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Hawaiian Holdings, Inc. (NASDAQ:HA)

Q4 2012 Earnings Call

January 29, 2013, 04:30 pm ET

Executives

Susan Donofrio - Senior Director, IR

Mark Dunkerley - President & CEO

Scott Topping - EVP & CFO

Analysts

Michael Linenberg - Deutsche Bank

John Godyn - Morgan Stanley

Helane Becker - Dahlman Rose

Hunter Keay - Wolfe Trahan

Bob McAdoo - Imperial Capital

Steve O’Hara - Sidoti & Company

Glenn Engel - Bank of America Merrill Lynch

Operator

Greetings and welcome to the Hawaiian Holdings Fourth Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Susan Donofrio, Director of Investor Relations for Hawaiian Holdings. Thank you. Please begin.

Susan Donofrio

Great. Thank you. Welcome everyone and thank you for joining us today to discuss Hawaiian Holdings fourth quarter 2012 financial results. On the call with me today are Mark Dunkerley, President and Chief Executive Officer and Scott Topping, Chief Financial Officer.

By now, everyone should have access to the press release which went out at about 4 O’clock Eastern Time today. If you have not received a release it is available on the Investor Relations page of Hawaiian’s website.

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 posted on hawaiianairlines.com.

Before we begin, we would 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 Holding’s recent filings with the SEC, including the most recent annual report filed on Form 10-K, recent quarterly reports filed on Form 10-Q, as well as reports filed on Form 8-K.

And with that, I would like to turn the call over to Mark.

Mark Dunkerley

Thank you, Susan and thank you all for joining us today. As you can see, from the press release that we issued earlier, we were able to report what amounted to a breakeven fourth quarter after adjusting for the effects of our fuel hedging program. The period was characterized by a number of unhelpful items which drove down our financial performance most prominently including sizeable competitor capacity in several of our markets, a strengthening of the dollar to the yen and the year-end accounting adjustment related to our frequent flier program. We will cover each of them in more detail later in the call.

Despite ending the year with an unsatisfactory quarter, we were able to generate a decent result for the full year evidenced by an improvement in both our adjusted operating and net income margins. We also boosted adjusted earnings per share by 25% and finished the year with a stronger balance sheet than that with which we started despite having taken delivery of four A330s.

Looking a little ahead into 2003, we see the difficult conditions persisting through the first quarter before becoming more benign for the balance of the year. Against this backdrop, we anticipate 2013 being another year of improving financial performance and predominantly after the first quarter. It will be a year of growth as we take delivery of additional aircraft and inaugurate new services to Auckland and Taipei.

My colleagues throughout the business have continued their near faultless performance for which they have my lasting gratitude. Its great comfort to know that the whole team delivered a better, traveler and shipper experience while we take on the challenge of developing our business. And we had a lot going on in the quarter.

In October, we launched new service to Sapporo, now our fourth city served in Japan. In November, we launched our first non-stop flight to Brisbane, Australia with service three times each week. We also announced a number of changes to our upcoming schedules. We announced the further expansion of our Asia network this summer with the inauguration of three weekly flights to Taipei in July. We’ll also make changes to our upcoming spring summer schedule in order to take advantage of counter-seasonal demand.

In the spring, we will add three weekly flights to our existing daily flights to Sydney for the months of April and May. On our Brisbane route, we will add 18 round trips in the months of March and April. Both of these increases were funded by drawing down West Coast flights where demand is weaker at that time of year.

For the summer peak, we will double the daily non-stop service we offer between Los Angeles and Maui. These seasonal adjustments are the consequence of having a broader network featuring roots with offsetting seasonality, giving us the flexibility to shift capacity around.

During the fourth quarter, we also announced the frequent flyer and codeshare partnership with Virgin America. This relationship helps us expand our network to markets where we have had limited or no presence. We also took delivery of two ATR42 turboprop aircraft to inaugurate new service to Molokai and Lanai in 2013.

Looking ahead to our future aircraft needs, we recently announced the signing of a Memorandum of Understanding with Airbus to acquire 16 new A321 neo aircraft between 2017 and 2020 with rights to purchase an additional nine. These fuel efficient, long range, singe isle aircraft will compliment Hawaiian’s existent fleet of wide-body twin isle aircraft used for long haul flying between Hawaii and the US West Coast.

With that list of recent developments mentioned, let me turn the call over to Scott to review the results of the quarter in more detail. Scott?

Scott Topping

Thank you, Mark and hello everybody. For the fourth quarter, the company reported breakeven results reflecting economic fuel expense, below the consensus estimate of $0.10. This compared to an adjusted net income $16.3 million or $0.31 per diluted share in the same period last year.

As Mark alluded to a bit ago, the gap between our most recent guidance and actual results is primarily driven by an accounting adjustment related to our frequent flyer program. The adjustment affected the timing of revenue recognized for mileage credit sold to partners in prior periods. As a result, passenger revenue decreased $7.9 million which after a small related expense offset produce $0.08 decrease in earnings per share and a decrease in PRASM and RASM of $0.02 for the fourth quarter and it didn’t helped that our revenue performance while within guidance move towards the lower end of the range.

