Hawaiian Holdings, Inc.
Q1 2015 Earnings Call Transcript

Published: 24 Apr 2015

[Operator:]

Good afternoon and welcome to the Hawaiian Holdings First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ashlee Kishimoto, Senior Director of Investor Relations. Please go ahead.

[Ashlee Kishimoto:]

Thank you, operator. Welcome everyone and thank you for joining us today to discuss Hawaiian Holdings' financial results for the first quarter 2015. 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 Web site 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, as well as reports filed on Form 8-K. And with that, I’d like to turn the call over to Mark.

[Mark Dunkerley:]

Thank you, Ashlee and Aloha everybody and thank you for joining us. Our $25 million $0.38 per share results were record for our company in the seasonally weak first quarter. Low fuel prices and strong demand across our network combined to more than offset the impacts of a strengthening U.S. dollar, declining fuel surcharges in some markets and an increase in industry capacity between North America and Hawaii. As a consequence we've been able to further strengthen our balance sheet to the point where today we're pleased to announce to share a buyback program covering a $100 million or 8% of our outstanding shares at today's share price. Our outlook remains positive and we continue to expect record profit margins, positive free cash flow and further strengthening of the balance sheet as the rest of 2015 unfolds. As always our employees are at the forefront of our accomplishments. Their performance makes our financial success possible and they have my undying thanks. Since we last spoke there have been a number of developments worthy of mention. In March we completed the refurbishment of our first Boeing 717 with a new interior and a consistent layout of a 128 seats. This aircraft is used exclusively for flights between the Islands of Hawaii. Today there are seven of our fleet of 18 aircraft flying with the new interiors and by the fourth quarter we will have completed this transition. The higher seat counts has the double-barreled benefit of giving us more seat capacity during the peaks of our neighbor island operation while at the same time, reducing our unit costs. In the quarter we also made significant progress towards de-levering. We repurchased 73% of our convertible notes which when added to the convertible notes repurchased in the fourth quarter means that at quarter's end, 91% of the original outstanding amount has been retired. This has reduced not only debt and future interest payments but also it has removed future delusion from our existing shareholders. We ended March with a liquidity ratio of 28% and our adjusted debt to EBITDA ratios stood at 3.6 times falling within our range for the leverage of between three and four times. It's been a very good quarter for our business in all kinds of ways. Good results, progress and strengthening our balance sheets and initiating direct shareholder friendly programs. To add more color on all of this I'll turn the call over to Peter who's going to discuss our revenue performance, before Shannon covers the finance section.

[Peter Ingram:]

