: 23 Oct 2013

[Operator:]

Greetings, and welcome to the Hawaiian Holdings' Third Quarter 2013 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Ashlee Kishimoto, Director of Investor Relations with Hawaiian Holdings. Thank you, Ms. Kishimoto, you may now begin.

[Ashlee Kishimoto:]

Thank you, operator. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' third 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. [Operator Instructions] By now, everyone should have access to the press release, which went out at about 4

[Mark B. Dunkerley:]

Thanks, Ashlee. Thank you, all, for joining us today. As you can see from the press release we issued earlier, for the third quarter we recorded adjusted net income of $0.69 per share, in line with consensus. Both revenue and cost were close to the expectations we'd set at the beginning of the period. Our domestic businesses, both North America to Hawaii and amongst the Neighbor Islands, performed well during the peak summer period. Performance in our International business was adversely impacted by both changes in the value of the dollar and by the dilutive consequences of having added a clutch of new routes during the last 12 months. It was good to reach a period of the year when the rapid growth in industry capacity between the U.S. West Coast and Hawaii, seen of late, started to recede. At the same time, another quarter allowed for the further maturing of the international routes still very much in their infancy. To put these 2 improvements in context, if we take away the effects of the strengthening U.S. dollar from our results, the third quarter would've been the single best quarter in our company's history. Unsurprisingly, all of this growth made the third quarter the busiest single period in our company's 84 years in business. Despite the heavy load of activity, my colleagues, as ever, have excelled. Not only does Hawaiian continue to lead the operational league tables, but in the last quarter, we even exceeded our own significantly more exacting targets. Our success as a business has long rested on their efforts, and they have my thanks and appreciation. Before we get into the numbers, let me highlight some of the significant developments in our business since our last earnings call. In August, we announced the reintroduction of daily nonstop service between Honolulu and Oakland, beginning in January of '14. This is an increase from 4x weekly service today. This will bring us to daily service to both Honolulu and Maui from Oakland. We've kept the overall level of our Bay Area capacity flat by funding this added Oakland flying from reductions on other Bay Area routes. We also announced less-than-daily service between Oakland in each of Kona and Lihue for the summer 2014 and similar less-than-daily service for next summer between Los Angeles and the same 2 islands. In September, we enhanced our in-flight experience on our Boeing 767s by becoming the only U.S. carrier to offer the Apple iPad mini as the in-flight entertainment system. This initiative has been extremely well-received. For this seasonally weak period of demand to New York, we've also reduced daily frequency to 5x a week and redeployed the capacity to Oceania. This coincides with a period of seasonally strong demand for the Hawaii vacation from that part of the world. Later this week, we're going to file an application with the U.S. DOT to award Hawaiian the route right to serve Tokyo Haneda being vacated by American Airlines. If awarded, Hawaiian intends to use the route right between Haneda and Kona. Hawaiian is the only one of the original awardees of Haneda rights to have made a commercial success of them. Our continued interest in additional rights underscores our confidence in Japan and in our ability to prosper there, despite the substantial strengthening of the U.S. dollar against the yen in the last year. With that introduction, let me turn the call over to Scott to review the results for the quarter in greater detail.

[Scott E. Topping:]