For the full year, adjusted for economic fuel costs and excluding the affect of 2011 lease termination charges, we recorded net income of $55.6 million or $1.06 per diluted share in 2012 compared to $43.2 million or $0.85 per share in 2011.

Our return on invested capital for 2012 was 14.9% before tax and 9% on an after tax basis. Our operating revenue for the fourth quarter was $493 million, up $59 million or 13.6% year-over-year. Passenger revenue increased 13.2% compared with the fourth quarter of last year. Load factor for the quarter decreased 2.2 percentage points to 81.9% while yield decreased 10%. Combined, this produced a decrease in RASM of 12% and a decrease in PRASM of 12.4%. Of the 12% reduction in RASM, about half is the result of deterioration on existing flying and the rest is the result of performance on our new flying. In a moment, Mark will address other components impacting passenger revenue in greater detail.

Other revenue were at a slower pace than fourth quarter capacity primarily because certain elements of it, most notably we achieved relate primarily to our domestic business where much of our growth has been on the international side.

Our cargo business continues to grow at an impressive pace both domestically and internationally with cargo revenue up over 40% on the quarter. With more A330’s flying in the system and our network expansion, we have increased our focus on our cargo business and had has produced positive results for cargo revenue despite a sluggish global environment.

On the expense line, fourth quarter CASM excluding aircraft fuel and 2011 lease termination charges decreased 11.3% on a year-over-year basis and excluding the frequent flier adjustment decreased 11.2%. Aircraft fuel costs increased $42.7 million or 32.2% driven primarily by an increase in volume. We consumed 54.5 million gallons of jet fuel, up 28.8% from the same period last year. This was essentially in line with the growth in ASMs. Higher prices also contributed to higher fuel costs.

Our economic fuel cost per gallon including hedging gains, losses and expenses related to contract settling during the fourth quarter was 327 per gallon compared to 320 in last year’s quarter. Our GAAP fuel cost was 322 per gallon compared to 313 last year.

We continue to maintain a disciplined approach to fuel hedging. We've hedged 63% of our consumption in the current quarter. For the rest of 2013, we've hedged 56% in the second quarter, 47% in the third quarter and 34% in the fourth quarter.

In 2014, we've hedged 22% in the first quarter and 10% in the second quarter. You can find more details in the press release.

As we've expanded internationally, our foreign currency receipts have become material. Just over a half of our foreign receipts are in Yen, roughly one-third are in Australian dollars, in the Korean Won is nearly 10% with a small remainder coming from various other currencies.

The Yen weighting will decline as we increase flying to Australia this year and start service to New Zealand and Taiwan. While the Yen has weakened recently, other currencies were as opposed to have actually strengthened providing a partial offset to Yen effects. To manage foreign exchange risk, we have embarked on a program to hedge the volatility related to foreign exchange and are initially focused on the yen-dollar relationship.

Aircraft rent expense increased 12.3% compared to the prior year quarter as we have two additional aircraft under operating leases in this year’s quarter, one A330 and one 717. The costs associated with these aircrafts were partially offset by costs savings from the return of a 767 in the fourth quarter of 2011.

Depreciation and amortization expense increased 18.7% year-over-year to $21.9 million with a significant portion of this change reflecting the addition of two debt finance A330s and three aircrafts under capital leases.

Below the operating line, we reported non-operating expense of $18.4 million in the quarter compared to $1.8 million in the prior year period. The most significant difference year-over-year relates to unrealized losses on future hedge positions compared to significant unrealized gains in the prior year period driven by the run up of fuel prices at the end of 2011.

Our hedge positions are mark-to-market, mark-to-fair value under accounting policies and changes are recognized through non-operating expense. Higher interest and debt amortization expense also added to the difference in the non-operating line relative to a year ago.

Our balance sheet remains strong in this period of rapid growth. We ended the quarter with $406 million in unrestricted cash and $5 million in restricted cash. Our revolving credit facility remained undrawn at the end of the year, providing additional liquidity of $69 million which is net of letters of credit.

At the end of the quarter, our cash and equivalents plus capacity and the revolver was 24.2% of trailing 12 month revenues.

CapEx in the quarter was $75 million which includes pre-delivery payments of $27 million related to future aircraft and engine deliveries, and $48 million related to other aircraft items. This was above the $55 million to $60 million that we had mentioned on our previous call.

The main drivers of this variance were the acceleration of the spare engine purchase that had favorable economics and payments for Buyer Furnished Equipment for 2013 deliveries that were not included in our forecast.

Full-year CapEx was $406 million, $380 million of which was related to current and future aircraft and engine deliveries.

Looking ahead this year, we're anticipating first quarter CapEx in the range of $105 million to $115 million and for the full year, we're expecting CapEx in the range of $340 million to $350 million, primarily related to our future aircraft deliveries. Financing commitments are currently in place to fund the majority of these expenditures.

With respect to interest expense, we expect a similar level as we move sequentially from fourth quarter to first quarter.