Thanks Mark. First quarter operating revenue grew to $540 million on a capacity increase of 4.7%. RASM came in at the positive end of the guidance we issued towards the end of the quarter and better than our expectations at the beginning of the quarter. This improvement versus expectations was the result of stronger bookings on both domestic and international roots during the quarter and was further supported by very strong results from our cargo business. Our business is performing well with margins expanding throughout the business. Our network is well positioned in both established and growing markets, weather environmental challenges including a stronger U.S. dollar, lower international fuel surcharges and industry capacity increases and we are strongly positioned competitively from service and product perspective. Let me cover a few of the commercial highlights. Firstly our neighbor island network remains in area of strength. The completion of our 717 modifications will further enhance our product offering and competitiveness providing additional capacity for peak demand flights while reducing our unit costs. The full benefit of this won't be realized until later in the year when we have a 100% consistent fleet with expanded capacity. But as we achieved a critical mass of reconfigured aircraft over the summer, we'll be able to increase seat availability on peak flights. Secondly, our international performance has continued to benefit from the network adjustments we made in the first half of 2014 and the maturation of the routes we've started over the last few years. We are seeing year-over-year unit revenue improvements on the majority of our routes absent the foreign exchange conversion and fuel surcharge impacts. Awareness of the Hawaiian Airlines brand is strong and growing and Hawaii enjoys resilient demand for travel from throughout the Asia-Pacific region. Thirdly, we continue to see growing revenue from value added products. In the first quarter our sales of the value-added products were $21.32 per passenger an increase of 28% year-over-year. Sales of Hawaii miles were big contributor here, highlighted by the improved economics of our co-branded credit card relationships that we'll lap in the second quarter. We also continue to make gains with the Extra Comfort Seat Product that we launched last targets. Extra Comfort remains an unqualified success and based on strong demand for the product we are able to adjust prices during the first quarter which will provide incremental improvement throughout the year. Growing margin accretive non-fair revenue remains a key focus for the periods ahead. And in that context we look forward to the launch of our redesigned Web site in the second quarter which will help us market these products and others we are developing even better. Lastly and as I mentioned briefly at the beginning of my comments our Cargo division had another excellent quarter both stood unexpectedly by the dock slowdowns on the West Coast in February which redirected some cargo shipments from sea to air during the period. By the end of March most of these one-time benefits abated and going forward we expect to settle into a more modest period of growth. While the demand environment remains strong there are some factors pressuring unit revenue. Industry capacity between North America and Hawaii was at double-digits year-over-year in the first quarter and is expected to be up similarly in the second quarter based on published schedules. We entered the first quarter which is generally a trough seasonal period aside from the first couple of weeks of January behind our book load factor target. During the period bookings strengthened but not enough to fully overcome a tougher year-over-year pricing environment and the initial deficit book load factor. Looking forward we expect to see sequential improvement over the low point that we had in the first quarter. Although the industry capacity situation remains similar in the second quarter we are moving to a seasonally stronger period and our book load factor is flat to positive across the three months. As a result, we expect better North America unit revenue performance in the second quarter than the first, especially as we get to the beginning of the summer season in June. Looking to the peak summer months and beyond, the capacity environment improves with growth leveling off to mid-single digits for the second half of the year. Internationally we continue to see the impact of a stronger U.S. dollar, lower fuel surcharges in some of the countries we serve and pockets of industry capacity pressures. In the first quarter fuel surcharge and currency differences totaled above 3 percentage points of system RASM impact year-over-year and in the second quarter we are expecting the impact to total a little over 3.5 percentage points. Importantly we are seeing year-over-year improvements on the majority of our routes absent the foreign exchange conversion and fuel surcharge effects. In addition the overall profitability of our international network is meaningfully enhanced by the powerful impact of the lower fuel prices on long haul services. And as a note, we continue to hedge our foreign currency exposure with the use of forwards and for the remainder of the year we've hedged approximately 50% of our yen and Australian dollar exposure at better levels than today's exchange rates. Finally with our balanced network of maturing growing markets and even stronger -- ever stronger value added services we are well positioned to react to changes in market conditions. Our people continue to provide superior service and our product is ideally suited for long haul leisure. All of this gives us abundant confidence as we look to the balance of 2015. With that let me turn the call over to Shannon to discuss our costs and the balance sheet.

[Shannon Okinaka:]

