Hawaiian Holdings, Inc.
Q3 2015 Earnings Call Transcript

Published: 20 Oct 2015

[Operator:]

Greetings and welcome to Hawaiian Holdings Third Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now turn the conference over to Miss. Ashlee Kishimoto Senior Director of Investor Relations. Thank you Miss. Kishimoto, you may begin.

[Ashlee Kishimoto:]

Thank you, operator. Welcome, everyone and thank you for joining us today to discuss Hawaiian Holdings' financial results for the third quarter of 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 cost and the balance sheet. We will then open the call up for questions, first from analysts and then by the media. Mark will end with some closing remarks. By now everyone should have access to the press release that went out at about 4

[Mark Dunkerley:]

Thank you, Ashlee. Hello, hi, everybody thank you for joining us today. We posted record breaking results this third quarter with adjusted net income of $78 million and earnings per share of $1.29, a 63% increase from last year. The earnings growth this quarter reflects the continuation of the trends we’ve experienced for much of the year. Fuel prices have been lower and demand has remained strong in all of our geographies, while the strengthening of the U.S. dollar and the decline in fuel surcharges have partially offset this bounty. In the past quarter, we’ve also started to benefit from seeing the rates of industry capacity in all of our geographies begin to add. Together these influences help propel this quarters adjusted pre tax margin to 20% and our return on invested capital for the trailing 12 months to 25%. Let me take a moment to thank all of the great employees at Hawaiian. It’s been a poor summer operationally as reflected in our having recently posted our worst monthly punctuality in over a decade. The culprits have been several; the combination of a burgeoning flight schedule of Honolulu and airport construction has meant that during the peak hours of the day there have been insufficient gates. This has been exacerbated by congestion in customs, resulting in our not being permitted to de-plane arriving international passengers promptly. And lastly, an abrupt change in the traffic control procedures at Honolulu gave us no opportunity to make schedule changes to address the lengthen block times that have resulted. Throughout it all my colleagues on the front lines have persevered. They have worked incredibly hard to minimize the impact of these issues and they have done so all the while looking after our guests. We’re supporters of the need to modernize Honolulu International Airport so the construction is the necessary evil that will eventually lead to a much needed improvement in the airport experience for our guests. As ever, lots has been going on since our last call. Under our $100 million stock buyback program we repurchased approximately 900,000 shares this quarter totalling $20 million. Since authorization of the program in April, we’ve repurchased 1.6 million shares for $38 million. This represents about 2.5% of our current market cap. We will continue to be opportunistic buyers of our stock. Earlier today, we announced a program to upgrade all of our A330 premium cabins including the installation of 180-degree lie-flat seats. Reflecting the uniqueness of our premium cabin needs, we have commissioned the production of a new seat that we are confident will be the best in its segment of the lie-flat seat market. As part of this refurbishment, we’ll also be adding 28 extra comfort seats in response to the strong demand for our premium economy seating. Assuming the complexities of certification and production can be navigated to schedule, our first retrofitted A330 will be delivered in the second quarter of 2016. It’s no coincidence that the interior modification to the fleet will complete just as the A321neos begin to arrive in 2017. The A321neos will be deployed on routes between Hawaii and the west coast, ring in some of the A330 currently deployed on our shorter five to six hours sectors. In turn, the freed up A330s will be deployed on longer haul sectors where the value of the new premium seat can best be appreciated. Our mission, to provide the best value proposition within the front of the plane or the back has not changed. As this evolution takes place, we remain the airline providing the best value for money service between the island of Hawaii, between Hawaii and the U.S. west coast and between Hawaii and destinations further afield. We’ll add detail to our plans for the A321neo fleet at our upcoming investor day in December. Last month, we formally launched our new website which offers our customers improved navigation, content and booking features. The new website also provides important new functionality including more seamless integration of vacation packages and other products into the booking blocks. Importantly, it provides the technical foundation with many more enhancements planned in the months ahead. All told the new website will enable us to better convert demand into revenue. Lastly our Chief Operations Officer, Sean Menke left Hawaiian last month and I want to thank him for his contributions and wish him the best. Jon Snook has joined Air Ohana in the Interim while we search for permanent COO. Jon has served most recently as Senior Vice President of customer service for American Airlines. The third quarters result reflect further improvement in our business from the early part of the year when in addition to the strengthening U.S. dollar we were also battling the impact of double digit industry capacity growth between the West Coast and Hawaii. Assuming that fuel prices remained low, but the strong demand we are seeing does not evaporate and that the U.S. dollar remains in its current range the fourth quarter is set to prolong this trend of improving financial performance. Let me turn the call over to Peter to discuss our revenue performance before Shannon is going to cover our finance.