Thank you, Mark. As mentioned earlier for the third quarter, the company reported adjusted net income of $36.8 million or $0.69 per share, this compared with adjusted net income of $40.6 million or $0.77 per share for the same period last year. Our return on invested capital for the trailing 12-months was 12% before tax and 7.2% on an after-tax basis, which exceeded our weighted average cost of capital. Operating revenue for the third quarter was $599 million, a 9.1% increase year-over-year, while passenger revenue increased 9.3%. Load factor for the quarter decreased 0.1 percentage points to 83.2, while yield increased 0.3%. Combined, this result resulted in an increase in RASM and PRASM of 0.1% and 0.2% year-over-year, respectively. As with the effects of currency translation to U.S. dollars and new international flying, our overall PRASM would've been up approximately 6% year-over-year. And despite these headwinds, our unit revenue results marked a positive inflection spurred by strong performance in our domestic operations. International service comprised 30% of our passenger revenue, with the majority of ticket sales in foreign currencies. If we break this down, approximately half of our international sales were in yen, 20% in the Australian dollar, 10% in the Korean won, with the balance coming from various other currencies. And as you know, we hedge a portion of our foreign exchange exposure with forward contracts. Details on the hedging program can be found in the press release. As we turn to expenses, aircraft fuel costs increased $15.6 million, or 9.4%, driven essentially by increased consumption. We consumed 59 million gallons of jet fuel, up 8.7%. Our GAAP fuel cost was $3.06 per gallon, compared to $3.04 last year, and our economic fuel cost per gallon was $3.12 as compared to $3.07 last year. Our fuel hedging program remains consistent with our usual practices. Again, more details can be found in the press release. Excluding aircraft fuel, our operating expenses were slightly better than we initially expected. CASM x fuel increased 2.1% year-over-year. As we mentioned on last quarter's call, we expected our CASM x fuel to be elevated this quarter for the following reasons. In last year's third quarter, we had large favorable items on the maintenance and compensation lines, totaling approximately $7 million. This tough year-over-year comp, combined with $2 million, which rolled from the second quarter to the third quarter, inflated the GAAP in CASM x fuel by approximately $9 million or 2 percentage points. Absent these adjustments, our CASM x fuel would be flat. Depreciation and amortization was down year-over-year. The increase in additional owned aircraft and aircraft under capital leases in our fleet were more than completely offset by a decrease in amortization expense related to an intangible asset that was fully amortized in the fourth quarter of 2012. During the quarter, we returned 1 Boeing 767 at the end of its lease term and had no A330 deliveries. Below the operating line, we reported nonoperating expense of $7 million in the quarter compared to $1.1 million in the prior-year period. The most significant difference year-over-year relates to lower fuel hedging gains compared to last year and higher interest and debt amortization expense due to additional A330 financings. Our balance sheet remains strong in this period of growth. We ended the quarter with $441 million in unrestricted cash and $21 million in restricted cash, primarily for deposits related to future interest payments for the pre-funded EETC that we entered into this past May. Our revolving credit facility remained undrawn at the end of the quarter, providing additional liquidity of $70 million, which is net of letters of credit. CapEx in the quarter was slightly higher than anticipated at $73 million, which included $50 million of payments for aircraft and aircraft-related items. Wrapping up the third quarter, we accelerated and completed our minimum required contributions for the 2013 plan year, contributing $12 million to our pension plans. We are not required to make additional contributions for the remainder of the year. So with that, I'll turn the call back over to Mark for further commentary on the business.

[Mark B. Dunkerley:]

