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Hawaiian Holdings (NASDAQ:HA)

Q1 2013 Earnings Call

April 23, 2013 4:30 pm ET

Executives

Susan Donofrio - Senior Director of Investor Relations

Mark B. Dunkerley - Chief Executive Officer, President, Director, Member of Executive Committee, Chief Executive Officer of Hawaiian Airlines Inc and President of Hawaiian Airlines Inc

Scott E. Topping - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer, Executive Vice President of Hawaiian Airlines Inc., Chief Financial Officer of Hawaiian Airlines Inc. and Treasurer of Hawaiian Airlines Inc.

Analysts

John D. Godyn - Morgan Stanley, Research Division

Helane R. Becker - Cowen Securities LLC, Research Division

Hunter K. Keay - Wolfe Trahan & Co.

Michael Linenberg - Deutsche Bank AG, Research Division

Glenn D. Engel - BofA Merrill Lynch, Research Division

Bob McAdoo - Imperial Capital, LLC, Research Division

Stephen O'Hara - Sidoti & Company, LLC

Operator

Greetings, and welcome to the Hawaiian Holdings First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

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

Susan Donofrio

Thank you. Welcome, everyone, and thank you for joining us today to discuss Hawaiian Holdings' first quarter 2013 financial results. On the call with me today are Mark Dunkerley, President and Chief Executive Officer; and Scott Topping, Chief Financial Officer.

I'd also like to welcome Ashlee Kishimoto to the Investor Relations team. Ashlee has been with the company for about 4 years as the Director of SEC reporting and is based in Honolulu. And I know many of you are already familiar with her. By now, everyone should have access to the press release, which went out at about 4:00 Eastern Time today. If you have not received the release, it is available on the Investor Relations page of Hawaiian's website, 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, recent quarterly reports filed on Form 10-Q, as well as reports filed on Form 8-K.

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

Mark B. Dunkerley

Thank you, Susan. And I, too, welcome Ashlee to her new role in Investor Relations. As you can see from the press release, we issued a little earlier, for the quarter, we reported a net loss of $0.29 per share adjusted for the effects of fuel hedge accounting. Our results were disappointing but unsurprising. Our performance was undermined by an extraordinary increase in total industry capacity between Hawaii and the U.S. West Coast and in certain international markets during what is traditionally the weakest quarter of the year. A further unhelpful development has been the weakening of the yen. However, in the plus column, good cost control and an improvement in our Neighbor Island business helped to offset some of the impact during the period.

We are looking forward to the summer when market conditions are set to gradually improve as a result of some recently announced reductions in capacity. When this happens, we would anticipate results that reflect what we should be earning in a more normal environment of supply and demand. More about this later.

As always, we had a lot going on in the quarter. In March, we launched our first nonstop flight from Honolulu to Auckland with service 3x each week and increasing to 4x per week during peak periods. We are the only U.S. airline serving this city. In February, we announced our 5th destination to Japan with service 3x per week to Sendai beginning in June. We also announced the branding of our turboprop operations as 'Ohana by Hawaiian. And executed an LOI for a third ATR 42. Since the quarter ended, we announced a couple of other changes to our international network. First, we announced our intention to launch nonstop service 3x per week between Honolulu and Beijing beginning in April of 2014. And second, we announced that we will terminate our 4x per week service to Manila effective August 1 of this year.

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

Scott E. Topping

Thank you, Mark. As mentioned earlier, for the first quarter, the company reported an adjusted net loss of $14.8 million or $0.29 per share reflecting the economic fuel expense. This compares with an adjusted net income of $3.3 million or $0.06 per share for the same period last year. Our return on invested capital for the trailing 12 months was 12.1% before tax and 7.2% on an after-tax basis. Operating revenue for the first quarter was $491 million, a 12.7% increase year-over-year while passenger revenue increased 12.5%. Load factor for the quarter decreased 2.9 percentage points to 80.9% while yield decreased 7.7%. Combined, this produced decreases in RASM and PRASM of 10.8%.

Please note, there are substantial impacts on our unit revenues from the changing mix of international flying. Looking at a same-store comparison and assuming that in the first quarter we flew the same routes we had in the first quarter of last year, PRASM would be down only 2%.

Other revenue increased 14% year-over-year this quarter. And one of the highlights on this line is our cargo business. It continues to grow both domestically and internationally with cargo revenue up 53.5% year-over-year, further building on the strong improvements we posted in the back half of 2012.

Turning to expenses. Aircraft fuel costs increased $34 million or 24.4% driven primarily by an increase in the consumption. Here are the quarter-over-quarter comparisons, we consumed 54 million gallons of jet fuel, up 25.1%, our GAAP fuel cost was $3.24 per gallon compared to $3.25. And our economic fuel cost per gallon, including hedging gains, losses and expenses related to contracts settling during the first quarter was $3.29 as compared to $3.27 last year.

