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Executives

Mark Dunkerley - President & Chef Executive Officer

Peter Ingram - Chief Financial Officer, Executive Vice President & Treasurer

Matt Bernier - Senior Director of Finance.

Analysts

William Green - Morgan Stanley

Bob McAdoo - Avondale Partners

[John Weiner - Weiner & Co.]

Kim Zotter - Imperial Capital

Steve O’Hara - Sidoti & Co.

Hawaiian Holdings Inc. (HA) Q2 2009 Earnings Call July 27, 2009 4:30 PM ET

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Hawaiian Holdings Inc. second quarter 2009 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for question. (Operator Instructions).

I would now like to turn the conference over to Matt Bernier, Senior Director of Finance.

Matt Bernier

Thank you Mary. Welcome everyone and thank you for joining us today to discuss Hawaiian Holdings second quarter 2009 financial results. On the call with me today from the company are Mark Dunkerley, President and Chief Executive Officer, and Peter Ingram, 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.

Before we begin, we’d like to remind everyone of the Safe Harbor statements under the Private Securities Litigation Reform Act of 1995. 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 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 From 10-Q, as well as reports filed on Form 8-K.

With that, I’d like to turn the call over to Mark.

Mark Dunkerley

Thank you Matt, and thank you everyone for joining us today on the call. The second quarter financial results we released today reflect another period of good financial performance for our company in what remains a challenging macro environment.

While the call influences on our financial performance are the same as those facing our competitors, that’s much lower fuel prices than last year offset by much lower demand resulting from our present economic woes. The big distinction is that in our case we’ve been able to strengthen our balance sheet and our cash.

With the credit markets in turmoil, and recognizing that we have a number of substantial outplays in the next few years, this comparative strength is of tremendous importance. The price of fuel and the state of the economy dominate conversation about airlines these days. So, in our call I’d like to veer from this formula by first highlighting the contributions of our employees to Hawaiian’s success.

Hawaiian’s employees both in front line and in support role deliver a level of service to our customers that is the envy of the industry. Everything we do in management to position Hawaiian well is for [note] without the support of our employees. The dedication of our employees to our business is an inspiration to those of us in management and it gives us great confidence that together we can meet the challenges that lie ahead.

Let me briefly run through the numbers for the quarter. Our net income for the second quarter was $27.5 million or $0.53 per share. That compares to a profit of $54.3 million or a $1.09 per diluted share a year earlier. Last year’s results of course were dominated by a $52.5 million litigation settlement.

Throughout the remainder of today’s call as we compare our financial performance, including unit cost performance to the second quarter of 2008, we would generally compare on a basis that excludes last year’s litigation settlement.

Income before taxes was $37.3 million this year compared to $1.8 million last year, and our operating income $31.7 million in the current year period compared to an operating loss of $4 million last year. Total revenue declined 8.5% to $292 million, despite a 1.8% increase in capacity, reflecting persistent pressure on passenger yield throughout the operation.

Passenger revenue per seat mile declined by 14.7% while total revenue per seat mile declined a lesser 10.2% during the period. The relative strength in the latter number reflect a continuation of a year-over-year increases in ancillary revenue.

Operating expenses decreased by $62.9 million as we realized the benefits of lower fuel prices. Excluding fuel and the litigation settlement our CASM increased by 1.1%, the result of our continued discipline on the cost side of the equation.

As I said at the start of the call we are reasonably pleased with these results, especially against the backdrop of such a difficult macro economic environment. We do recognize however, that it was a huge year-over-year decline in fuel prices that reduced our unit cost which in turn generated a relatively good financial result at a time when our results and those of many other airlines would otherwise have been unimaginably dire.

Between mid March and the end of the second quarter, we saw the price of jet fuel spiked by more than 50%. To remind us all, what we are posting as a tremendous benefit year-over-year could become considerably less beneficial in the periods ahead. Of course, the price of fuel could stay where it is or it could even retreat from here. The experience of the last year teaches us only that it is unpredictable.

There is little to cheer on our revenue line. Like all airlines, we have seen very substantial reductions in ticket prices. Indeed, the ticket prices stabilized during the quarter, this actually represents a further decline when the impact of seasonality is taken into account.

Peter will share the details of our third quarter outlook later on the call, but I would add my caution to that as every other executive commenting publicly at the moment, that we live in uncertain times and the future cannot be predicted with our custom level of confidence. With that said, let me cover in a bit more detail our results and the conditions we see in the market place.

Our fuel bill for the second quarter declined $68.7 million or 55.7% despite a small increase in the level of our flight activity. Excluding the impact of fuel hedging, our fuel expense per gallon declined 56.1% to a $1.59 a gallon. On an economic fuel cost basis, this takes into account the settlement of fuel hedges during the quarter, our cost per gallon declined by 52.7% from $3.38 a gallon to a $1.60 per gallon.