Turning now to our pension plans, we made no contributions to our plans in the fourth quarter as we met our minimum required contribution for the 2012 plan year during the third quarter. Full-year contributions to our pension plan and post retirement plans totaled $19 million.

Looking ahead, we expect to contribute $15 million to $20 million to our plans and see a slight decrease in expense year-over-year.

With that, I'll turn the call back over to Mark for further commentary on the business.

Mark Dunkerley

Thank you, Scott. The operating environment unfolded much as we had forecast in last quarter’s earnings call. We face market specific circumstances of excess capacity which drove down results on the affected routes and in turn on the business segments as a whole.

As was the case at the end of the third quarter, no one segment of our business had universally good or bad route results and neither was there a correlation between individual route results and whether the route was a new addition to our network or a long standing feature.

As far as individual business segments, I will start with North America which now accounts for 45% of our passenger revenue. Overall, industry capacity was up 13% for the quarter of which our contribution was three percentage points.

For the West Coast only the numbers became 12% for the industry and two percentage points for us. While this capacity growth was similar to that of the third quarter, the fourth quarter has proportionately fewer high season dates which can absorb high levels of capacity.

North America PRASM declined almost 10% on a year-over-year basis for the quarter while load factor remained relatively flat. The capacity growth was spread across the large majority of our origin markets creating a very poor pricing environment. This required us to discount our fares to maintain our volumes.

Looking ahead, total published industry seat capacity from the Continental United States to Hawaii is forecast to increase 11% and 4% in the first two quarters before declining by 4% in the third quarter. We [put] capacity on the seasonal basis in the spring for deployment in international markets helping this trend along. The moderating industry growth followed by an actual declining capacity in the third quarter has already had the effect of creating conditions in which Hawaiian has been able to lead and increasing some fares.

Since bookings for the first quarter are already well advance, these positive fare initiatives will not have a substantial bearing on our first quarter outlook, but they are already helping our second quarter picture. Our new co-chair partnerships have also proven successful in giving us good connecting volumes.

This traffic from interior North America allows us to diversify our onboard traffic. We will continue to add new itineraries by combining our network with those of our partners to drive incremental business.

Our international business represents 32% of our passenger revenue as of 26% last year from last year. Capacity increased 57%, the combination of one new route each in Japan and Australia and the 24% year-over-year increase in capacity on existing routes.

The existing route increases primarily attributable to Sydney and Incheon. International market PRASM declined by 11.8% on a year-over-year basis for the quarter, while load factor declined 4.6 percentage points.

Performance on our new routes accounted for 7.7 percentage points of this decline. There were different dynamics to play within the international entities, so I’ll go over some detail by sub region.

In Japan, our revenue result was affected by weaker Yen, lower fuel surcharges and some route specific over capacity. The sharp move in the dollar-yen exchange rate had the effect of reducing our dollar receipts from flying to Japan by about 6 million. The impact of the lower fuel surcharge was approximately another 3 million. Despite these unfavorable developments, our Japanese routes contribute positively to Hawaiian’s overall results.

Asiana services currently Sydney and Brisbane in Australia but soon to include Auckland, New Zealand performed well in the fourth quarter. The capacity we've added to Sydney was positive and we've added more to the northern spring as mentioned a few moments earlier. Brisbane services which began at the end of November are off to a profitable start and we've added seasonal capacity there as well. Our New Zealand service which starts in Mid March is entering its prime booking window and the early demand trends are encouraging. The results for our other routes in our international segment were mixed, some very good, some not so good.

Having recognized that we added too much capacity to our Neighbor Island flying from our Honolulu hub in particular, we cut capacity over 4 percentage points over the course of the fourth quarter. It takes a little time to cut capacity, but frankly we didn't cut soon enough or deeply enough so our Neighbor Island results were utterly unsatisfactory for the quarter. [RASM] declined 9.6% on a 2.1% reduction in load factor. Capacity was up 10.6% year-over-year.

We actually saw strong local demand for trips between the islands of the state, but the demand for seats from other airlines for their connecting passengers fell off during the period, pulling down the overall result. All of the capacity added to the Neighbor Island’s schedule early in 2012 has now been taken out and indeed we will be down in year-over-year capacity for the first quarter. The recent reductions in capacity are already having a beneficial impact, as we've applied targeted fare increases on four separate occasions in December and early January. Those early in the quarter for this very late booking market, the capacity reductions have allowed these price increases to be absorbed without an impact on low tractor.

The Maui hub has worked well for us in the midst of this disappointing performance for the route group as a whole, and it is retained after our capacity realignment. The contribution of the Maui hub reinforces our confidence in our overall Neighbor Island strategy, while at the same time we fully acknowledge that we simply added too many seats in the market as a whole, damaging the results for this segment. We will do better than 2013.

Earlier this month, we announced the signing of an MoU with Airbus covering the acquisition of 16 A321NEO aircraft and nine purchase rights for delivery from 2017. As we were so close to announcing our year end results, we haven't briefed you on our thinking behind the decision, so I will take a few moments to cover this news now. We've never been under any illusion that the West Coast markets to Hawaii will ever cease being intensely price sensitive. With this as a given, we understand that we must always have a unit cost advantage or at worse parity with the airlines against which we compete.