Our fuel hedging program remains consistent with our usual practices. As of April 17, we had 55% of our consumption hedged for the remainder of this year. We also have positions in 2014 with 47% hedged in the first quarter, 34% in the second quarter, 16% in the third quarter and modest positions in the fourth. More details can be found in the press release.

As you all know, about 1/3 of our passenger revenue relates to our international services. To further break this down, in the first quarter, Japan and Australia constitute about 80%. For the remainder, Korea accounts for about 10% with the balance coming from various other currencies. While year-over-year, the yen weakened and the Australian dollar was flat, the Korean won strengthened providing a partial offset to the effects of the yen.

To update you on our foreign exchange hedging activities, on April 17, we had 60% of expected yen receipts hedged in the second quarter, 49% hedged in the third quarter and 35% in the fourth quarter. In 2014, we've hedged 22% in the first quarter and 20% in the second quarter. In addition, we recently started hedging our receipts in Australian dollars. This year, we have 51% of our expected Australian sales hedged in the second quarter, 34% in the third quarter, and 21% in the fourth quarter.

Next year, we have 21% in the first quarter and 19% in the second quarter. Again, more details can be found in the press release.

Under our accounting policies, our foreign currency hedges are designated for effective hedge accounting treatment and are recognized at fair value with changes running through the balance sheet. These mark-to-market changes are then reclassified to the P&L through the revenue line during the period that the related sales are recognized.

Our fuel hedge positions are mark to fair value under our accounting policies and are not designated for hedge accounting. So the mark-to-market changes are recognized on the P&L through nonoperating expense.

Continuing with costs. Maintenance expense increased 26% year-over-year. The increase was lower than anticipated due to the timing of several maintenance checks with approximately $2 million rolling into the second quarter. Other than that, maintenance costs for the quarter reflected volume related increases in line with our growth, including power-by-the-hour costs and planned heavy maintenance checks. D&A was flat year-over-year. The increases in additional owned aircraft and aircraft under capital leases in our fleet were offset by a decrease in expense related to an intangible asset that was fully amortized in the fourth quarter of 2012. Aircraft rent expense increased 12% year-over-year due to 2 new A330 aircraft leases since the first quarter of last year, one this quarter and one from the second quarter of 2012.

Below the operating line, we reported a nonoperating expense of $15.5 million in the quarter compared to $1 million in the prior year period. The most significant difference year-over-year relates to unrealized losses on our future fuel hedge positions compared to unrealized gains from the prior year period. We also had higher interest and debt amortization expense due to the additional A330 financings relative to a year ago. Our balance sheet remains strong in this period of growth. We ended the quarter with $438 million in unrestricted cash and $5 million in restricted cash. Our revolving credit facility remained undrawn at the end of the quarter providing additional liquidity of $69 million which is net of letters of credit.

CapEx in the quarter was $36 million, which included $27 million related to payments for upcoming aircraft and engine deliveries, and $9 million unrelated to air -- to unrelated to aircraft purchases. This amount is below what we anticipated in our last call primarily due to the slip in the delivery of our 11th A330 from March to the beginning of April.

Wrapping up the quarter, we contributed $3 million to our other postretirement plans and we expect to contribute a minimum of $12 million more to our plans during the remainder of the year.

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

Mark B. Dunkerley

Thanks, Scott. Our first quarter results reflect the difficult environment we've been operating in. At the margin, there are some elements of execution where I think we should have done a better job. But even flawless execution wasn't going to overcome the headwinds of the double-digit capacity growth out of North America. To be clear, this commentary doesn't apply to our Neighbor Island business where I think we did a good job of addressing a number of challenges from last year.

Let me go into a bit more detail starting with our North America routes, which, during the quarter, accounted for 44% of our passenger revenue. As a result of the challenging competitive environment, our PRASM declined 6% on relatively flat load factor year-over-year. On the same-store comparison, PRASM would have declined 2%. Hawaiian has, we believe, the lowest unit cost of any carrier in this segment by our legion [ph]. We have the best service and an excellent reputation for providing value for money transportation to the traveler. We also enjoy a strong competitive position in the largest routes between the U.S. mainland and Hawaii. So our results are more reflective of environmental challenges than they are of any underlying weakness in our formula.

And we only have to look at the capacity numbers to see this. The year-over-year increases in capacity have been 13% for both the third and fourth quarters of 2012 and now, 11% for the first quarter of this year. Our contribution to the 11% increase was 2 percentage points due entirely to the addition of our daily New York to Honolulu service.