[Peter Ingram:]

Thanks Mark. Hello, hi everyone. Third quarter operating revenue was $632 million with capacity up 3.6% year-over-year. PRASM declined 4.6% which was at the better end of our original guidance range of down 4% to 7% due to solid demand throughout our network. Overall, the quarter played out very much as we expected going in with North America and Neighbor Island results strengthening and foreign-exchange and fuel surcharge effects pressuring our international revenue performance. These third quarter year-over-year results reflect an improvement from the second quarter and absent the 4x and fuel surcharge effects, our system RASM would have been down less than half a point for the period. Our value added revenue per passenger in the third quarter grew $0.70 to $21.52 due primarily to the continued success of extra comfort. Looking forward to next quarter we expect moderate growth based in particular on the continuing success from our existing products including our co-branded credit card and extra comfort. As expected, our North America results have trended in a healthy direction this quarter reflecting a better operating environment with seat growth from the west coast of Hawaii moderating to up 6% year-over-year compared to double digit increases in the past three quarters. Overall, North America passenger was up 2.9% in the quarter with PRASM down 1.6% on a capacity increase of 4.6%. These results better the results of the first half of the year with each month improving sequentially in the third quarter. Looking ahead, the outlook for capacity from the west coast to Hawaii continues to moderate. Based on published schedules industry capacity growth is expected to be up 5% in the upcoming fourth quarter and the first quarter of next year. In the Neighbor Islands, we also saw sequential improvements. PRASM declined 1.7% from last year on capacity growth of 5.2%. Last quarter, we talked about the need to fine tune some of the capacity adjustments we made in the early part of the year and specifically to dial back some of our growth in Kona and Hilo. These adjustments were fully reflected in our September schedule and it’s not a coincidence that this was the best month of the quarter with positive year-over-year PRASM. We continue to progress with our 717 interior modifications and at the end of the quarter we had 14 of 18 aircraft completed. The program is scheduled to be completed by the end of the year. Looking ahead to the fourth quarter we expect to see sequential year-over-year improvements continue in our Neighbor Island revenue performance. Also as expected, international revenue performance was affected by the continued impact of the stronger U.S. dollar and substantial year-over-year reductions in fuel surcharges. Importantly, demand remains steady from our international markets despite the strength of the U.S. dollar demonstrating the resilience of demand for travel to Hawaii. In the third quarter, PRASM on our international routes recorded a mid teens percentage decline, attributable completely to foreign exchange rates and fuel surcharges. While this is obviously a significant impact it needs to be considered in the context of A4A [ph] Pacific region PRASM results, which based on the latest available data for the third quarter showed double digit point declines from last year. It is also the case that in aggregate our unit revenues and local currency continue to improve, demonstrating a strengthening of our market position. Of course the lower fuel prices that have led to reduced fuel surcharges also significantly benefit our overall financial performance on these routes. In the upcoming fourth quarter, 4x and fuel surcharge headwinds are expected to be similar to what we saw in the third quarter at about 4 to 4.5 points of year-over-year system RASM impact. And while we are starting to enter a period where the strengthening dollar affected the prior year comps, we won’t fully annualize the currency impacts until next year as the U.S. dollar has strengthened against various currencies over a multi month period. We continue to hedge our foreign currency exposure with Yen and Australian dollar forwards and for the upcoming fourth quarter we are hedged at approximately 50% of our exposure at levels better than current exchange rates. Looking the operating environment for international markets to Hawaii based on published schedules we are expecting see growth of 1% in both the fourth quarter of this year and the first quarter of next year. We continue to make adjustments to ensure that we perform as well as possible in light of the macro factors affecting performance and going into next year we’ll continue to look for opportunities to optimize our schedule including seasonal adjustments to our schedules involving more flying during peak periods and less during the trough. Let me switch gears to our outlook for the fourth quarter. We are expecting ASM growth of 2% to 4% from last year in the fourth quarter which is in line with our full year plan of ASMs up 3% to 5% from last year. From a RASM perspective, we are forecasting better results in the fourth quarter with RASM expected to decline 2.5% to 5.5% from last year. These expectations reflect the continuation of positive trends in North America and the Neighbor Islands. Notably, excluding foreign exchange and fuel surcharge headwinds our year-over-year RASM would be positive at the midpoint of this range. In conclusion, the strong third quarter results enhance our confidence in the business going forward. Demand to Hawaii remains steady and growing. The competitive capacity landscape in all of our geographies is manageable for as far as we have visibility. Domestically, the operating environment looks good and internationally we continue to benefit from the maturing of our roots and the development of our distribution capabilities, all of these positions us extremely well for the periods ahead. With that, let me turn the call over to Shannon to discuss our costs and the balance sheet.