Thank you. Revenue was in line with expectations in the third quarter. I'll address each of the market geographies individually. But overall, our Neighbor Island business continued to perform well. We saw meaningful improvements in North America, as industry capacity declined over last year. And we have a mixed bag of performance in our new international operation. So let me start with North America. North America represented 47% of our passenger revenue. Performance improved substantially during the third quarter. PRASM grew 10% on a 2% increase in load factor. Our own capacity was up by slightly less than 1%. Our revenue results reflected an improving balance of supply and demand and our superior product offering. While it's difficult to precisely attribute a benefit to the implementation of our upgrade to the revenue management system, we believe this also contributed to the improvement. As we've mentioned before, industry capacity growth has a significant impact on this part of our business. During the third quarter, industry capacity declined 1% compared to the double-digit, year-over-year increases from the third quarter of last year to the first quarter of this year and a 5% increase last quarter. Industry capacity is expected to continue to decline by 3% in the fourth quarter and 1% in the first quarter of next year, as some of the capacity added last year leaves the market. Booking trends have been strong to date and we expect strong, year-over-year revenue performance to continue in this geography in the fourth quarter. Our Neighbor Island routes, which accounted for 23% of our passenger revenue, posted good results in the quarter. PRASM was up 15.9% on a 4 percentage point increase in load factor. Since 2011, we have grown ASMs by 8% in this area of our business, while keeping supply and demand in good balance. We attribute the strong results in our Neighbor Island business to a number of complementary initiatives. In terms of schedule, since growing capacity in 2012, we've focused over the last several quarters on optimizing capacity by day of week and by time of day. We've also fine-tuned our Maui hub operations to provide good connections to Neighbor Islands off our long-haul services to Maui from the Bay Area, Los Angeles and Seattle. In conjunction with our revenue management system upgrade, we also realigned our fare structure to increase the number of price points and provide more revenue management flexibility. All of these, we believe, contributed to the improved performance. Our international routes accounted for 30% of our passenger revenue in the third quarter. In this part of our business, PRASM decreased 17.7% on a 2.6 percentage point decrease in load factor. Both of these results are sequentially better than the year-over-year results in the second quarter. As in recent quarters, translating foreign receipts into dollars, along with mix effects from new international flying, has had a substantial impact on these numbers, so it's important that we delve more deeply. Currency headwinds dampened PRASM by 11 percentage points before the benefits of hedging. Adding new flying contributed another 1.5 percentage-point reduction to PRASM compared to a same-store comparison. So absent the effects of exchange rate and changing mix, our overall PRASM would've been down approximately 5 percentage points. If the dollar remains in the current trading range, vis-à-vis the yen and the Australian dollar, then we've got another 6-months plus of unfavorable foreign exchange comparisons. The impact of our mix of flying should be dwindling in the coming quarters since we'll be lapping the start of a number of new international routes while not adding new destinations at the same rate. Japan, as Scott mentioned earlier, accounts for roughly half of our international activity. It remains a successful part of our network, despite the currency headwinds which amounted to $13 million net of hedging in the quarter. Within Japan we have routes that are mature and are doing fine. We have routes on which we have competitive pressure, and we have routes that are in the early stages of maturation. As witnessed by today's request to be granted the Haneda route right vacated by America, we remain bullish on this market. Much thanks are due to our travel partners in Japan who've been key in helping us build a franchise and with whom we enjoy tremendous working relationships. JPY 80 to the dollar was great while it lasted, but it was never key to our being successful. We can make money where the exchange rate has now settled, at round about JPY 100 to the dollar. And indeed, we can succeed in Japan at a yen value below today's mark. Let me now move south to Oceania, our routes to Australia and New Zealand. These accounted for 1/3 of our international revenue. Starting with Sydney, we saw better results sequentially as the rate of industry capacity growth slowed dramatically, from up 19% in the second quarter to up 1% in the third. Our relatively new Brisbane route, meanwhile, continued to shine and has developed more quickly than the average. Australia has been a source of good results for us, despite the weakening of the Australian dollar taking $1 million chunk out of our results. Since there is a much longer booking curve in Australia than, for instance, in Japan, we expect the big move in currency that took place in the spring to start hitting our results in a much more significant way in the fourth quarter and into next year. Elsewhere in Oceania, our service to Auckland is about 6 months old and continues to develop as expected. Demand in Korean -- in Korea, while improving, has fallen short of our expectations. You recall that there was a significant increase in capacity between Seoul and Hawaii last year, that negatively affected our Korea performance. We had expected that, by now, demand would've caught up with capacity, but slower than expected economic growth has delayed this from occurring. On the flip side, with a weak economic backdrop, industry capacity is now moderating. And this should provide some benefit going forward. Capacity declined 11% in the quarter and is expected to decline 10% in the fourth quarter and the first quarter of next year. Korea, with its growing middle-class, remains an important opportunity for us going forward, and we feel the current imbalance between supply and demand will gradually come right. The past 3 years have been a period of rapid expansion at Hawaiian. We remain solidly profitable, adjusted for nonroutine items, while launching service to 10 new cities. We're now entering a different phase in our evolution. Capacity will start to slow, and there will be fewer new route launches. Our efforts are going towards maturing the ones we have so recently started. Our combination of cost competitiveness, widespread brand recognition and high service quality, position us better than any of our other competitors between the U.S. West Coast and Hawaii. Our position within the islands of the state of Hawaii is good. Our international expansion has yielded great promise. In sum, we remain confident that our strategy is sound and that we're positioned well for the years ahead. With that, I'll turn the call back over to Scott who is going to take you through our fourth quarter guidance.

[Scott E. Topping:]