In the past few months, we've started to see the unraveling of some of these additions. With United, Alaska and Allegiant all announcing reductions in their schedules, for our part, we've kept our flying between Hawaii and the U.S. West Coast essentially steady for the past several years growing the number of flights by just 2% per annum since the bottom of the market in 2009. Our seat growth has been a bit higher as we substitute A330s for 767s. And of course, the new service to the East Coast drives a lot of air sends [ph] in our North America statistics.

Looking ahead, our flights between Hawaii and the U.S. West Coast are set to decline by 1% in the third quarter, and 2% to 3% in the fourth quarter. As a consequence of all of these scheduled drawdowns, the picture brightens ahead. Capacity for the second quarter, while still growing year-over-year, is nonetheless set to rise at a slower 5% rate. The tide turns in the third quarter with capacity declining by 2% before properly taking hold in the fourth quarter when published schedules show a 6% fall. Our commercial outlook for North America follows these capacity trends.

Of course, we haven't just sat on our hands as the market conditions have changed. Our growing international network, with its slightly counts to seasonal demand pattern, has enabled us to drawdown North America capacity during the weaker demand periods and redeploy assets overseas. We've added seasonal flying to Australia and New Zealand in the spring and the fall. These increases were made possible by drawing down frequencies in San Jose, Las Vegas and New York during the weaker demand periods for these markets.

Our international business represented 32% of our passenger revenue in the first quarter, up from 27% from the prior year period. Excess capacity and competitive pressures on a number of routes, as well as the continued devaluation of the yen weighed on our results. PRASM declined 16.8% year-over-year for the quarter on a 6.1 percentage point decline in load factor. Our capacity increased 59.7% which included new services launched since the first quarter of last year from Honolulu to Fukuoka, Sapporo, Brisbane and most recently, Auckland. In addition, we increased service to daily between Honolulu and Incheon. The changing mix of international flying and the declining yen contributed 12 percentage points to the overall decline in PRASM. There are different dynamics that play within the international entities, so I'll go over the details by subregion. In Japan, our results obviously suffered from the weakening of the yen. If the exchange rates had been the same as it was in the first quarter of last year, our yen denominated revenue would have been $5.5 million higher. As Scott mentioned earlier, we have a foreign currency hedging program in place to mitigate some of the volatility that we're seeing in our international sales.

Besides the currency headwinds, our Japan routes also saw substantial increases in capacity to which, of course, Hawaiian was a contributor. In addition to these macro factors, we don't think we've performed as well as we should have. Our sales presence has not fully matured in a market, which only 2.5 years ago, we didn't serve at all. The good news is that we believe we have the lowest unit cost of any of the operators in the Japan market and consumer research suggests that we are getting good awareness of our brand and that our service is held in high regard by the Japanese traveler.

In June, we will add Sendai as our 5th destination in Japan. This service will be a triangle route with a nonstop leg from Honolulu to Sendai and a return by Sapporo. Sapporo and Sendai have offsetting seasonality so while we are adding a new origin point, we are at the same time effectively derisking our existing Sapporo route. This is an example of our commitment to make necessary adjustments to deal with changing conditions in the operating environment.

Australia remains strong with all of our added capacity to Sydney, that's an increase in both frequency and gauge, having been absorbed by the market. Brisbane is only a few months old but is developing nicely. Auckland, New Zealand started in mid-March. So it's still very much in its infancy. As a group, we have been sufficiently encouraged to add seasonal capacity which, as I mentioned earlier, we have drawn down from our North America operations.

Earlier this month, we announced the cancellation of our service to Manila from August 1. We didn't see light at the end of that tunnel and so, made the straightforward decision to stop flying there. As we continue to grow into the still relatively new part of the world for us, we expect that not every assumption will prove to be correct, and that we will, on a market-by-market basis, have to learn the curiosities of computing effectively. This is built into our expectations for the future and we will make adjustments along the way to make sure that over the long term, each part of our network continues to contribute to the whole of our financial performance.

It's been a much better picture for our Neighbor Island business in the first quarter. This segment now represents 24% of our passenger revenue, and we are pleased to say that this part of our business has turned the corner and is improving nicely. PRASM increased to 4.5% year-over-year on a 5.2 percentage point increase in load factor. The first quarter results reflect a strong demand for local travel, resulting in a better-than-expected load factor.

Industry capacity in the first quarter decreased to approximately 4% of which our contribution was about 3 percentage points. The overall year-over-year industry capacity picture is expected to see a decrease of 1.5% in the second quarter and somewhere up in the low single-digit range in the third and fourth quarters of 2013.

This was a challenging quarter with a number of items working against us in North America and in Japan. While we did well in our Neighbor Island business, I think there are things we could have done better, both in North America and in our international network. Our strategy of diversifying away from a dominant reliance on the U.S. West Coast by flying in markets most likely to generate growing demand for the Hawaii vacation, is sound. As market conditions improve in the second half of this year and as we continue to apply the experience we've gained in new markets, we look forward to our results improving.