[Shannon Okinaka:]

Thank you, Peter and hello everyone. To recap the quarter, adjusted net income grew to $78 million or $1.29 per share an increase of $29 million or $0.50 per share over the same period last year. Operating expenses excluding fuel increased $20.5 million from the prior year on a 3.6% increase in capacity which resulted in a 2.2% increase in cabinet fuel from last year. These results were better than original guidance and in line with the improved guidance range we gave at the beginning of the month. The favourable results were due to a combination of permanent cost savings and a shift in timing of maintenance expenses from the third to fourth quarter. Fuel costs continue to provide a significant tailwind in the third quarter. Economic fuel cost per gallon for the third quarter decreased 37% to $1.95 per gallon which resulted in a $16 million decrease in our economic fuel costs from last year on a 1.6% increase in fuel consumption. Before we leave the third quarter, let me take a moment to discuss our share count and the impact on our earnings per share. As Mark mentioned earlier, we repurchased $20 million or approximately 900,000 of our shares outstanding this quarter. These repurchases reduced our basic share count based on the weighted average number of days outstanding for the quarter. As of the end of the quarter, the convertible notes have a remaining principal balance of $3.3 million which represents repurchases to date of 96%. Dilution of 400,000 shares is reflected in the diluted share count this quarter. In addition, the warrant related to our convertible note remains. As discussed on our last call, although the warrant is economically neutralized by a call option, and will have no dilutive impact to actual shares issued, GAAP requires us to dilute a share counts by an additional 6.4 million shares this quarter. If we had settled the warrant at the beginning of the quarter, our share count would decrease to 54.5 million which is the equivalent of an increase to adjusted EPS of $0.15. As a reminder, this addition of dilution will continue until the warrants are settled or naturally expire in June of 2016. Now turning to the balance sheet, we ended the quarter with $611 million in unrestricted cash, cash equivalents and short-term investments. Our liquidity ratio including the availability under our undrawn revolving credit facility of $175 million was 34% on a trailing 12 month basis above our liquidity target of 23% to 25%. Our leverage on an adjusted debt to adjusted EBITDA basis continues to decrease this quarter and stood at 3.1 times within our target range of 3 to 4 times. We continue to evaluate the best pieces for our cash going forward and will provide an update and address our capital allocation plans at our upcoming investor day in December. Switching gears to the fourth quarter outlook. We expect our unit cost excluding fuel to increase 3% to 6% from last year with the following items driving this increase. Approximately 2 percentage points relate to wages and benefit, including the higher pension expenses we seen throughout this year resulting primarily from a decrease in discount rate and change in the tally assumptions and also wage increases. About 1 percentage point due to a harder year-over-year comp in commissions and other selling expenses of the rapid decline in fuel prices in the fourth quarter of last year resulted in a substantial reduction in our frequent flyer liability and an increase in aircraft rent expense from the three new A330 leases delivered in February, May and October offset by the lease return of two C767 totaling approximately O.5 percentage points. These items contribute to 3.5 percentage points of the year-over-year increase in the fourth quarter. For the full-year, we now expect our CASM ex-fuel to be on the favourable end of our previous guidance range and up 1% to up 3% from last year. We also continue to expect a full year effective tax rate between 38% to 40%. Based on the fuel curve as of October 14, our economic fuel cost per gallon for the fourth quarter is expected to be in the range of $1.75 to $1.85 and for the full-year $2 to $2.10. Our hedges expected to settle in the fourth quarter, are currently at a loss of $13 million. And as of September 30, 2015, we hedged approximately 50% of our projected fuel requirements for the remainder of 2015 with heating oil swaps and puts. Looking forward, we are expecting to see improvements in our fuel hedges settling next year as we begin to lap the lower fuel prices that began in the fourth quarter of last year. For the fourth quarter, we expect our fuel consumption to be in the range of down 1% to up 1% from last year and for the full year up 0.5% to 2.5%. Based on the current outlook, we expect fuel savings from last year net of hedges and volume increases of $60 million in the fourth quarter and $220 million for all of 2015. These savings will more than offset the U.S. dollar exchange rates and lower fuel surcharge headwinds which on a full-year basis are expected to be $19 million in total net of hedges. We continue to expect our full-year CapEx to decrease significantly from 2014. As a reminder, all of our 2015 A330 deliveries are financed through sale leaseback arrangements. In the fourth quarter, we will take delivery of an A330 and return a 767 at the end of its lease. In conclusion, we continue to execute to our plan. We are financially stronger and our outlook for record profitability in 2015 remains. Our margins are improving and our balance sheet continues to strengthen. We are well positioned for the long-term success of our business with continued earnings growth and positive free cash flow. This concludes our prepared remarks and with that I'll turn the call back to Ashlee.