Thank you, Mark. As mentioned earlier, our growth will continue to slow in the fourth quarter and we expect capacity on an ASM basis to increase between 3.5% and 5.5% year-over-year. As we've discussed in the past, slowing growth in the second half of the year was driven by the delivery schedule of our A330s that was front-loaded in the first half of both 2012 and 2013. In the fourth quarter, we'll add 1 A330 while returning and retiring 2 767s. By the end of the year, we will have grown by just 1 net widebody aircraft for the year and our A330s will outnumber our 767s. PRASM and RASM are expected in the range of up 2.5% to up 5.5% year-over-year. These revenue metrics are boosted in part by an adjustment in the prior-year period. In last year's fourth quarter, we had an unfavorable, frequent flyer adjustment on the passenger revenue line, totaling $7.9 million pretax. This inflates our fourth quarter PRASM and RASM by 1.8 and 1.6 percentage points, respectively. Turning to costs, for the fourth quarter, we expect CASM x fuel to range from up 2% to up 5% year-over-year. This is also somewhat elevated, due to some variability quarter-over-quarter related to a favorable frequent flyer adjustment on the expense lines, totaling $5.4 million. This tough year-over-year comp inflates our CASM x fuel guidance by about 2 percentage points. So in sum, the frequent flyer accounting adjustments made last year has the effect of inflating our expected year-over-year RASM improvement by roughly 2 percentage points and our CASM performance by the same amount. In the fourth quarter our CapEx is expected be in the $90 million to $100 million range, including 1 A330 delivery. 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 flat to up 2% in the fourth quarter as a result of our 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 Michael Linenberg from Deutsche Bank.

[Richa Talwar:]

This is actually Richa Talwar filling in for Mike. The first one I have is just on your turboprop business. I know it's a very small portion of your overall business, but there was some press recently that the government budget issues were affecting your ability to jump-start that operation, so I was hoping you could speak to that. And then if you could also comment on your relationship with Empire Airlines as it relates to that business unit?

[Mark B. Dunkerley:]

Sure. I mean our -- the contribution of turboprop to our business right now is 0 because the FAA won't process the important certification work that needs to take place in order to allow us to start service. It's a completely unacceptable situation, utterly frustrating from our perspective and woeful in every dimension. And we are going to -- we're extremely unhappy by the situation. It was caused actually by sequestration, not actually by the government shutdown. And at this point in time, we have no estimate of when the FAA is going to be able get around to our certification -- the certification activities that needs to take place.

[Richa Talwar:]

But my -- just one quick follow-up on that. Were you paying mortgages on those aircraft that you've taken for that operation or not yet? And was there a financial impact...

[Mark B. Dunkerley:]

There is -- those aircraft are owned, wholly owned by us. They're not leased. There's no debt associated with them. But they are owned assets of ours and they are sitting idle. With respect to our relationship with Empire, it's a typical type of relationship for this -- of this nature. We essentially meet their costs of operating the flights and they are also doing some maintenance modification work on the airplane. Clearly, at the moment, those costs are relatively low because nothing's actually happening.

[Richa Talwar:]

Okay, great. And then sort of a high-level, big picture question. As your business starts to mature, as you overlap on some of these new markets, and you said that your capacity growth is expected to moderate. Are you shifting focus at all a little bit more towards shareholder-friendly initiatives? I mean, are you considering a dividend, share repurchase, anything like that?

[Mark B. Dunkerley:]

Yes. I mean, I think our big shareholder-friendly initiative, I think, is improving financial results, which I think we've talked at length about. Clearly it's inappropriate for me in a call like this to make specific comment about things like share buybacks or dividends. You should know that we are absolutely conscious of the need to provide returns to shareholders and we do constantly evaluate what our near- and medium-term prospects are, and what we think would be best in terms of shareholder returns.

[Operator:]

[Operator Instructions] Your next question comes from John Godyn from Morgan Stanley.

[John D. Godyn:]

Mark, I was hoping -- you mentioned that the revenue outlook looks good year-over-year. I was hoping you could just elaborate on holiday booking specifically. I know you guys have a little bit of a longer booking curve here. Is there anything worth noting on the holiday specifically?

[Mark B. Dunkerley:]

Yes. Let met just turn that one over to Peter, who's here and who can answer that for you, John.

[Peter R. Ingram:]

Hey, John. With respect to North America, which is where we have the most visibility on the booking trends, I'd say that the fourth quarter, trend-wise, looks similar to the third quarter. I would say the one nuance to watch for in the quarter is the timing of Thanksgiving, which makes November a little bit of a weaker month, with a week in the middle of the month that is sort of an extra week compared to last year, that is in a slower period, but we ought to make that back up in December when we get all of the return Thanksgiving traffic in the early part of December and then a relatively compressed period before the Christmas and New Year traffic picks up at the end of the year. So year-over-year, the November will be the weakest month of the quarter, and December should be the strongest month of the quarter. But overall, trends look pretty positive there.