With that, let me turn this call back over to Scott to give us a window into the next quarter.

Scott E. Topping

Thank you, Mark. Looking at the second quarter, our growth will continue and we expect capacity on an ASM basis to increase between 20% and 23% year-over-year. As we've discussed in the past, we are slated to add 5 A330s to our fleet this year. One was delivered in the first quarter, 2 more came earlier this month, another is expected at the end of the second quarter, and the last is scheduled in the fourth quarter. These additions are offset by retirements and lease returns of 4 767s in 2013, one of which has already occurred this month. A second 767 will be retired in the third quarter and the final 2 will leave our fleet in the fourth quarter. Thus, for the full year, we will grow by only one net widebody with our ASM expected to increase 13.5% to 16.5%.

Many of the challenges we faced in the first quarter will persist into the second quarter although aided by a slower rate of year-over-year industry capacity growth on our North America routes that we have seen over the last 3 quarters.

Nonetheless, the revenue environment remains challenging. Load factor for the quarter is expected in the range of down 1.5 to 3.5 percentage points, yield is expected to decrease 4% to 7%. Combining these numbers, we expect PRASM and RASM to be in the range of down 7% to 10% year-over-year. These ranges are sequentially better over the last 2 quarters.

Turning to costs. For the second quarter, we expect CASM ex-fuel to range from down 4.5% to down 7.5% from the second quarter of last year. For the full year, we continue to expect CASM ex-fuel to be down in the low single-digit range. In terms of financing, we feel very good about the options available to fund our growth. We have financing commitments for our second quarter delivery and we are working on plans to finance our final 2013 delivery and deliveries into 2014.

In the second quarter, our CapEx should be in the $150 million to $160 million range with approximately 80% related to aircraft and aircraft related items with 3 A330s expected to be delivered during the quarter. We continue to expect full year CapEx to be within the $340 million to $350 million range.

Reflective of our recent financings, we would expect interest expense to increase by about $1 million sequentially from the first quarter to the second quarter. The expected increase is due to debt financing for our A330s, one of the April deliveries and the expected June delivery. Our full year effective tax rate is expected to be in the 39% to 41% range and we do not expect to pay federal cash taxes until 2015, at the earliest.

Regarding fuel and sticking with our normal practice, we are not going to give guidance at this time. We expect our fuel consumption to be 17.5% to 20.5% higher year-over-year in the second quarter as a result of our capacity increases.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Mr. John Godyn with Morgan Stanley.

John D. Godyn - Morgan Stanley, Research Division

I was hoping, Mark, that you could just sort of speak to some of these sort of strange issues that other airlines have been speaking to in terms of demand, signs of economic sluggishness. I guess you did speak to the end already but sequestration, assays, furloughs, falling fuel weighing on revenue, kind of this longer list than usual of different things that are affecting the revenue environment.

Mark B. Dunkerley

Yes, candidly, we're not seeing any sort of systemic shortage of demand. I think we think demand is actually pretty healthy still out there in the marketplace. We do think that there has been tremendous increase in supply as some of our statistics from our prepared remarks demonstrates. So I think we would characterize the current situation not being one of a fundamental demand weakness, but instead, being very much one of excess supply. Now chicken and egg, obviously, out there. But we've just -- we're not seeing anything that correlates with some of the comments that I too have heard from some of the other guys.

John D. Godyn - Morgan Stanley, Research Division

And then just in terms of sort of sequestration, kind of direct government impact and then on a go-forward basis, FAA, furloughs, just any comments worthwhile there?

Mark B. Dunkerley

Again, we don't actually carry -- government-related traffic is not a huge portion of our revenue base. Therefore, we haven't seen an enormous slowdown that we can attribute to the government sequestration. As to the FAA, we're a day into it. Yesterday passed without any particular impact. We wait to see what happens down the road.

John D. Godyn - Morgan Stanley, Research Division

Okay, that's helpful. And if I could just ask a cost question to close it out here. The guidance assumes that costs, CASM is ex-fuel sort of reaccelerates towards the end of the year. I think that's sort of natural because of what's going on in some of the comps. But I just sort of want to make sure that that's a comps issue and nothing in the cost that we should be aware of sort of driving that inflection in the core cost structure.

Mark B. Dunkerley

I think you said it exactly accurately. I think it's a comp issue, nothing -- there's no extraordinary item that we're anticipating for the fourth quarter.

John D. Godyn - Morgan Stanley, Research Division

Okay. And so bigger picture, we've been in a couple of years here where you're significant capacity growth sort of appropriately is allowing you to manage cost down year-over-year. Big picture as long as the capacity growth continues at an elevated rate as we look into 2014, that should be the framework that we should be thinking about as opposed to sort of annualizing any fourth quarter CASM ex-fuel going forward or anything like that.