[Ashlee Kishimoto:]

Thank you, Mark, Peter and Shannon. Also thanks to all of you for joining us today and for your continued interest in Hawaiian holdings. We're now ready for questions from the analysts first and then the media if time permits. As reminder, please limit yourself to one question and if needed one follow-up question. Operator, please open the line up now.

[Operator:]

[Operator Instructions]. Our first question is from Helane Becker of Cowen & Company. Please go ahead.

[Helane Becker:]

Thanks, operator. Hi, guys. Thanks for the time.

[Mark Dunkerley:]

Hi, Helane.

[Helane Becker:]

Just one question to clarify, Shannon, did you say – what did you say about fuel cost savings in the fourth quarter? I missed that number.

[Shannon Okinaka:]

I will get it for you Helane, $60 million.

[Helane Becker:]

So, that's six zero, right?

[Shannon Okinaka:]

60, yes.

[Helane Becker:]

Great. And then $220 million for the full year?

[Shannon Okinaka:]

Correct.

[Helane Becker:]

Okay. That's not my question. Okay. Sorry about that. But I did have one question. I think you were talking about the reconfiguration of the aircraft and adding the seats to A330. Did you give us a cost estimate for that will be and how we should think about that in terms of CapEx?

[Mark Dunkerley:]

No, we didn't, we haven't given an estimate of that. I think it is within the CapEx profiles that we've talked in general terms about for 2016 and 2017, so its sticks within what we've already said and as we roll into Investor Day we may have little more for you then.

[Helane Becker:]

Okay, great. That was really my question. And the rest of that was pretty awesome. Thank you.

[Mark Dunkerley:]

Thanks so much, Helane.