[John D. Godyn:]

Okay. That's very helpful. And Mark, you mentioned, just kind of ticking through this list of headwinds that we've been tracking throughout the year, you mentioned that some of the markets, and I think you highlighted Korea, have not been building as well. You also mentioned that some FX headwinds are going to continue a bit here. And if I remember correctly, the competitive capacity numbers that you gave, while certainly that headwind is getting a bit better, it sounded like the number was a little worse than what I remembered before. I think you said negative 3% in the fourth quarter. You had been saying negative 5% before, if I have that right. What I'm getting at here is, I think there was a sense last quarter that as we look towards the end of this year and into next year, we'd be poised for sort of significant margin improvement, year-over-year. It seems like your fourth quarter guidance is on the right track in that direction. But in terms of some of these headwinds that you highlighted, is there any sense that these are becoming risks that are significant enough to maybe alter that trend as we look into 2014? Just wanted you to kind of gauge that commentary a little bit for me.

[Mark B. Dunkerley:]

Sure. Sure, happy to. The -- if you take exchange out of the picture, and exchange is very important, it has to be included in the picture, but just follow me through on this. I think the sort of improvements, the maturation that we're seeing in routes, and against the expectation that a typical international route would take somewhere in the region of 3 years to come to full maturity, I think we're pretty pleased with how developments are building there. I think we have suffered, somewhat, from the fact that we had an abnormally weak U.S. dollar in that first year of Japan and, to an extent, Australia. And I think we're going to suffer more from comparison than we're going to suffer from fact. I think Australia and Japan continue to do well for us as route groups, and we would anticipate that they will continue to contribute meaningfully and positively going forward. It's just, year-on-year, when you take 20% out of the value of your -- of each ticket that you sell, it has some fairly dramatic impacts on year-over-year comps.

[John D. Godyn:]

Got it. So is it fair to sort of say there are continued headwinds but the broader thesis of margin expansion and margin rebound here is still intact, even in the face of those headwinds?

[Mark B. Dunkerley:]

Yes, yes. I think it absolutely is.

[John D. Godyn:]

Okay. That's very helpful. And then just last, last question, and this might be for Scott. But when we think about the CASM x fuel profile, we've been in a period here of, just based on the aircraft deliveries decelerating capacity growth. As we enter perhaps some quarters where it reaccelerates in 2014 and -- should we expect the CASM x fuel growth profile to turn negative again? Is that the right way to think about it? Or are there some puts and takes that might not cause that to happen as we look into 2014?

[Scott E. Topping:]

Yes. I think, John, there is some unevenness. And again for the fourth quarter there are some headwinds due to the effects of some accounting adjustments from last year, as I mentioned on the frequent flyer accounting side. So there is kind of a built-in headwind for the quarter. We'll talk a little bit more about 2014 costs next week at Investor Day. We're pretty early in our budgeting process, but I think it's fair to say we're going to be focused on cost and we are going to try to continue to improve in that area. But the math behind lower growth, as you said, will be working against us.

[Operator:]

[Operator Instructions] Our next question comes from Hunter Keay from Wolfe Research.

[Hunter K. Keay:]

So question, the new service from LAX to Kona and Lihue, does this type of service to the outer islands, does that kind of cannibalize your higher-margin Neighbor Island business? And is it margin-dilutive? And as you add more service to -- nonstop service to these outer islands, should we think of the Neighbor Island business as simply just being too big?

[Mark B. Dunkerley:]

Yes. Let me have Peter answer that one for you.

[Peter R. Ingram:]

Yes, Hunter, the service that you're referring to, and we have it from both L.A. and Oakland next summer, is seasonal service that will go into Kona and Lihue. Frankly, in the peak part of the day when we have our wave of flights coming from the West Coast, we've got an awful lot of demand for Honolulu, but also a lot of demand for Neighbor Island. And there is a real shortage of our ability to provide connecting seats to the Neighbor Island. So I don't think we are going to be feeling that it cannibalizes any of the capacity on the Neighbor Island flights. I think, in fact, it frees up some of the capacity on those flights for connections from other places where we don't see the depth of demand that we have in the Bay Area and in L.A. to provide service directly to Kona, Lihue. Obviously, we're not the only one to have discovered flying direct to the Neighbor Islands. This is a trend we've seen for a long time. It is something -- because we don't have big hubs from which to feed on the mainland and because we don't have narrow-body aircraft in our fleet to serve the Neighbor Islands, where it makes sense for us is really in that peak summer period where we get a little bit of aircraft back by the way we time our maintenance. And that allows us to put these seasonal services in at that period of peak demand and work off of them. Both these -- or all these routes are going to do well next summer.