Mark B. Dunkerley

Yes. I think that's right. We've got a bunch of things going on. First of all, I think -- one of the things, I think, we're sort of starting to signal is that we've gone through a period of tremendously rapid growth. Our rate of growth is still going to be -- to use your word, elevated, going forward, but it's going to be at a lower rate going forward than it has been in the immediate past. I think what you're going to see out of us is sort of consolidating our presence in some of the markets that we've recently inaugurated. In my prepared remarks, I given you quite a laundry list of things we've started in the last 12 months. We clearly have to develop some level of mastery of the environment that we're going into. So I think that's going to be a big agenda item. There's quite a bit I think to the extra capacity coming in is going to be focused on building frequency in some of these limited frequency routes. All of that should have some beneficial impact on our unit revenues going beyond 2013. Obviously there comes a point where the comps get progressively more difficult. So I think that's part of the picture that we were looking at in -- once we get out of '13 and into '14, it'll be a comp issue but the fundamentals of growth driving-- helping on unit costs will, I think, remain. And then on top of that, we will have, continue to have, as we inaugurate new routes here and modify routes there, some mix issues to do with the stage length of the routes that we're adding stage length to routes that from time to time we'll be cutting back.

Operator

Our next question is coming from the line of Ms. Helane Becker with Cowen Securities.

Helane R. Becker - Cowen Securities LLC, Research Division

Just in terms of the inter-island business. I think you started to say that you were seeing improvement and improved results. So maybe you could add a little bit of comment on how that's going compared to where you were, say, 6 months or a year or so ago?

Mark B. Dunkerley

Yes. Thank you, Helane, for asking a question about the business, it's doing well at the moment. Yes, it is -- really it turned the corner. A year ago, about this time, we developed the Maui hub and we increased the amount of capacity we were flying between the island of the state of Hawaii, as well as increasing some services from the U.S. mainland to Maui.

As we discovered over the first 6 months of operating it, some of that capacity increase was warranted particularly flying off the West Coast to Maui. Some of those sectors did really quite well for us. Some of the inter-island flying did much less well. We didn't fill airplanes to the extent that we had anticipated. So our task over the last 6 months has been to sort of right size our Neighbor Island network, while preserving the very beneficial impacts that we've seen from the Maui hub. And I think in the first quarter of this year, we have -- we've achieved that. And that's come to steadily higher load factors. And we've moved our capacity to where we see demand and we've trimmed our capacity time today in certain routes where we've been carrying to low passenger loads to justify the flight.

Helane R. Becker - Cowen Securities LLC, Research Division

Okay. So would you say now that you're -- that you've right sized it enough so that it's going forward, it's stable? Is that how should I think about it?

Mark B. Dunkerley

Yes, subject to the year-on-year comp issues, you've heard me say that we're going to be reducing capacity in the second, third and fourth quarters on Neighbor Island flying. And I think that is -- represents steady-state now being a year-over-year lower level of capacity than we saw in the -- for the second and fourth quarters of 2012.

Helane R. Becker - Cowen Securities LLC, Research Division

Of last year. Okay, got you. So I understand that. And then my other question is really -- and I think you mostly answered it in some of your prior remarks, but you're seeing kind of increased capacity in markets where you were the only airline. And that's specifically some of your international flying where it used to be Hawaiian Airlines was just the only airline going from Honolulu to Manila. That was a major route and now you're leaving that route because I guess it's just not meeting your expectations. Is there -- I mean, is this a function of the success you're experiencing in the markets and why other airlines are kind of going into those markets, or is it just that the increase in the number of people who are able to travel is increasing? And so, therefore, Hawaii becomes a realistic goal for them or how should we think about that? And does it make sense to slow the growth even more or more rapidly than 20% to 23% that we're going to see for at least the next quarter or 2?

Mark B. Dunkerley

Well, first of all, if I can just sort of correct something there, Helane. So you mentioned Manila, for example. We weren't the first carrier in that market. Philippine Airlines is in that market. It has been, they've actually -- I believe, they've actually reduced capacity over the period since we've been in there. And indeed, I'm unaware of any market -- I'm trying to think here, I don't think there's been a single international market where we've been the only carrier starting in the route and had some -- another carrier subsequently join in. So I think the premise of your question, it isn't actually accurate.