Given that we are a legacy carrier with many elements of legacy costs we must rely on operating the most efficient aircraft for the West Coast to Hawaii sector length. Up to now this is mid operating wide body aircraft, even if in doing so we forego the opportunity to fully participate in some of the smaller markets. Today there is no single aisle aircraft that can match the operating economics of the wide bodies that we fly.

With the arrival of the new engine technology, the inherent seat mile cost gap between wide bodies and the very largest of the new single aisle aircraft diminishes, perhaps to the point of disappearing. As a consequence, we have both a competitive opportunity to buy for markets we have thus far had to bypass and that’s principally between the neighbor islands and points on the US west coast and the defense against carriers who will operate the new generation single aisle aircraft.

As is our practice, we held a competition between the manufacturers, spanning much of last year before awarding the contract to Airbus. The A321NEO will be the largest of single aisle aircraft capable of crossing between the United States west coast in Hawaii with a full load in adverse wind conditions, and as such it will be the most cost effective of the genre.

Our last A330 delivery is slated for 2015 and our first A321NEO is due to arrive in 2017. Lending in our six A358 delivering towards the back half of the decade gives us a long-term growth rate of between 4% and 5% measured in seats. We have flexibility in the delivery terms and in our ability to manage the retirements of our existing fleets to allow us to modulate that rate of growth by several percentage points either up or down.

Importantly, we believe that our balance sheet will continue to strengthen throughout the decade and that the new aircraft will not therefore put us under undue stress. In the last week, our pilots ratified the changes to our collective bargaining agreement with them to allow these aircrafts to be operated and we are in negotiations with our flight attendants to do the same. If we can reach agreement with our flight attendant, we will be selecting an engine for the aircraft and then completing the full purchase agreement.

It’s frustrating to close out a decent year of financial performance with a dip in our results at year-end. It’s been a challenging quarter with a number of things working against us, including changes to exchange rates, the high level of industry capacity in some of our markets and an accounting issue. While we are still seeing many of the same environmental conditions persisting into the first quarter, the outlook for the balance of 2013 is brightening. At the same time we are also taking steps to further improve our performance. With that let me turn it back over to Scott to give you a window into the next quarter.

Scott Topping

Thank you, Mark. Looking at the first quarter our growth will continue and we expect capacity to increase between 25.5 and 27.5% compared to the same period in 2012. The vast majority of this is the full impact of last year’s growth. Looking at this year’s additions to the fleet, we have five A330 delivery scheduled in the months of February, March, April, June and November. Our retirement plane calls for four 767s to leave the fleet. The expected timing of these retirements is one in the second quarter, one in the third quarter and two in the third quarter.

On a net basis, we will grow by one wide body. We aren’t however growing our ASMs at about 17% over the year. This is due to full year effect, the long haul nature of our expansion and the larger capacity of the A330 with 13% more seats than the 767 it replaces. Load factor for the first quarter is expected to be in the range of down 2 percentage points to flat. Yield is expected to be in the range of down 5% to down 8%. Combining these numbers we expected PRASM to be in the range of down six to down 9%. This decline is driven entirely by our new client. Other revenue is expected to lag passenger revenue as the majority of our growth is international. The net result is the RASM is expected to be down 7% to down 10% compared to the first quarter of last year.

Turning to cost; for the first quarter we expect CASM ex-fuel to range from down 6 to down 3 percentage points. For the full year we expect CASM ex-fuel to be down in the low single digit range. It is worth mentioning here that our D&A expense will benefit this year from certain intangible assets that became fully amortized as of November last year. This expense was running at about 4 million for quarter since June of 2005.

Our tax rate is expected to be in the 39% to 41% range, and we do not expect to pay cash taxes until 2015 at the earliest. As we look at our plans to fund aircraft deliveries, financing is now in place to cover four of the five A330s we have coming this year. Two aircraft have committed bank financing and the other two will be under sale back agreements. We are now choosing among various options to finance our final 2013 delivery and delivery is coming in 2014. The A330 remains a popular aircraft to finance providing us with a number of attractive alternatives.

I would also note here that our ATR42s were purchased with cash. Regarding fuel and staying with our normal practice, we are now going to give price guidance at this time. We expect our fuel consumption to be up 22% to 24% year-over-year in the first quarter as a result of our growth.

With that said, we've reached the conclusion of our prepared remarks. I would like to thank all of you for being with us today and for your continued interest in Hawaiian Airlines. I will turn the call back over to the operator now to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Michael Linenberg with Deutsche Bank. Please proceed with your question.

Michael Linenberg - Deutsche Bank

Just two questions here, Scott you went through the breakout of your foreign currency receipts and I am just curious what percent of your revenue do you receive in foreign currency?

Scott Topping

Our international revenues are, it’s around a third of our total revenue. Breaking that down a yen is again kind of 50% and 60%. The Australian dollar about a third and then the Won is 10% and the remaining currencies are small single digit range.