[Operator:]

Thank you. The next question is from Hunter Keay of Wolfe Research. Please go ahead.

[Hunter Keay:]

Hi, everybody. Thank you very much.

[Mark Dunkerley:]

Hi, Hunter. You bet.

[Hunter Keay:]

Hey, Mark. So question for you, as you think about the competitive environment of North American market, do you have a sense for what percentage of North American passengers to Hawaii really are not up for grabs due to maybe the dynamic of how Hawaii is such a heavy redemption market. So, like for example you may know that 25% of legacy airline excess passengers to Hawaii redeeming miles, so they are not really a passenger that you guys target or thing you can target, so the level of concentration as it relates to the number of passengers that the airlines are going for the sort of up for grabs, is actually a lot smaller than number of people that actually flying that market, you know am I thinking about that properly. Have you guys done any studies or have any data around that redemption and go, that's how people flying that market from North America?

[Mark Dunkerley:]

First one, I mean I think sort of intellectual you are striking on a point, yes, so lot of redemption miles are burn flying to Hawaii and clearly that traffic is not up for grabs if it’s a mileage plus or advantage -- SkyMiles are use to name three. They could kind of redeem on their own metal, we don't have an exact sense of how much that is. Frankly it goes up and down, depending on -- presumably on what these guys do in term of managing their inventory, but what it does say, I think it that our penetration of the market of that traffic which is up for grabs so to speak is actually better than our passenger share in that market. And we are currently at about a quarter of all the traffic coming off the West Coast and we therefore be quite a bit higher than that in terms of the traffic that is circled up for grabs.

[Hunter Keay:]

Okay. But you guys don't have a sense for like how much is it, is it 15% of the passengers flying our redeeming miles, you do not know what that number is, right?

[Peter Ingram:]

Hunter, I don't know the number, off top of my head and there's a way to estimate it, looking at the DOT, O&D numbers, looking at the percentage of zero coupon tickets you have. My guess is that the number you just gave out will probably be at the high end that would probably end up being actually less than that.

[Hunter Keay:]

Okay, Peter. Thanks a lot. So another random one for you, but would you guys ever consider expanding the operation to a point to point operation within the lower 48, whether if there's an other area of growth for Hawaiian, there's an opportunity, we drive some business to the Hawaiian Island. I don't know, if you guys have done any internal study, even if just sort of like a longer term type approach, anything like around that at all?

[Peter Ingram:]

Yes. We have certainly thought about it periodically when we do strategic reviews. What I would say is that we don't have any ambitions at the moment to fly sectors uniquely within the lower 48. I think if we look kind of more into the future there's a question about whether the business model that we have centered on Hawaii which is we think has been very, very successful over the years is one that we could replicate elsewhere. I think that is a different strategic question, but at the moment we don't have any plans to operate sectors between two points on the continental United States.

[Hunter Keay:]

Okay. Thanks very much everybody.

[Peter Ingram:]

You bet.

[Operator:]

Thank you. The next question is from Mike Linenberg of Deutsche Bank. Please go ahead.

[Mike Linenberg:]

Hey, everybody. Thanks for the question.

[Mark Dunkerley:]

Hi, Mike.

[Mike Linenberg:]

Hey, Mark. The A330 reconfiguration, it looks like the seat counts actually going to go down about 5%, I mean, I know it doesn't start till the second half of 2016 or maybe its June of 2016, so as we think, I realized we're looking out far, but we have some A321 is coming and I think, but you have your big wide body fleet losing seats. I mean, are we going to see capacity maybe trending lower than what we've seen in the past couple of quarters or what would – how should we think about it?