[Operator:]

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

[Helane R. Becker:]

So I have -- I only have 2 questions, but one is -- I'm going to ask them at the same time. One is maintenance. I was kind of surprised to see the 17% increase in the quarter given the shift in mix in aircraft. And the other is really a process accounting issue with the stock price over $8. You're kind of in the money on this $7.88 convert, and I kind of wonder what your thought process is with respect to share count regarding that convert if the stock stays where it is.

[Mark B. Dunkerley:]

Helane, sorry. On the first part of your question, I didn't -- I mistook what you said. You mind saying it again?

[Helane R. Becker:]

On the maintenance question, you mean?

[Mark B. Dunkerley:]

Ah, yes...

[Helane R. Becker:]

Yes, so you have a 17% increase in maintenance in the quarter, and I would've thought, given this changing mix of aircraft, maintenance would've come down a little bit.

[Mark B. Dunkerley:]

Scott?

[Scott E. Topping:]

Yes. I think it was the -- really, the year-over-year comparison had some unusual maintenance catch-ups and adjustments and accruals last year that made the 17% kind of overstate what the real run rate is. On the convert, Helane, we're certainly looking at that now. One thing to keep in mind is that we account for those with the treasury stock method, which means the dilution comes in fairly gradually and it doesn't become very material. So -- and of course it has to be over $7.88 to be dilutive on a GAAP basis. I would also like to remind everyone that there is a hedge in place on the convert. So from an economic standpoint, from a cash flow standpoint, we have effectively raised the conversion price from $7.88 to $10. And so the economics of it are what the focus should be, but of course on a GAAP accounting basis, we also have to recognize that dilution begins to come in gradually at $7.88 and above.

[Operator:]

Our next question comes from Fred Lowrance from Avondale Partners.

[Fred T. Lowrance:]

Just want to shift the focus over to Japan real quick. I look at the competitive capacity growth over there. You see, obviously, the arrival of Korean Air to that market. Over the last several months, Japan's airlines started to add some capacity on in Narita, Osaka, Nagoya, and then accelerates into the double-digit growth rate in the fourth quarter, first quarter and in the second quarter of next year. So are we looking at another West Coast, U.S. to Hawaii competitive headwind here in Japan? Or does the fact that most of this growth is on Narita-Honolulu, which you technically don't compete on, though you have that Tokyo exposure through Haneda. Does that limit the impact on the overall fare environment that you expect out of the Tokyo market?

[Mark B. Dunkerley:]

Well, Tokyo, I think you asked exactly the right question. Narita is not a perfect substitute for Haneda. So there is some degree of insulation, but neither is it completely, such a completely separate market that there is not a relationship between overall capacity out of Tokyo and our individual performance on Haneda. So where you see capacity going up, I think it's fair to assume that there will be some effect on our ability to secure price increases caused by that. But at the same time, during the same period of time, we are building our name awareness, our brand presence. We have -- are deepening the relationships that we have with our distribution partners. In some of our other markets, which are even newer, we're still in the process of understanding the nuances of how to sell and distribute tickets. So we've got some very important positive influences on where unit revenues are going, all other things being equal. And to the extent that things aren't equal, that we then have to offset or even -- or it can become additive to that. I think Japan, as a whole, we continue to -- we've got a lot of moving parts, some of them you've just highlighted, which makes it -- at this stage, we're not saying that there is a decline in demand caused by the stronger U.S. dollar or the weaker yen, because we can't actually pass that out of what's going on there. In general, we are quite pleased with development, the way that Japan is developing. We do have to deal, as you say, with some capacity headwinds in Tokyo. That's kind of a roundabout answer, but I hope that kind of captures the sense of it.

[Operator:]

[Operator Instructions] Our next question comes from Bob McAdoo from Imperial capital.

[Bob McAdoo:]

Just to [indiscernible], as we have seen in some places, you squeezed capacity down to something less than daily service, whether it's Kennedy or some of the new markets in the Oceania area, whatever. Is there anything to be gained by going to something less than 7 days a week in places like Korea or Fukuoka or Osaka, some of the other airports that maybe are not as matured yet? Is there a reason why we're still at 7? Or are they just doing so well, they need to be at 7? Kind of give us some color on that, if you would please?