Michael Linenberg - Deutsche Bank

Okay, but when I think of the third you know your revenues are international, there's obviously some portion that's sold in US, although I guess…

Scott Topping

Yeah, it’s tiny, absolutely tiny.

Michael Linenberg - Deutsche Bank

Okay, that makes sense when I think of that at your point of sales strength there seem to be a lot more Japanese on those flights than Americans coming to Japan.

Scott Topping

Yeah, absolutely.

Michael Linenberg - Deutsche Bank

That brings me to my second question, Mark, I think you said what was the yen impact; did you say it was $6 million in the quarter, did I…?

Mark Dunkerley

Yeah, you got that right, $6 million and then the fuel surcharge was an additional roughly $3 million.

Michael Linenberg - Deutsche Bank

Okay, so I just, when I think about the $6 million and I know Scott you talked about the yen hedge, you know I think about the deterioration of the yen versus the dollar during the quarter and it really picked up late in the quarter and so when I think about the purchase habits a lot of these tickets are purchased in advance. They were probably purchased when the yen was stronger, what I am getting to is that the average yen for the quarter was probably a bit stronger than where it is now. It may have actually depreciated another 10% or so. So can you just walk us through how you think about that and then the yen hedge position, I think you haven't placed Scott, I'm not sure you have one or you are going to put one on, can you give us any details on that?

Scott Topping

Absolutely.

Mark Dunkerley

Sorry, just before on that, one of the really important things to remember about our Japanese business is the bookings are made very early, but under the terms of Japanese domestic law, it doesn't have to be ticketed until 28 days before departure. So in terms of our, I mean, we recognize the revenue when flung, but in terms of our ability to get our hands on the cash, it doesn’t come into quite close to the date of travel, just for your information. Back to you Scott.

Scott Topping

Yeah, Mike, if you look at the quarter, the fourth quarter as you said the yen was deteriorating more kind of later internet the quarter, so if you look at the average for the quarter our exposure was about between 4% and 5% of devaluation of the yen. Obviously, as you go forward, more has happened as you said and so as you look into the first quarter, we should experience a little bit more change in potential deterioration.

Moving to the hedge, it is fairly recent that we put it on. I would like to say we put it on when the end was 80, but we did not. It's closer to the current market, but we built up a position in March. That’s about, occurring about 35% as we look out to the second, third and fourth quarters, we were building up to 30%, 20% and 10% but we’ve just kind of got a start and so that’s not where we will end up. These positions are simply forward. So we’re not spending any premium on the hedge at this point. It's pretty plain vanilla, but importantly getting out in front of the yen a bit more in case continues to fall.

Operator

Thank you. Our next question comes from the line of John Godyn with Morgan Stanley. Please proceed with your question.

John Godyn - Morgan Stanley

Mark, and maybe Scott, just a question on sort of some of the aircraft purchases that you have done historically, but also historically; we've definitely seen, I think with some of these larger orders are biased towards new aircraft. On the other hand, in the secondary market, we've seen some very interesting values lately, and we have also seen some other airlines take advantage of those values and of course there is a new entrant in Hawaii whose bread and butter strategy is using older aircraft to reduce costs. When we think about kind of your approach, Mark, you did mentioned a lot of the efficiencies, you mentioned may be that some of the aircraft orders are very specific to the nature of the routes because they can fly kind of unique pairs. But I was hoping that may be you could elaborate on this idea, are secondary market value is just not low enough to make the math work there, are you getting a great deal on some of these new aircraft or are they just sort of the only aircraft that can fly this mission?

Scott Topping

It’s a great question. A couple of things I would point out to you, first of all, we have operated many older planes; we have got today I think in our fleet seven 767s which came from the pre-owned lots. So we have quite a bit of experience of operating older airplanes. For the kind of flying that we do, they present a number of real, real challenges particularly in the wide-body space they all have different configurations, so for example, we have 16, 767s with five different fleet configurations; it has real impact in terms of our ability to deliver decent customer service, and financially, because for example, it limits the number of common premium seats for which we can charge a premium seat fees; that’s just kind of a small window into some of the issues associated with operating older aircraft.

The second thing that I would point out is that we don’t, being a legacy carrier, we will never be a low cost carrier; we have of course the demand that we provide is superior quality of service and that we get paid for providing that superior quality of service; that becomes extremely difficult with used aircraft partly as a result of some of these consistency issues that I have just mentioned to you.

And then the third point that I would make to you is that, we also have seen new aircraft as partly an approach to hedging fuel, and we would happier operating sort of expensive capital cost airplanes in a low fuel environment than we would be operating low capital cost airplanes in a high fuel environment, because of fuel burn.

The latter scenario, I think really potentially undermines the foundation of our entire enterprise and franchise, I think the former scenario would represent some periods of unfavorable comparisons, but it wouldn’t be damaging our franchise.

John Godyn - Morgan Stanley

Okay, got it. And that's very helpful, thank you. And Mark on your comments about sort of the supply-demand balance improving later in the year; you gave some capacity numbers which were very helpful. I mean, it sort of implies that all of the issues that we are seeing right now on the capacity side and you have seen no real weakness in demand incrementally or anything like that, is that a fair characterization of the situation?