But on to this sort of broader question about sort of are we being chased essentially from any of these markets and I think when we look at Manila, Manila was an interesting situation and each market is different. But in the Manila situation, we have a competitor who has persisted in pricing their product at a rate which I cannot possibly be compensatory to them and for sure isn't to us. They've gone through an ownership change, we had certainly hoped that there would be a change into a more rational approach in the marketplace that wasn't and we decided to perhaps stop beating our head against the wall and withdraw from that marketplace. In that marketplace, as indeed in every marketplace that we fly internationally, I think we enjoy a sort of mixture of a product and cost advantage which means that in a compensatory pricing environment, we want to be happy, our competitors may be happy or may be unhappy. But we don't believe there's a single market that we can see where our competitor can be happy at the ambient level of pricing and we're unhappy.

Operator

Our next question is coming from the line of Hunter Keay with Wolfe Trahan.

Hunter K. Keay - Wolfe Trahan & Co.

So the question, is there a point where the valuation of your stock gets depressed relative to peers to the point that it actually makes sense to put some of the growth, bigger picture growth on pause and maybe start buying back some of your stock and I really think you're running the business for the long run, I fully appreciate that. But as you think about sort of the CapEx and you look at the -- sort of the implied free cash flow the next couple of years, it's going to be pretty difficult to really generate some good financial returns. Are there any covenants that preclude from doing something like that first and foremost? And second of all, what would sort of get you to that point where you really start to really evaluate whether or not the growth is worth it?

Mark B. Dunkerley

Well, let me take this sort of in reverse order. We're constantly assessing whether we think the growth is worth it and as you see with the cancellation of Manila, that will have the effect of reducing our overall rate of growth in the next period. I think at the same time, we are looking at our fleet, we're looking at delivery dates, we're looking at when seat checks take place and so forth determining whether we've got things dialed in just right for one -- for the market conditions. I would say that we aren't going to be making decisions about things like long-term capacity growth around such issues as 6 months where we've seen a double-digit increase in West Coast of Hawaii flying which again, we've already started to see based on competitor actions is just not sustainable. We're not going to keep chasing short-term issues.

As to whether if we slow the rate of growth, we would consider a stock buyback. I mean, clearly I can't answer that directly on the telephone. I can tell you we are always mindful of looking for ways to improve the long-term value to shareholders. That is one tool in the tool chest and we do have the ability to -- we don't have any covenants at the Hawaiian Holdings level that would prevent us from doing that.

Hunter K. Keay - Wolfe Trahan & Co.

Okay. And, Scott, what do you guys spend annually on fuel hedge premium costs and how much time of your day or week or month is spent making fuel hedging related decisions?

Scott E. Topping

Last year, we spent about $7 million after tax on premiums. This year should be similar on a growth-adjusted basis. In terms of time, we have a couple of people putting just a portion of their day into that enough to ensure we understand that the markets and that we're executing our program, as you know, is fairly simplistic and we stick to our practice of dollar cost averaging in and using instruments that are plain vanilla for the most part. So it's not a big drag on our internal resources.

Operator

[Operator Instructions] Our next question is coming from the line of Mr. Mike Lindenberg with Deutsche Bank.

Michael Linenberg - Deutsche Bank AG, Research Division

Just a couple of questions. I guess, Mark, or maybe -- or, Scott, this just goes to the guidance, you talked about RASM being down 7% to 10% in the June quarter and CASM ex-fuel down 4.5% to 7.5% and we're obviously going to make our own call on where we think fuel prices are. But when you -- you plug that in, it's possible and maybe this is the more aggressive side of the range, but it's possible that your margins are somewhat flattish year-over-year. Maybe even up on the more aggressive end of the range. When I look at your March quarter, your margins year-over-year were down a lot, I want to say, 5, 5.5 percentage points or so. Mark, you did mention that in the March quarter, there were a few things that maybe you didn't do as well. I get the sense that there were better ways to deal with some of the more challenging issues that you faced in the quarter. Maybe you can talk about what some of those are and maybe how you're addressing them in the second quarter because from the guidance, it does seem like that we can get back on track and get back to a point where margins are somewhat flattish year-over-year, which would be a good June quarter performance. Your thoughts on that?

Mark B. Dunkerley

Yes, absolutely. First of all, in terms of the areas where I think we could have done a better job, I mean, we did introduce a lot of new services in the last 12 months in several different countries. Each country has its own distribution, eccentricities. And I think that in hindsight, we were slow to appreciate how things were changing in each of the market places and react to them. Some of that comes from just not knowing the markets as well, some of it goes from the level, just the level of number things we had going on in our company in the last 12 months. Both of which I expect to get better over time and both of which have got a lot of our attention at the moment.