Thank you, Peter. As Mark mentioned earlier, and to recap the quarter, adjusted net income grew from a net loss position last year to $24.7 million or $0.38 per share. Adjusted net income this quarter excludes the non-cash market-to-market impact on outstanding fuel hedges totaling $8.9 million on a pretax basis, and the loss on the early retirement of our convertible notes totaling $7 million pretax. Our earnings per share this quarter reflect the additional variation of 9.8 million shares related to the convertible notes and associated warrants. Given the significance of the convertible notes repurchased to date the related dilution appear to be high. The latest work is that the diluted share balance is based on the weighted average days that shares with evidence. So for example, if the notes were repurchased on January 1st and throughout the quarter our diluted share chunk would be $3.3 million lower and our earnings per share will be $0.02 higher. The related cost spread which provides us the economic benefit of the spread between buying shares at $7.88 and selling at $10 remains in place. About the diluted effect of the warrants that are economically neutralized and will have no diluted impact to actual share issued, GAAP required to reflect an additional $5.8 million shares in our diluted share count this quarter which will continue until the cost spread is exercised or expired. To summarize if we had repurchased the convertible notes on the first day of the quarter and adjusted to eliminate the non economic division of the warrant our share count would have been $55.8 million shares for $0.06 improvement to EPS. This quarter strong financial performance resulted in improved profitability and reflects the continued strengthening of our business. Our adjusted pretax margins for the first quarter through to 7.4% and we had a pretax ROIC of 19.4% for the trailing 12 months ending in the first quarter. Both of which are strong results in a seasonally weaker period. Turning to cost, our first quarter total operating expenses excluding fuel increased $14.1 million from the prior year on a 4.7% increase in capacity which resulted in a 0.6% decrease in CASM ex-fuel year-over-year. These results are in line with the revised guidance range we gave at the end of March with better than original expectation. This favorability was primarily due to a number of one-time cost reductions and a shift of certain maintenance expenses later in the year. Lower fuel prices in the first quarter led to a decrease in our economic fuel expense of $45 million year-over-year which reflects offsets from realized losses on our hedges and a 3.3% increase in consumption. Economic fuel cost per gallon for the quarter was $2.21 as compared to $3.10 in the prior year quarter, a decrease of 29%. Turning to the balance sheet, we ended the quarter with a $488 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 28% of trailing 12 months of revenue above our target of 23% to 25%. As Mark mentioned earlier our financial position afforded us to repurchase $63 million face value or 73% of the convertible note principal balance outstanding during the quarter. This reduced our leverage to 3.6 times on an adjusted debt to EBITDA basis at the end of the quarter achieving our target of between 3 and 4 times. Our first priority for capital allocation was to de-risk our balance sheet through reductions of leverage. We will continue to manage leverage levels and make investments in our business for our long-term operational success. In addition the newly announced $100 million share repurchase program is an important initiative to further increase value for our long-term shareholder. Our current and expected future profitability of forfeit the opportunity to provide more direct returns to our shareholders while ensuring to maintain a sustainable and healthy business. We also continued to evaluate contributions to the pension funds along with the other cash needs of our business. And during the quarter we contributed $13 million to our pension and other post retirement plans which was $7 million above our minimum funding requirements for plan year 2015. Looking ahead to the second quarter and full year RASM is expected to decline 1% to 4% year-over-year in the second quarter on a 3% to 5% increase in ASM. To recap that Peter mentioned earlier the second quarter year-over-year revenue outlook is comprised of the following; the sequential improvement in North America unit revenues and relative stability on neighbor island route. Good momentum in our value added products, the lapping of some of the positive network changes last year and the improved economics of our co-branded credit card arrangements, and continuing headwinds from foreign exchange and fuel surcharges in the international space without risk the year-over-year system RASM would be about 3.5 points better. CASM ex-fuel is expected to increase 0.5% to 3.5% year-over-year in the second quarter and for the full we continued to expect CASM ex-fuel to be up in the low single digit range specifically 1% to 4%. In the second quarter the biggest drivers of the year-over-year CASM ex-fuel increase are as follows. Higher pension expenses resulting from a decrease in discount rate and change in mortality assumptions as well as contract wage increases totaling 2.5 percentage points and an increase aircraft rent expense with two new A330 leases financing our February and April deliveries. And lease return cost accruals for two B767 departing the fleet in the second and fourth quarter totaling 1.5 percentage points. We continued to indentify and invest in cost savings opportunities. We expect the full year effective tax rate between 38% to 40%, based on our current outlook we expect to become cash tax payers in 2015 as our net operating losses related to the bonus depreciation for the A330 aircraft we purchased are expected to be fully utilized during the year. Based on the forward fuel curve as of April '15 we expect our second quarter and full year economic fuel price per gallon including taxes and hedges to be in the range of $2.10 to $2.20. Our hedges expected to settle on the second quarter are currently on a loss of $16 million. We expect our fuel consumption to be up 2% to 4% year-over-year for the second quarter and continued to be 1% to 4% year-over-year for the full year. Based on the current outlook we expect fuel savings net of hedges and volume increases of $15 million in the second quarter and $200 million for 2015 which as Mark mentioned earlier more than offsets the international revenue headwinds from the fuel surcharges. We continue to expect our full year CapEx to decrease significantly from 2014 to a range of 45 million to 55 million. As a reminder we will financing all A330 deliveries this year to sell these stock arrangements. In conclusion our outlook for 2015 is for record profitability. The strategic investments we've made over the past few years lower capital commitments and tailwind of lower fuel prices position us for expanding margins, continued earnings growth and increasing free cash flow which will commit to reducing our financial leverage and increasing long-term shareholder value. This concludes our prepared remarks and with that I will turn the call back to Ashlee.