Looking at our other operating expenses; CASM excluding fuel, was held relatively in check during the period. Increases in other rentals and landing fees that we have encountered over the past several periods and some increases in our aircraft rent expenses were offset in part by reductions in some of our revenue related costs like credit card processing fees. Pete is going to cover these in greater detail in just a moment.

Cost control remained a central point of our approach. With so many of the elements that impact our business beyond management’s control we would better be focused on those that we can influence. I’d like to take a couple of moments to review the market dynamics in each of the major pieces of the business, starting with our InterIsland groups.

Despite the return of unsustainably low pricing to the InterIsland routes over the past several months, traffic levels were less robust than in 2008. This reflects the weaker local economy in Hawaii and a sustained, albeit flattening reduction in the number of tourists arriving in the state.

During the second quarter, the level of discounting in the market place didn’t reach the sub $30 levels that we show in the first quarter, but prices in the low 40s remained broadly available, and you would be amused and slightly horrified to learn that as Hawaiian prepared to celebrate its 80th anniversary, our original timetable in priceless has been discovered.

It shows that in 1929, eighty years ago we charged $32 for an InterIsland ticket, a fare that has been seen in the market place as recently as a couple of months ago.

Although, our load factor has been below prior year levels, we continue to maintain a load factor premium relative to both of our competitors. All in all, since our InterIsland groups have a low price elasticity of demand, the low prices have not stimulated and offsetting increase in travel. This has resulted in our InterIsland passenger revenue per ASM declining in the mid 20% range.

We’ve also seen over the past several months, as we discussed with you in April, an uptick in the level of discounting between the west coast and Hawaii. We made a decision in the spring not to match the deepest of the discounts, instead judging that with the new pattern of very late bookings, we’d be able to avoid the worst of the yield dilution by holding inventory for sale close in to the date of departure.

This worked admirably, though it is hard to describe a slightly more than 10% reduction in revenue per ASM in glowing terms. Year-over-year declines in visitor arrivals to Hawaii and the Western United States have generally stopped as we passed the anniversary of the seat falloff in industry traffic in April 2008.

Fare levels remained considerably lower than those seen in the summer of 2008, but the benefits of lower fuel prices are more profound on long haul flying than on short haul flying. This combined with the lower capacity levels between the US West Coast and Hawaii has led to a measure of balance between supply and demand.

So the RASM decline was almost the entirely attributable to declines in yield, with load factor only slightly lower year over year. It’s important to note that our year-over-year changes in load factor varied markedly month by month over the quarter. This reflects variability to last year rather than any change to our business this year.

Last year, we posted extremely high load factors in April and May. In the immediate after math of the closures of Aloha and ATA, whereas the June load factor last year was lower as we sort to maximize fare levels in the phase of surge in fuel prices. As such, our load factor was down year-over-year in the first two months of the quarter, but up in June.

Pete is going to address our outlook in a few moments, but I would like to presage his comments with my own. We’ve done extremely well in this environment through the first six months of this year and the back half for the year, predictions don’t come easily or with much confidence. We still have little forward visibility as to the state of demand, and fuel prices still exhibit extraordinary volatility.

Using the forward curve as a guide for the price of fuel, and extrapolating the pricing behavior we have seen by our competitors of late. We would anticipate our third quarter margins narrowing somewhat.

If this comes to pass we will still be strengthening our balance sheet through our operations at a time when most of our competitors are selling the family silver to achieve the same aim. We are making no predictions at this stage for the fourth quarter.

With that, I’ll turn the call over Peter to provide a bit more detail on the numbers for the second quarter, and more detail on our outlook for the third. Peter.

Peter Ingram

Thanks Mark. Let me begin by reviewing by the non-passenger revenue line, since Mark covered the passenger items in a fair bit of detail already. I’ll start with the cargo line, which includes freight, mail and our baggage handling revenue.

The total revenue from these categories increased by more than $6 million, compared to the second quarter last year with revenue from the baggage handling fee changes that we implemented in the latter part of 2008 more than offsetting a decline in freight revenue.

Those of you who follow our competitor’s results will know that revenue declines in the cargo side of the business are a common affliction in the current economic circumstance, and this affliction caught up with us in Q2, although I believe that our results have continued to hold up better than most of our competitors in this area.

We would anticipate that both the weaker cargo results and the benefits of the baggage fees are trends that will continue into Q3, though it is worth noting that the year-over-year increases related to the baggage lines will begin to become less pronounced as we annualized the fee changes in the latter part of the year.

Looking at other revenue, as was as the case in the first quarter the leading driver of our improvement was higher revenue from the sale of frequent flier miles to our Affinity program partners including those from our credit card partnership.

Moving on to operating expenses, wages and benefits increased somewhat with higher expenses related to our larger operation, and our pension expenses partially offset by a smoother operation compared to the chaotic period last year, when we scrambled to grow the InterIsland business after Aloha’s collapse and encountered a lot of overtime costs and training expenses as we were digesting growth in a compressed period.