As to where do we think -- can we paint a sort of rosy picture? I think the answer to that is, we can for the second quarter. The bit that's sort of difficult to judge is that we had this dramatic increase in capacity, particularly from the West Coast to Hawaii. We know that during the summer season, the peak seasons, that capacity can be absorbed. Perhaps not at the same yield as we would all like to see in the strong seasonal environment. But nonetheless, the seats can get filled at fares that make sense for the business. What's happened over the last 6 months is that we've discovered -- everybody's discovered that in the weak month, there just simply aren't enough passengers out there who can be induced to fly to Hawaii when you got that much capacity during the weak period. What we've got in the second quarter, of course, is largely a weakish period of the year trending into a solid piece of the year. And the real question, I think whether or not the second quarter ends up being at or above the margins that we saw last year will really depend on the last month of that quarter and how well we can sort of transition into the seasonally strong environment. Of course, that's the month of the quarter that we have the least good visibility into as I'm speaking to you at the moment.

Michael Linenberg - Deutsche Bank AG, Research Division

Okay, great. And then just my second question, the hedge for the Japanese yen will certainly help with respect to the translation. But like other carriers like yourselves, with the weak yen, there is a demand effect and when you look at your market composition, a large portion -- a very high portion, is discretionary. What are you seeing with respect to bookings from Japan to Hawaii over the next few months with the backdrop that for a Japanese leisure passenger, the trip to Hawaii may now be 20% more expensive and yet the beaches of Okinawa are still attractive. And maybe it's a market-by-market differential? And maybe you're not seeing as much of an impact now because I do know that a lot of these vacations do get booked up some time in advance. So I realize there's a lot of different moving pieces here but we're just trying to understand the demand effect of the weak yen on the leisure -- the Japanese leisure passenger and what you're seeing.

Mark B. Dunkerley

Okay. Well, again, this period is -- has got a couple of elements to it. First of all, up until the third, fourth week of May, is the slowest period annually for Japanese demand for this sort of travel. It's the period leading up to Golden Week, which is a massive public holiday for the Japanese. And so demand is low and we expect it to be low and we're not seeing anything to surprise us there. The Golden Week period, which is a week but it sort of stretches out 10 days, 2 weeks worth, is a peak we think things look fine for that. The indications we're getting are that actually the summer doesn't look bad to us at the moment. I've got to overlay that with the fact that there are still market-by-market, some market sort of specific issues. We've got -- I'll give you an example. We've got a new entrant flying the region to Honolulu, which is probably Korean Airlines. They have very substantially reduced fares to induce people to travel out of Narita. We fly out of Haneda. So we're enjoying a -- we enjoy a fair premium but that's not to say there's no elasticity at all between what happens in Narita and what happens to Haneda. So we've got some sort of market specific issues that we're dealing like that one that I've just mentioned to you. We've got our eyes out to see if demand is sort of sequentially going down. This summer will really tell. I think right now, we're really not in a position to tell a great deal. And just by the way, Japanese travelers by domestic law, have the ability to cancel flights up to 28 days before departure. So forward bookings are a less good guide to future performance in Japan than they are, for example, in the United States, whereas, we know that doesn't happen.

Operator

Our next question is coming from the line of Mr. Glenn Engel of Bank of America.

Glenn D. Engel - BofA Merrill Lynch, Research Division

A couple of questions. One is if you're going to start seeing the net impact of Japanese travel to Hawaii, and less capacity between Hawaii and North America is good for that market but also means less local Hawaiian customers, could we start seeing some pressure on the inter-island routes as the supply from outside of Hawaii starts to flatten out?

Mark B. Dunkerley

Glenn, I think we can. That's one of the things we look at all the time and that's one of the things that informs us as to how many seats we provide flying between the islands of the state of Hawaii. We mentioned, we've got some reductions and seat capacity planned. So I think those things can indeed drive a reduction in Neighbor Island flight.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And in your Japanese flying, where are we in terms of getting the slots that you need in terms of attractive slots that you need to maximize your revenues?

Mark B. Dunkerley

In terms of -- well, the only place where we have a -- stock constraints is in Haneda. And we have the slots that we want in Haneda. We've got the desirable slots for our schedule.

Operator

Our next question is coming from the line of Mr. Bob McAdoo with Imperial Capital.

Bob McAdoo - Imperial Capital, LLC, Research Division

Yes. I want to talk a little about the A321. Could you tell us what the range of that airplane is likely to be and given the fact that you've got a bunch of the A330s going into the West Coast, I assume you got reasonably long ownership kind of obligations there, where do you put 16 airplanes without it to be a problem?

Mark B. Dunkerley

Well, the 321s have the range to fly between the U.S. West Coast and the islands of Hawaii. During the period of times that they come in, we're going to be seeing a retirement cycle for the remaining 767s. We will -- by the time it's opened, the point of time when the last A330 arrives to -- at that point, we will have 6 767s left in the fleet. So the 321s over time will naturally replace the 6 767s. And being a smaller aircraft, just on a capacity perspective, you need about 9 of them just to replace the existing flying from the 767s. Also, the A321s will have a better seat mile cost profile than any other aircraft of that type flying in the marketplace, it's a bigger airplane than the other narrow bodies and therefore, the cost per seat mile is lower. And as we look around, we can see some other opportunities which over time, we think we will enjoy competitive advantage over. I would say that our long-term growth profile, so if you look at all of the puts and the takes of our 330s, those that remain to come in 76s leaving, 321s coming in, 350s, averages out at about 4%, 4.5% per year over the long term. And we have built in to our fleet plan the ability, with some notice, some change to the capacity trajectory overnight. But with some lags, we have tremendous flexibility to flex either up or down that rate of growth.