[Ashlee Kishimoto:]

Thank you, Mark, Peter and Shannon. And thanks to all of you for joining us today and for your continued interest in Hawaiian Holdings. We are now ready for questions from the analysts. As a reminder, please limit yourself to one question and if needed one follow up question. Operator, please open the line now.

[Operator:]

At this time we will be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Hunter Keay with Wolfe Research. Please state your question.

[Hunter Keay:]

Can you guys be kind to provide PRASM growth by geography again?

[Peter Ingram:]

Hunter this is Peter I'll take that one. Let me go through into North America I'll start out there was a high single-digit deterioration in PRASM during the first quarter year-over-year and that’s on lower load factors and lower yields. You're looking to the second quarter on that one as we said in the call we expect sequential improvement and we come into the quarter in a better position bookings wise than we were three months ago when we talked to you looking at the first quarter. Neighbor island remains pretty stable and was basically flat year-over-year in PRASM and we have a similar outlook for neighbor island going forward as we said remains an area of strength. Internationally we came in with a low single-digit deterioration year-over-year in PRASM in 1Q. And looking forward to the second quarter as we lose the benefit of some of the network changes that we lap in the year-over-year numbers and we see a slightly greater impact from the fuel surcharges and the currency impacts we expect that to grow to a slightly larger PRASM decrease in the second quarter.

[Hunter Keay:]

And early this month you guys created a position I think the position is new called the Director of Strategic Initiatives. And you said this person was going to oversee some high impact strategic projects. I'm wondering and if that going to be very voluntary oriented. I'm kind of wondering what you have in mind for that?

[Mark Dunkerley:]

That’s actually part our transformation team, we actually use that as a place where we -- it's a group of people that we bring in from outside the company who have unique backgrounds and skills and we deploy them on projects that we think have some sort of interests in potentially transformational qualities to them. The expectation for that group is that within a couple of years they've moved into the organization into regular managerial roles. It's not actually a new position we've had this position before actually couple of VPs today formally have this kind of role. It's great to have him, it's great to have the team but I wouldn’t read too much of it in terms of some great departure.

[Hunter Keay:]

And then just last quick one here. Shannon can you just help me with the model little bit, you said the share count would have been $55 million. Is that the balance sheet share account right now the end of the quarter and how should we model in diluted share account going forward?

[Shannon Okinaka:]

That’s the diluted share count, so the second quarter diluted share count will be lower and probably is low 60s maybe once we're taking the fourth quarter of the repurchases into account, he wouldn’t really do anything with the warrants on this plane with cost effective at this plane. So that would still be there.

[Operator:]

Our next question is from Helane Becker with Cowen and Company. Please go ahead.

[Helane Becker:]

I just had a few questions. With respect to capacity of the West Coast I guess into Hawaii. So listening to other airline conference calls over the past hours I suppose. I'm hearing them talk about pressure in the market and pricing pressure. And you're really not seeing that. Could you just like talk a little bit about what strength you're seeing relative to what weakness they might be seeing. Do you think you're growing share?

[Mark Dunkerley:]

First of all Helane I think we’ve talked about for sometime there is quite a lot of industry capacity growth coming off the West Coast equally as we've mentioned before. We like our combination of product and cost better than but we would imagine other carriers like theirs in this market place. We tailor out what we do to Hawaiian and as such in these sorts of circumstances we tend to suffer from the industry dynamic or benefit from the industry dynamic. And tend to perhaps suffer a little less than some of our competitors to given our better positioning in the marketplace. And we pass out to Peter, see if he's got any added color.