Mark Dunkerley

Yeah, thank you for raising it; I would absolutely endorse that deal; I would say that we are not seeing any weakness in demand whatsoever; it’s a question of being simply too many seats in the marketplace.

John Godyn - Morgan Stanley

Okay. And you may have noticed I am not sure, but United has been putting out some advanced book factor numbers in particular with Asia-Pacific reaccelerating; I know that there are overlaps or not; a great read across for you guys, but are you seeing anything sort of change in those markets just in the last month or so?

Mark Dunkerley

No, not at all; we of course, I split it a little bit by sub-region; we talked about Japan, we have got some markets, specific over capacity there. There is a much bigger issue of course is the yen and the fuel surcharge that we mentioned. Elsewhere, we are getting positively good results out of Australia and New Zealand and our other markets I think are doing fine. So we are seeing no sort of change again I think our international operations as a whole is contributing and even Japan continues to contribute positively to our overall results.

John Godyn - Morgan Stanley

And just last question just a follow-up on Mike’s question on Yen exposure and other things, Scott, I think you mentioned that you are at 35% hedge exposure but that's not where you are going to end up. Is the goal here 100% and to the extent that you might be able to provide kind of a target rule of thumb that we can use for changes in Yen to changes in the revenue and the same thing for the fuel surcharge effect, I don't know if you think that way but if any elaboration there will be helpful.

Scott Topping

Sure, our program is really just in its infancy. I think we could take the hedge up to 100%. I don't think you will see that. We will start out a little more modestly and again depending on where the currency is we will factor into the equation.

So I think you will see us go a little bit higher but probably not any race to get everything hedged here. The sensitivity if you looked at the coming quarter and you had a 10% [immediate] shock to all of the currencies we are exposed to, you would see about probably a $5 million to $6 million after tax impact.

The reality is if you looked at the last quarter, we did as we mention have some offsets. So we had a number of currencies going the right way but the volume of Yen overpowered that. But we had an offset kind of probably close to a third kind of watering down the effects of the Yen with the other currencies. So I'm not sure that relationship stays but its just kind of a natural hedge if you will that's being in a number of different currencies.

John Godyn - Morgan Stanley

And just on the fuel surcharges, is there a rule of thumb there for the Japan fuel surcharges?

Scott Topping

No, not really. That one is pretty mysterious and we are learning more about it on the finance side and if you look at the current period, the fourth quarter the fuel surcharge is set in June and July for the fourth quarter basically. So you have quite an opportunity for the Singapore (inaudible) Index to disconnect from what's going on in your on the run and fuel prices.

So I think that one is a bit more of a kind of a wild card and we will certainly track that and then try to understand how those two correlate but it is as we just learned them in the last quarter it can be negatively correlated and pretty tough to forecast.

Operator

Our next question comes from the line of Helane Becker with Dahlman Rose. Please proceed with your question.

Helane Becker - Dahlman Rose

So this is my question, so this is my question when we think about the 2013 full-year guidance, are we thinking about it, with or without these year-end adjustments?

Mark Dunkerley

I think we were thinking about it with the accounting charge in the numbers and the fuel adjusted out in the ordinary course. When we say that we think the results are going to be better, I don't think it materially induce on the accounting charge. I would hope that the rate of improvement would be greater than $7.9 million charge.

Helane Becker - Dahlman Rose

Okay, and then my other question is with respect to some of the newer services that you added or how are they relative to your expectations? You know, I know that sometime it takes a while for a route to develop, but are they in line with where you saw they would be or have you been disappointed at all with what you are seeing? Could you maybe adjust that a little bit?

Mark Dunkerley

Sure. I would describe. I don’t want to get into route specific comments but I would describe as being three quarters, very encouraging one quarter, slightly disappointing with the net of the encouragement versus disappointing being strongly positive.

Operator

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

Hunter Keay - Wolfe Trahan

So, Mark, can you give me a little more color on some of the commentary you gave us about the other airline connecting passengers on the interisland airline business? I am wondering what happened? Is it temporary? Or is it more of a permanent function of some of your competitors offering more flights to the outer islands and if it’s not temporary what are you going to do with the 717s?

Mark Dunkerley

I think we have, time will tell whether those are temporary or not. I think it is a feature of the overcapacity coming off to the US mainland to Hawaii. Unsurprisingly, I think carriers want to keep as much of their traffic online as they can and they use our interisland network to smooth out demand imbalances between flights and so when there is excess capacity, I think there is less need for them to do that.

So I think that part of it will sort of actually resolve itself how long that will take I think remains to be seen. In terms of the number of 717s, if you recall when we got the additional 717s at the beginning of last year, the main reason for those 717s was to improve our schedule reliability.

These aircrafts are now half through their useful life, they are hardworking air planes, they fly in many instances, 16 cycles in a day with one of the things we are discovering is we need more maintenance time for aircraft across the calendar nothing unusual about that it’s just a fact of life.