[Mark Dunkerley:]

So, first of all, yes, you're correct. Our current A330 seat count is 294, it will go down to 278. Clearly we think it’s accretive or else we wouldn't have done it. We think we will get value add for the lie-back seat and the addition of extra comfort seat have proven to be very successful in the marketplace. In terms of seats growth, I think you can expect to see for us in the kind of the medium terms trend is low single digits, low to mid single digits somewhere in the kind of 3% to 5%, 6% somewhere at that level. There will be blips up and down, so for example, when we get things like the A321 delivered, they come in and initially you're not operating as effectively or efficient as you can, because the numbers of aircraft are pretty low, so you have some blips up and down, but that is our kind of long term trend to seek growth, reflecting by the way, our belief about the growth and demand for the Hawaii vacation, though, to some not in significant degree on the growth rates around the Pacific Rim not just domestically in United States.

[Mike Linenberg:]

Okay, great. And then just one follow-up here. When we think about fuel surcharge and we think about fuel surcharges in markets where they regulated like I think, you know, in addition to Japan, I think they regulated out of China. At what point is there no longer a fuel surcharge, at least the regulated fuel surcharge out there in the fair structure. It would seem like given the decline in fuel that we're scraping the bottom. And so going forward if we would to have further declines in fuel maybe we don’t see the type of decline in fuel surcharge that we've seen over the last 12 months, am I thinking about that right?

[Peter Ingram:]

Yes, Mike. I think you are about right. The two main markets that we served where you've got this sort of mechanical fuel surcharge related to a lagging indicator of fuel price, our Japan and Korea are the main ones. We have – and they are, the surcharge has not yet gone right to zero, but I think as you get beyond the fourth quarter we had the real movement last you when we start getting into first and second quarter. Next year we have sort of fuel prices have stabilized more that early drop and so you will to a period where the year-over-year fuel surcharge is an even comp.

[Peter Ingram:]

Okay, great. Thanks Peter.

[Operator:]

Thank you. The next question is from Joseph DeNardi of Stifel. Please go ahead.

[Joseph DeNardi:]

Hi. Thanks.

[Mark Dunkerley:]

Hi, Joe.

[Joseph DeNardi:]

Mark, just maybe more strategic question, I can recognize you guys are benefiting from some more favorable competitive capacity trends going forward, but maybe longer term is there any way to mitigate some of that capacity risk through partnerships or new alliances just to maybe get some of that better under your control?

[Mark Dunkerley:]

Yes. First of all, I think – so when you talk about sort of alliances and cochairs and things like that. First of all, I'll make couple of points. We've got a number of those relationships today both domestically and internationally. Secondly, it is in the nature of those relationships that we don't control any outcomes and of course that is something that would be a legal and therefore contemplate in any way. I do think that we have – our network is a value to airlines that fly to Hawaii and those that want to access the Hawaii market and their networks are value to us and we have a number of arms length relationships with such airlines and they include for example ANA and Korean. They include all of the big three U.S. domestic carriers whose -- we carry between the Islands of Hawaii and with whom we have interline relationships.

[Joseph DeNardi:]

Okay. Thanks a lot.

[Mark Dunkerley:]

Joe, did I answer your question? I just trying to pass it out little bit.

[Joseph DeNardi:]

Yes, it did. I think one of the concerns longer term that some investors have is just to what extent you're going to be able to deal with higher competitive capacity growth on the North American sites. I'm just wondering if there's anything more that you guys can do to protect yourselves against that or is it just part of the nature being a smaller carrier?

[Mark Dunkerley:]

I mean, I think ultimately we don't think any market, can you protect yourself against competitors coming in, certainly in none of ours. What I can tell you is that we are absolutely confident that our mix of costs, brand and positioning in the marketplace is better than anybody else is for this particular market. So we don't see anybody either present or prospective coming into market and having us sitting there and wishing we were with them. We're quite happy being us. So, long as all of the players in the marketplace are sensitive to the basic economic conditions that should see us through to wining in the marketplace.

[Joseph DeNardi:]

Okay. And Shannon, I think you mentioned in the press release that you've achieved your leverage target. What's the plan there as it to kind of hold it at that level or go lower?

[Shannon Okinaka:]

So, Joe, we're still doing a bit more analysis on going forward. So we've achieved the target pretty quickly this past year from last summer and we are now looking forward to 2016-2017 and we're going to talk about a bit at Investor Day. But we are continuing to look at it and work on it.