[Peter Ingram:]

Yes I think I'd did that we have seen the industry capacity go up for the last couple of quarters and it continues through the second quarter as we said during the call. And you can see from the North America revenue numbers that I just gave out in response to Hunter’s question that has put some pressure on particularly in trough periods, but I think where we’re standing that pressure while we’re well positioned competitively. We are optimistic as we go into the seasonally stronger period for sequential improvement in the second quarter and of course we’re benefiting as all carriers are from lower fuel prices in this period. So I think all of that contributes to the record performance that you saw post year for the first quarter.

[Helane Becker:]

The other thing I’m kind of wondering about is in international markets. Remember a couple of years ago at Investor Day you talked about growth internationally and how that was going to help you to diversify the root network? And I’m just kind of wondering here a couple of years later you’ve had to readjust some of your capacity in international markets because some of it hasn’t gone as well as thought. Do you think that you would continue to look for opportunities or can you maybe update us on some of the newer markets like China where you, I don’t know I think we're almost a year into that market and so on.

[Mark Dunkerley:]

Yes, happy to do so, in fact we are celebrating the [year-end] Beijing; we’ve got a team over there creating some possibility around that. So yes, good record actually. So if you look back to when we first started talking about our desire to grow our international presence. Our international revenues accounted for about 6% of our total network revenue phase. And at the high points we got up to about 33% I want to say and now we’re down at about 25%. A lot of that has to do with the changes in exchange rates and so forth because that obviously affects how we report our dollar, the dollar value of our international revenues. On to your question of, do we think that we somehow kind of run out of steam on that or do we have ambitions to continue to grow as a percentage of our total activity? The answer is relatively straight forward. We do actually think there is some additional international opportunities that are out there. We have very recently as many people have seen applied for [indiscernible] was one such opportunity that we applied for. We are actively looking at a couple of others. I think our sort of order for international expansion has cooled a little bit because of the U.S. dollar exchange rate but strategically we take a kind of longer term view we still think that our growth in our international network is the right thing for Hawaiian and we are quite happy to buy the time and work on that as opportunities present themselves when the economic conditions merited.

[Helane Becker:]

So if you thought that dollar was going to stay strong for five years would you still have that here.

[Mark Dunkerley:]

Yes, I mean I think we’ve articulated that we kind of like where our international network is right now. We’re not suggesting any CapEx, some of our competitors have suggested CapEx indeed as I mentioned it even applied for some additional service. So yes, even in the current environment we are long-term bullish on international we are not quite sort of rapidly bullish as we were couple of years ago but we're still very enthusiastic about it.

[Helane Becker:]

Great. And you're obviously bullish on your stock?

[Mark Dunkerley:]

Yes.

[Operator:]

Our next question is from Andrew Didora with Bank of America. Please state your question.

[Andrew Didora:]

This one is for Peter, thank you for the color on the summer bookings near-term that was really helpful. I’m curious given how the closing bookings track better than you expected in 1Q, how these closing bookings trended off late maybe particularly in the early April and around the Easter holiday and then just curious in terms of how you are baking this into your 2Q guidance?

[Peter Ingram:]

In the last two, three, four weeks I think the bookings have tracked fairly stable. There is a little noise in some of the year-over-year numbers because when you hit a holiday period like around Easter it tends to be a slower booking period and of course that isn't synced up perfectly year-over-year. So we track little behind during the period when Easter was running and now we’re tracking little bit ahead during the period when Easter was last year. So you have to adjust for a little bit of that noise. I think the important thing for us is that we are better positioned coming into the period than we were three months ago. And if you had a do over and could go back in time six months we probably would have positioned ourselves better for the first quarter that’s in the rear-view mirror now and we’re looking forward making sure we’re managing the business appropriately for technicians that are out there today.

[Andrew Didora:]

And then just in terms of the summer bookings, I guess at this point in time of the year I guess what percentage of your I guess budgeted load factors are already on the books for say June, July, and August.