And indeed, the actual flying we did last year was over and above the utilization that we have done previously in ‘11 on the smaller fleets. So we have really kind of (inaudible) the capacity in 2012 beyond which we would initially anticipated that was a mistake as I hopefully have sort of fully acknowledged and admitted. And so as we actually kept the brakes on capacity, I think we will have essentially the right number of interisland aircraft for the right public capacity.

Hunter Keay - Wolfe Trahan

And on the conference call you noted, specifically highlighted that they have started charging a second bag fee for flight to Japan. I am curious to without coming on that specifically sort of get your sort of updated opinion on again the perception of Asian O&D passengers, or there was any passengers from Asia to the United States perceived the concept of unbundling and how that might evolving?

Mark Dunkerley

Of course we are obviously looking at the decisions that competitors make in the marketplace. We will watch ourselves right, watch one another very carefully in that regard. But just in general, at the moment, I don’t think we believe that there is a huge appetite or willingness or acceptance of unbundling in particularly for example, the Japanese market, indeed a lot of our product is sold as part of somebody’s else bundle.

So to actually, a lot of the product is sold doesn't even unbundled to the level of the air travel being separate from the hotel and another elements of the trip. So to get to the point where we see unbundling air travel per se, I think it is some ways, but we are also looking and watching what our competitors are doing and seeing what their experience is.

Operator

Thank you. Our next question comes from the line of Bob McAdoo with Imperial Capital. Please proceed with your question.

Bob McAdoo - Imperial Capital

I have kind of a simple question about the way you kind of presented things on the front of the press release. If you talk about adjusted net income of $100,000 more or less and a GAAP net loss of 3.4 million and that difference tends to be looks to me to me if I'm reading this thing right is tied to your fueling unrealized hedges. Then you got this prior adjustment and I am wondering why that isn't kind of excluded as well or is that something we should expect every quarter, every fourth quarter is that ongoing kind of a set of adjustments we are going to see from time to time, how should we be thinking about that.

Scott Topping

Thanks for raising that Bob. There was consideration of putting that frequent flier adjustment out of period adjustment as an adjusted item, and we went round and round with our friendly auditors and at the end of the day concluded that it wasn’t worth doing. It was a close call but it may have invited some other looks into the accounting that would be time consuming and really is not worthwhile. So we chose to keep it in GAAP and continue to just educate as to what its about and why its there and we can spend some time offline on that if you want the full story but at the end of the day we chose to keep it in GAAP and not to break it out.

Mark Dunkerley

Yeah, Bob to state the same thing a little bit differently I think the accounting rules are pretty clear that we can't treat it as an adjustment. Its for the prior period, its not deemed to be material, it’s a small amount because of a number of periods. We don't expect it to roll forward and leave it up to you as to how you treat it in terms of your analysis. We obviously are obeying the scriptures of the accounting rules and that's why its not an adjusted item in the same way that (inaudible) is.

Bob McAdoo - Imperial Capital

But does that mean I mean are we saying that this is kind of a one time thing and we don't really expect to see it like in the fourth quarter next year or whatever.

Mark Dunkerley

That is correct. That's right.

Bob McAdoo - Imperial Capital

So if I'm trying to assess how you are doing or what's likely to be your cost of revenues going forward for me to exclude that from the base in which I project seems to be reasonably, it’s a reasonable thing to do, is that correct.

Mark Dunkerley

We would not be jumping up and down. We would not be objecting it to your treating it that way. We are saying that from an accounting perspective we have to treat it the way it is.

Bob McAdoo - Imperial Capital

Okay. So what you are really saying is that the guys that sign off on the books have their way of doing business but if we are truly trying to analyze your company and what your company is doing that is kind of a one time out of a period thing, it is not something we should have to deal with going forward.

Scott Topping

I wouldn't criticize that statement from you.

Operator

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

Steve O’Hara - Sidoti & Company

Can you just talk about the actual unit cost decline for full year 2013? I guess given what I guess is a $60 million improvement or thereabout depreciation and amortization, some 767s leaving the fleet and a further slate of A330s that would have expected something of a full-year decline or more than that and then maybe if you can talk about, what targets you have for the long-term.

Scott Topping

Steve we would hope that we can over achieve there and low single digits, this year we were down 6%. A couple of things actually, in 2013, that will be a bit more challenging and one is it's going to be a maintenance here, that’s a little heavier than 2012. It's not going to be quite as heavy as 2011. So somewhere in between there on a growth adjusted basis but there will be some additional maintenance pressure.

And we just continue to invest in the business and if you look at the back half of the year, we're slowing down to about a 10% to 12% growth rate as oppose to almost 30% in the half that we just went through the 2012 year. So that is another dynamic and there are just a number of pieces here and there that lead us to believe that it should fall somewhere in the range of where we were this year. I think the slowdown in growth is certainly a part of that and then some expenses that are just higher, such as maintenance also driving that.

Steve O’Hara - Sidoti & Company

Did you quantify the impact on either a first quarter RASM or fourth quarter RASM in terms of the Japanese yen decline or maybe the currency effects in general that you expect?