[Mark B. Dunkerley:]

Sure, absolutely. I mean, it's kind of a market-by-market analysis. I don't think there is any rule of thumb that you can apply. A place like Fukuoka and Osaka, we're head-to-head with competitors that are operating daily. So once you -- the math of going below daily is relatively straightforward, which is that if you go from, let us say, daily service to 4x a week, the number of outbound and return combinations that you can sell diminishes by a greater ratio than the 3/7 that you've taken away. Because people travel round-trip, and the chances are that if they can't travel on you round-trip, they won't travel with you on the outbound leg as well. That is not so important in markets where your competitors aren't flying daily, where you get to choose which days of the week if you're traveling where the market isn't mature. In places where your competitors are daily, when there are no good connecting opportunities that you can offer with codeshare partners and the like, it becomes more problematic. That probably is the biggest single driver of decisions around where we're less than daily and where we go to daily. Also of course, most importantly, it's just the size of the market, the number of people traveling. I think what's interesting in Korea that you called out specifically is we went from a situation in which we were 5x a week. We had a competitor that was daily. They went up to -- in a relatively short period of time, they went up to 3x daily. We had another competitor in daily and we added 2 more services. A lot of that extra added service is coming out. The market is still growing. And I think we feel pretty pleased with the prospect of supply and demand coming back better into balance.

[Bob McAdoo:]

What if you just cut out, like, 1 round-trip? I mean rather than going -- cutting out 3 round trips?

[Mark B. Dunkerley:]

Yes, we've cut out 1 round...

[Bob McAdoo:]

Do you really lose that much?

[Mark B. Dunkerley:]

Well you certainly -- you certainly do. You penalize yourself by more than 1/7 in terms of the number of outbound and return combinations that you can offer the customer. Because if you cut out Monday, just for the sake of argument, people who wanted to travel outbound on a Wednesday and back on a Monday won't fly on you. People who wanted to go up...

[Bob McAdoo:]

I understand that. It's obvious, I mean the numbers are clear. I'm just trying to figure out if, economically, do you really lose -- is there any way to -- a Tuesday over, a Wednesday back kind of thing. I mean is that -- in the middle of the week, when -- I assume, is there no season -- no cycle or cyclicality as you move through the week? I'm just trying to figure out...

[Mark B. Dunkerley:]

Sure, sure. No there is. What'll -- and I mean, clearly, we look at this, by the way. If you recall, Sydney, we started, I think, at 5 a week. We went down to 4 a week. We pulled it up to daily. We've gone up to 10 a week. So we do move days a week around. I'm answering this question more just to give you a window into how we think about it. It is the nature of life that you do have lower days in the middle of the week or typically than you do at the weekends and so forth. The problem is that a lot of people like to travel one day -- one way during a peak day of the week and some of them want to come back on what's a low day of the week, and if you're not careful, if you chop out the low day of the week, what you're doing is turning a peak day of the week into a low day of the week, because you don't get business in the first place.

[Peter R. Ingram:]

I would just add to that. I think Mark answered it correctly, that it really is something we you look at on a case-by-case basis. There are examples where we have gone less than daily in some of the San Jose and Oakland markets out of the Bay Area. And Bob, you mentioned New York in your original question. One of the advantages we have in places like that is, because we have other service and we can work connections, that if we're not flying Oakland-Honolulu on a daily basis, we can connect it back over Maui and still provide the 7-day-a-week coverage. Similarly, with JFK, we've got the connectivity through JetBlue and Virgin America and our codeshare partnerships there to make some connections over the West Coast. So that also factors into that case-by-case analysis. And we're certainly willing to evaluate those things, going forward, make those decisions and adjust the schedule seasonally, but there's no hard and fast rule to answer that in every case.

[Operator:]

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

[Mark B. Dunkerley:]

Okay. thank you, everybody, for joining us on today's call. Importantly, next Tuesday, we are holding our annual investor webcast. And it's a format that gives us much greater scope to discuss our strategy and the path ahead, and perhaps to be able to answer some of the questions that you've asked in this conference call with greater specificity. We hope that you'll have an opportunity to listen in to our webcast, and that's at 1 p.m. Eastern Daylight Time. It's accessible on the Investor Relations page of our website. So with that, mahalo for joining us today.

[Operator:]

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