[Peter Ingram:]

Going into a month we are probably booked to more than three quarters of what we'll fly in that months if tails off going forward. But if you looked into June, July, August off the top of my head without looking at figures right now we are probably sitting between 30% and 50% of what's on the books for that period now it's 30% to 50% of where we'll end up. And that ratio is been over about 90 to 100 day booking period which is really where the meet of the bookings come in.

[Operator:]

The next question comes from Joe DeNardi with Stifel. Please go ahead.

[Joe DeNardi:]

Mark can you provide a little bit color on how the board got to the authorization that you decided on the 100 million and what the time table is for going through that.

[Mark Dunkerley:]

I can give you a little bit but obviously not too much on the nature of the deliberation of our board and the future planning on the timing. First let me take it reverse order the authorization is for 100 million for two year program as you'll be familiar with that gives the company some flexibility within that time period to decide how much to buy and when to buy. And it wouldn’t be appropriate for us to share the details of that that’s kind of customary. In terms of why the board decided to do it. In some respect I think we are not there should be very little mystery about it. And last fall we explained what our balance sheet strategy we articulated in targets around the appropriate levels of cash for our business and the appropriate level of leverage. And we saw that is a very high priority some people will follow us, that’s a little critical that we went more optimistic earlier. But we very, very clearly articulated what to do with our balance sheet having achieved that with the balance sheet that gives the board the flexibility to think about alternative usage for cash over and above those needs and this is what they've determine to do.

[Joe DeNardi:]

And Shannon I think you said you'll be a cash tax payer in 2016. Can you maybe just quantify what the -- I guess the year-over-year headwind will be from a cash flow standpoint. Will it be a full year of paying cash taxes?

[Shannon Okinaka:]

One correction on that we're expecting to be cash tax periods in 2015. And well I can't really give you the amount of cash we're expecting to pay in '16 versus '15. I can tell you that our NOL currently are at $420 million.

[Operator:]

The next question comes from Mike Linenberg with Deutsche Bank. Please state your question.

[Richa Talwar:]

This is actually Richa in for Mike. So first you've fairly done some work here in capital deployment, but my math especially considering your right CapEx plans for this year. You still have considerable free cash flow post these repurchase. So I was wondering if you could walk through your plan for uses of excess cash that share repo has been announced. Do you see opportunities for instance to buyback more debt?

[Mark Dunkerley:]

Yes. I think somewhere in prepared remarks we've talked about continuing desire to de-lever. And there will be opportunities to do that we do have debts out there associated with aircraft and other bits and pieces. And when we can find attractive terms to some of the debt of cash otherwise access then we would logically take advantage of that.

[Richa Talwar:]

And then my second question is about competitive capacity. Earlier this morning we heard from one of your competitors that they are considering the introduction of more 777s on West Coast to North American routes. And another competitor not too long ago officially announced plans to commence service to Hawaii. So I was wondering if big picture that changes your calculus with respect to evaluating the West coast wind market for future growth opportunities. And if competitive capacity pressure as we've spoken through on this call if they continue to escalate should we expect that part of your network to shrink and do you flexibility in your capacity plan to trim capacity there if necessary.

[Mark Dunkerley:]

Again take that in reverse order. Yes we do have flexibility to make changes in terms of the amount of capacity that we operate and where we distribute it. So we do have flexibility we don’t have endless flexibility. But we got quite a bit of flexibility would allow us if showed shows to trim capacity in one of our kind of root clusters. As to what do we think about these additional capacity that's been announced coming in, I’d soon refer you back to what I said previously which is that from our perspective a competitors sees as a competitors sees as a competitor, we really putting a different about whether that seat is operated by brand A, brand B, brand C whichever airline. So we do take a lot of notices to what industry capacity is, but whether it is a legacy airline operating wide body or new air line with new type of product. We like our kind of relative positioning in the market place and that leads us to believe that in those circumstance where capacity ends up exceeding the demand to fill it. It tends not to be our capacity that is the marginal capacity, it tends to be the marginal capacity of other players. And if you look at the history of this market in the modern era the last 10 years or so, I think what you will find is that our capacity has been generally stickier not because we are stubborn but actually because other players if they make national decisions tend to lose the marginal capacity little faster than we make that decision.