[Joseph DeNardi:]

Okay. Thank you.

[Operator:]

Thank you. The next question is from Rajeev Lalwani of Morgan Stanley. Please go ahead.

[Rajeev Lalwani:]

Hi, thank for the time.

[Mark Dunkerley:]

Thank you, Rajeev.

[Rajeev Lalwani:]

Just another question for you on the capacity side, it seems like things are trending in the right direction. What do you attribute that to? What's the risks that it could reverse and not be as favorable such as the next couple of quarters, but as we look in next year and going forward?

[Peter Ingram:]

Well, I think when you look at the capacity and its favorability, you've got sort of break it down a little bit, but between Hawaiian, what we did arguably to ourselves and what competitive did. As we have taken some 6s, 7s out and put our A330 in, that's added some seats to the marketplace. The 330 has about 13% more seats than the 767. So, quite of lot of that extra capacity in all candor was stuff we do to ourselves, that process is largely complete now. Some of the 76s that are yet to leave out, our fleet are likely to be replaced by 321neos which have a smaller seating capacity. In terms of competitor retention, I think there has been a period where some carriers have come in, they have added capacity and I think they've discovered that it’s a pretty competitive marketplace. And again as I said in answer to Joe's question. I think they've discover that certainly Hawaiian has got a formally for serving this market that has been pretty successful and they've decided to some of capacity elsewhere. At this stage, capacity and sometime we rephrase that. Capacity is actually leaving the market, the rates of growth is declining. So that's really what happening out there. And it doesn't really surprise us. These things go in cycles and the feels like we are at the app of the cycle.

[Rajeev Lalwani:]

Understood. And then just a question on the RASM guide for 4Q. How conservative is or isn't, it seems like you guys have been pretty conservative and have come in better as you've got closer to actual, so any color that would be great?

[Peter Ingram:]

Yes. This is Peter, Rajeev, actually the last quarter we came in within the range, I'll be it on the better end and certainly we're going to aim for the best RASM performance we can achieve. And so, if we end up at the better end or better that would be good. Our objective when we give this information is to play it as straight down the middle as we can with you based on the information we have at this time, I would say, we have a pretty good level of confidence as usual about October and even November revenue at this point and there's still a fair bit of December to book and so that's really where the majority of the uncertainty and the quarterly guide is for us both on a positive direction and a negative direction.

[Mark Dunkerley:]

And actually if I can just add to that, if you look at the last three quarters, I think I'm right in saying that we are the positive end of the range or beyond the range in two of them when we were at the trailing end of the range for the one of them. I mean we do try and play it straight down in the middle. There is some variability within a quarter that nature of the business.

[Rajeev Lalwani:]

Understood. Thank you, Gentlemen. Very helpful.

[Operator:]

Thank you. The next question is from Steve O'Hara of Sidoti & Company. Please go ahead.

[Steve O'Hara:]

Yes. Hi, good afternoon.

[Mark Dunkerley:]

Hi, Steve.

[Steve O'Hara:]

Hi. I was hoping, I mean, just going back to Mike Linenberg's question. Just on the fuel surcharge, I'm just wondering maybe how transparent that is to the consumer in those markets, so I'm wondering if there's any like a continuation in the dollar yen relationship, how do you think that impacts demand or maybe worsening of that relationship. How does not impact demand, I guess I'm wondering, has the fuel surcharge maybe I don't want to say artificially, but how demand kind of stay up versus kind of what's happening with the dollar yen relationship?

[Peter Ingram:]

Yes. Steve, there's a lot of moving factors there. I would say in the fuel surcharges is pretty transparent in those markets that we talked about Japan were where it is fairly formulaic calculated, and I think people see that reflected in their pricing. It does affect travel to other destination as well and so that balances out some of the competitive impacts. I think as far as demand goes we've been very pleased throughout this year that despite the increases and the strength of the US dollar over a solid year, year and a half period now, that we've seen demand for Hawaii vacations remained very strong and it is – as I said in the prepared remark it’s a testament to the resilience on Hawaii as a destination, it is an inspirational destination for people throughout the Pacific RIM and we think that position us well for the future.