Scott Topping

Yeah, in the fourth quarter, it was about $6 million, and if you look at the first quarter and you just look at the changes in the currencies that have occurred and we know will effect the year-over-year comparison when we get through the first quarter, there is going to be a headwind of approximately 6 million to 7 million just due to the exchange rate changes in the first quarter.

Steve O’Hara - Sidoti & Company

Last question in terms of competitive capacity, it sounds like the pressure is going to ease through the year and correct me if I had that wrong.

Scott Topping

No, very much right.

Steve O’Hara - Sidoti & Company

How do you judge whether are these competitive responses to your actions or are these just normal puts and takes in the market in terms of the competitive reaction that I guess we are going to see through 2Q?

Mark Dunkerley

I think we all of the airlines have access to the same sort of data sources we see the same numbers and I think we all make an independent decisions about what we have to do and I think the rate of capacity growth between the US west coast and Hawaii was unmistakably too much in the course of last 12 months and we are seeing competitors tap on the breaks, we are doing our part as well. So I think that’s the process by which it unfolds. Again we are looking at the same information I think we independently come to very similar decisions.

Operator

Thank you. Our next question comes from the line of Glenn Engel with Bank of America Merrill Lynch. Please proceed with your question.

Glenn Engel - Bank of America Merrill Lynch

You mention the frequent flyer, yet you took that 7.9 million, but I thought also there was the change in the fuel assumptions and that was the frequent flyer good guys well, can you talk about magnitude of that and where it showed up?

Scott Topping

On the expense line there was a couple of things going on, but there was - I am looking at same and [Shain] and I am thinking (inaudible) million range and we can tighten that up for you, when we talk.

Glenn Engel - Bank of America Merrill Lynch

So if you look at the fourth quarter the revenue was, as Bob was saying understated by 7 million or 8 million, but the cost were also understated by you are saying 4 million to 5 million or 4 million or so?

Mark Dunkerley

I think the two are entirely separate, one was an in-period effect, the other one out of period. This is 7.9 addresses some out of period revenue recognition issues whereas the impact of the fuel, it wasn't in-period. So mathematically there are puts and takes, but they are not logically connected.

Glenn Engel - Bank of America Merrill Lynch

Second question on the pilot agreement, is there any sweeteners on current rates for reaching this, or it is just the affects the A320NEO rates?

Scott Topping

All right, just the A320NEO rates.

Glenn Engel - Bank of America Merrill Lynch

And the A321NEO as you mentioned the costs were closed to the wide bodies, where you think close to the A330s or close to the 767?

Scott Topping

Close to the A330s and it’s extremely sensitive, so the assumptions you are putting about load and what kind of wins are there on the days. So we do talk in general terms but when we that's why I said if I recall close to and perhaps and equaling works to that extent. It does vary depending on stage length, loads and winds.

Glenn Engel - Bank of America Merrill Lynch

And finally you mentioned the depreciation of 4 million a quarter good guy, how much of that showed up. You said some of it showed up in the fourth quarter or how much of that showed up in the fourth quarter.

Scott Topping

Glenn could you repeat that?

Glenn Engel - Bank of America Merrill Lynch

The depreciation and amortization good guy you said were something is rolling off and that would save you 4 million a quarter I think you said.

Scott Topping

Yes.

Glenn Engel - Bank of America Merrill Lynch

And how much of that started to benefit in the fourth quarter.

Scott Topping

Just one time.

Glenn Engel - Bank of America Merrill Lynch

What?

Mark Dunkerley

Yeah, it ended November 30 so it was just one month.

Glenn Engel - Bank of America Merrill Lynch

So one month okay.

Operator

Our next question comes from the line of (inaudible) with UBS.

Unidentified Analyst

You noted employee plans for some hiring sounds like can you just maybe fill us in on what type of hiring and what percentage management and what types of management maybe you will be looking to fill.

Mark Dunkerley

Cameron I'm not sure I got the first part of the question so do you mind repeating it.

Unidentified Analyst

Yeah, sorry maybe I'll speak up, I think in your press release you talked about some additional hiring, can you talk about what areas and maybe as it relates to management what areas of management you are looking to beef up.

Mark Dunkerley

Sure, well first of all in sheer number terms the majority of the areas for recruiting are going to be pilot, flight attendants and customer service agents and then maintenance also so that we can handle substantial increases in our flying and ground activities. In terms of management we have been hiring sort of selectively in different areas. I don't think there is one particular area that I would characterize as having a particular emphasis in terms of hiring. I think we are doing some hiring across the board. I think the numbers of management hiring are tiny compared to the math of the hiring for the flying and ground staff.

Operator

We have no further questions at this time. I would like to turn the floor back over to management for closing comments.

Mark Dunkerley

Okay, well thanks everyone for joining us today. As we've stated it was a difficult quarter, and the first quarter also looks challenging but the outlook is definitely brightening appreciably and we are optimistic about 2013 as a whole and we are looking forward to spending time with you as the year unfolds. So thank you very much.

Operator

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

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