[Operator:]

The next question comes from Steve O’Hara with Sidoti. Please go ahead.

[Steve O’Hara:]

Just going back to the convert one more time, if you ended up buying the entire issue what then happens to the warrants? And is there a way to kind of remove them from the diluted share count by I don’t know, you take some sort of loss or something like that but I’m just wondering is there a way to kind of get out of that diluted share count and also what happens if the stock moves up from here how much dilution is added back in.

[Shannon Okinaka:]

Hi Steve, it’s Shannon. I’ll take that question. The cost spread are separate instruments from the convert. So yes, we can treat them separately and so we could if we wanted to take them out like you said remove the dilution. But on that piece we believe that over time in addition to higher share price the cost spread value would continues to increase. So, because since we didn’t need the cash from cost spread to funds are repurchase of the convertible notes, we just chose to keep them in. We could, we’re seeing now and for second quarter 2016 this will expire take them out which would remove that additional dilutions. So the dilution that you’re seeing in EPS from these are non-economic, it’s a gap thing where we can only look at one side of the dilution but not the entire dilution it gets into lot of the accounting complexities. But you are right as share price increases the dilution on those would also increase. So as the share price increases the dilution increases.

[Steve O’Hara:]

And then just quickly on the other expense line there was -- it’s about 2.9 I think that’s related to the FX hedges, is that correct? And what happens as you, is there anything -- does that get refused as you ramp anything or is that kind of a good number to use going forward?

[Shannon Okinaka:]

It’s two things Steve, one part of it is the hedges but another part of it is the translation of our foreign bank accounts and foreign denominated balance sheet items converting into USD. So I don’t know that I'd extrapolate this quarter translation into the future. You just have to follow the market I believe on those.

[Steve O’Hara:]

I guess maybe a stable relationship between the dollar and would that mean that number will be the same or does it depend on what happens to it during the quarter?

[Shannon Okinaka:]

Yes, it’s really -- what happens in the market I mean the balance sheet is the point in time so it depends on how much cash we have in the foreign currency on that date.

[Operator:]

The next question comes from Michael Derchin with Sterne, Agee CRT. Please state your question.

[Michael Derchin:]

Great quarter, particularly after the last quarter call. Can I ask you about the inter island operation which we know in itself is a kind of annuity of source. But what’s the effect of that business which you dominate on your local operation both from Asia as well as North America in other words, extent you have that and others don’t fly of Hawaii, are you able to leverage that as the mode of sort against the competition.

[Peter Ingram:]

Mike this is Peter. I'll take that one. The fact of the matter is the neighbor island operation is a real network asset to us. It is very important for transporting local folks between the islands on regular business. But it is also very important to our network in terms of giving us the breadth on our Honolulu and Maui flights have been able to connect people to all the other islands and that is valuable as you suggested in your question for the West Coast it's valuable for New York and it's valuable for all the international points we serve. So we really look at that as a network asset for us.

[Steve O’Hara:]

Can I ask one more question just kind of update on China how is that market developing our Chinese middle class vacation is starting to become aware of Hawaii as an option.

[Michael Derchin:]

Yes I think China is developing well for us. It's got small it's growing very, very quickly but introduced on a relatively small market. From the perspective of the state I don’t think we're yet scratching the surface of what should be a simply huge opportunity here in the islands, but I think it will come.

[Operator:]

Mr. Dunkerley, there are no further questions at this time. Would you like to make any closing remarks?

[Mark Dunkerley:]

Thanks everyone for joining us today obviously we're pleased with our record first quarter results and the fact that we're signaling that an expectation that the strong results are going to continue the remainder of 2015 as well as our efforts to strengthen our balance sheet. The $100 million share repurchase program along with the reduction of our debt levels and so represented very positive changes to our capital structure and our goal of creating long-term value for our shareholders. So we really appreciate you joining us on today's call and we certainly hope to be having more calls like this in the future.

[Operator:]

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