[Steve O'Hara:]

Okay. Thank you. And then just quickly on the A321s and kind of transitioning some of the A330s out. I guess I'm just wondering what type of – how much confidence do you that you can manage that transition well, I mean, it seems like there is a little bit of risk there in terms of pulling out wide body aircraft replacing number of them with narrow body aircraft from maybe a customer service or quality perception standpoint. And then may what's the capacity – what's your capacity outlook for that West Coast to Hawaii. Would you be a net – adding net capacity or taking some way? And I know you guys, you know kind of switch things around with some Japanese markets, so maybe you go back to what you had previous to that move. But if you can talk about that a bit that, I would appreciate it. Thank you.

[Mark Dunkerley:]

Sure, well first of all, we're not taking out A330s for 321neos which I think you'd referenced in your question. We've got 706s that over time, we'll retire from our fleet and as we build our A321neo fleet there will be some likely degree of substitution there. Secondly, I think what the 321neo does is it allows us to manage capacity to reach market according to its merits. So I mean at the moment, we’ve only got one vehicle that can fly these markets and it’s got 294 seats in. There’ll be markets where I think we’re going to putting seats up by going to two flights a day serving not just Honolulu but a Neighbor Island directly where today we only have a wide body going from Honolulu to that market and of the other markets where we can be wide bodies in the peak months and narrow bodies in the less peak months. Overall, we would have envisioned that capacity between the U.S. west coast and Hawaii on Hawaiian Airlines will grow in the low single digit range, but having a smaller capacity haul will allow us to better match supply and demand and better able frankly to serve the Neighbour Islands than we do today.

[Steve O'Hara:]

Okay, thank you very much.

[Mark Dunkerley:]

You bet.

[Operator:]

Thank you. The next question is from Michael Derchin, Sterne Agee. Please go ahead.

[Michael Derchin:]

Hi, Mike, to make sure, I heard you correctly. Did you say that if you exclude the impact of FX and fuel surcharge in the fourth quarter that the RASM guidance would actually be positive in the fourth quarter?

[Mark Dunkerley:]

Yes, the midpoint of the RASM guidance would be positive in the fourth quarter.

[Michael Derchin:]

Okay, okay that’s good to know. And did you also say that in the inter-islands by September you have now turned positive in that regard?

[Mark Dunkerley:]

Yes, yeah.

[Michael Derchin:]

Okay. And I guess the only other question I had is you know on your capital deployment plan going forward, I mean you are generating a lot of free cash right now, it seems like your leverage you know kind of goals are hit way or early and it sounds like you are going to be looking at that carefully and kind of getting back to us later. I’m assuming that -- is it fair to say that further deleveraging is in the cards here?

[Mark Dunkerley:]

I think your statements make up to that last point. I would absolutely sort of confirm. I think on that last point we have the ambition of sharing a lot more detail come December 02, when we visit you all in New York and go over Investor Day.

[Michael Derchin:]

Okay. I appreciate it, thanks.

[Mark Dunkerley:]

You bet.

[Operator:]

Thank you. At this time that concludes the analyst portion of the conference call. We are now ready for questions from the media. [Operator Instructions] Thank you. It appears we have no media questions. I would now turn the conference back over to Mr. Dunkerley.

[Mark Dunkerley:]

Okay, thank you very much operator. Thanks again for joining us today. We are pleased with the third quarters record breaking results and that our prospects for the remainder of the year. Another reminder, the morning of December 2nd New York City is going to be our investor day where we are going to provide more details on our outlook for 2016 and beyond. Attendees are also going to have the opportunity to meet some more members of the management team which is something we also like to do at an investor day. So with that, thank you very much and we look forward to seeing you very soon.

[Operator:]

Thank you. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines and thank you for your participation.