Bob McAdoo - Imperial Capital, LLC, Research Division

So when do the A350s come in relative to the A321s?

Mark B. Dunkerley

It's actually 2017, you may want to ask Airbus.

Bob McAdoo - Imperial Capital, LLC, Research Division

You mean whether they're going to have the plane built by then you mean?

Mark B. Dunkerley

Yes. That would be a question you could ask them.

Bob McAdoo - Imperial Capital, LLC, Research Division

Okay. So the point of it is, you really -- you are going to need some more -- I mean, you still got 6 or 7 of these airplanes that are going to be new, new capabilities, or new places you've got to find and more capacity in existing markets or something is what it sounds like, is that right?

Mark B. Dunkerley

Yes. But we've also got the opportunity again because our last 330 delivers in '15. So we've got the opportunity to put -- so some markets grow, for example. 350 in our configurations got 294 seats in it. The 321 in our configuration will have about 190 seats in it. So they're going to be some markets where we want to operate 2 321s and withdraw a widebody from that market in order to apply that widebody to a growth market for example in Asia.

Operator

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

Stephen O'Hara - Sidoti & Company, LLC

Quickly, can you -- in terms of your -- the Manila route, can you just talk about how long you think that's been underperforming? And then in general, I mean, do you think you react faster to that underperformance or slower than other airlines maybe and is that based on kind of a smaller route structure than, say, Delta or US Airways or something?

Mark B. Dunkerley

Well, Manila has had, over the 4 years it's been with us, some tremendous ups and downs. And looking in hindsight, I think when we saw the ups, we had reason to believe that it was on a trajectory towards sustainability only to shortly discover that we, again, faced sort of pricing actions from our competitor that just destroyed the positive momentum. So clearly, in the hindsight, it was a route that I don't think we would have operated as long as we did, had we known, then, what we subsequently came to learn. As to whether we think we will make decisions as quickly or more slowly than some of our competitors, I think it's going to be about the same. I mean, we're looking at the same numbers, we're looking at the same results as our competitors do and I see no reason why we're not making fundamentally the same sorts of decisions as they are. I would point some things out, though. So for example, if you look at some markets overseas, you commit through a contract with intermediaries, the big travel agencies, that control most of the traffic in these markets. You commit often 6, 8 months in advance to a program of flying. You are then truly committed. I mean, there is not much you can do inside that period of time. So with that -- but frankly, that's the same condition that applies to other airlines flying in the same market under the same conditions. So I don't think we're any -- systemically any faster or slower about making decisions to come in or out of markets.

Stephen O'Hara - Sidoti & Company, LLC

Okay. So I mean, I guess, the -- maybe the international exposure can maybe limit your ability to make the right decision from time to time.

Mark B. Dunkerley

Yes. I think it's slows it and curiously enough, sometimes it slows it in a beneficial way. We certainly had some routes in the past that have had gone through some pretty torrid times where we've looked at the results and we've been thinking that it's -- the things don't to improve, it may not be worth keeping only to find that we were pleased not to be too quick on the trigger. And because we couldn't be simply because of the nature of the market.

Operator

At this time, there are no further questions in the queue. I would like to turn the floor back over to management for any closing comments.

Mark B. Dunkerley

Okay, thank you. One of the sort of things from some of the questions we got, a couple of things that I might just address is, one, are we seeing any sort of systemic reduction in demand, either from North America or from in particular, Japan because of the yen impacts? And the answer to that is, no, we're not. I think we've got some supply issues in terms of North America and we clearly got a yen exchange rate issue in Japan and I think at the margins and some excess capacity in that market as well. We certainly are on the lookout to see any -- if there's any fundamental weakness in demand. But as yet, we have not seen any indications of that. Nonetheless, it's been an extremely tough quarter in a tough environment. But we are happy to see the conditions gradually improving. So we're looking forward to the rest of the year when these conditions do actually improve and when we've got the opportunity to put some of the things that we've learned over this very difficult 6, 8 months into practice. And with that, thank you very much for joining us on today's call. And we look forward to seeing you in the period of time between now and our next quarterly results.

Operator

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful afternoon.

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Source: Hawaiian Holdings Management Discusses Q1 2013 Results - Earnings Call Transcript
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