Aircraft rent expenses increased $4.8 million in the current period. The expenses here increased above a normal run rate as we recognized a $4.1 million increase supplemental rent during the period based on an assessment with some of the maintenance deposits that we paid to the less source of our aircraft will not be used in the future to offset future maintenance expense, and as such we needed to true up the associated balance sheet account to our current best estimate of recoverability.

This change in estimate will not appear, materially affect the run rate of aircraft rent expense in future quarters. Other rentals and landing fees also increased during the quarter by $4.8 million. Generally consistent with the experience we have had with this line over the past several quarters. The primary driver of these increases is higher rates and charges for airport operations here in Hawaii, with increases in volume having a lesser impact on the increase.

Maintenance expenses declined year-over-year as the absence of engine overhaul events that occurred in the second quarter of 2008 was more than enough to offset increases in the power by the hour line associated with more flight activity, particularly with our larger InterIsland 717 fleet.

Selling expenses also declined year-over-year. The biggest contributor to this improvement was a reduction in credit card fees relative to spike we saw in last year’s second quarter, following the surge in ticket sales during April with the dramatic changes in our competitive landscape in 2008.

Moving down to the non-operating lines, Mark already mentioned that we posted a gain related to our fuel hedge positions. As most of you know by now, we mark over fewer hedges to fair market value through non-operating expense each reporting period.

Given this accounting methodology, and our disciplined approach to hedging, we will tend to post gains in quarters when the price of fuel rises and losses in quarters when the price falls.

As a result, with increases in the price of crude oil and other fuel products in the second quarter, our hedge book increased in value and we recognized a gain of $6.5 million. During the quarter, we realized losses of about $200,000 on positions that settled above recorded gains of $3.2 million on these same contracts relative to where their value was marked at the end of Q1, and another $3.5 million in gains from the fair value of contract that we will settle in future periods.

As of June 30, the overall value of our open hedge positions was positive to the tune of about $7.4 million, but I would caution that this value changes day-to-day with changes in the forward market. Our approach to hedging remains disciplined, as we seek to average into a position overtime that provides upside protection on about 55% of current month consumption, and a declining position in the months beyond that going out about one year.

We believe that this discipline has proved appropriate, as we weather the market fluctuations in the past 18 months and don’t have any plans to materially alter our approach. I would refer you to the table at the back of our press release for some more information about the recent status of our fuel hedge position.

Elsewhere in the non-operating lines, we recorded a $1.7 million partial reversal of our fourth quarter 2008 impairment charge related to the adjustment of the valuation of our auction rate securities.

Separately, subsequent to the end of the quarter we liquidated $3.2 million of the auction rates at face value pursuant to an annual sinking fund redemption. As a result, as of today, we now have $32.3 million in face value of the notes, which we carry on our balance sheet in long-term investments at a discount of related to the continue their liquidity of these securities.

Before leaving the income statement, let me just touch for a moment on our tax rate which came in at about 26% in the current period. Frustratingly to some of you, this has been a difficult to project number, as the valuation allowance on our deferred tax assets tends to lead to a lot of period-to-period volatility in our tax provisions.

There are number of factors that may cost the full-year rate to vary, but our best guess based on the current situation is that the rate will end in 2009 slightly lower than what we recognized in the first half.

Our capital expenditures for the quarter totaled $9.4 million, bringing us to $11 million year-to-date. The largest single acquisition this quarter was spare engine that we had previously leased for 767 fleet.

We will be acquiring a second spare engine off lease in the third quarter, and will also see in the beginning of our Winglet program for the 767s in the back half of the year. As a result, we project the CapEx for the year will total about $30 to $35 million. Our balance sheet ended the quarter in good shape, an achievement that is certainly worth highlighting in the current industry environment.

Our balance of unrestricted cash, cash equivalents and short-term investments stood at $282.6 million, an increase of almost $35 million from the end of first quarter. We don’t have any meaningful debt maturities until the first of our term loans matures towards the end of 2010, and in fact the larger piece of our term loan maturities is not until 2011. As such, we don’t have any short term needs that would require us to access capital markets at a time when conditions aren’t attractive.

During the quarter, we purchased 26,775 shares under our stock repurchase program bringing total purchases to just over 217,000 shares. We announced today that our board has decided to terminate the program in light of the increase in our stock price since its inception in March.

Looking ahead to third quarter, our capacity should increase about 2.5% year-over-year. Mark discussed the revenue outlook in a fair bit of detail earlier, and given the higher fares that were in place last year, both InterIsland and Transpacific; it will come as no surprise that we expect revenue per ASM to continue to be under pressure in the third quarter. Relative to the third quarter of 2008, we expect passenger revenue per ASM to decline between 16% and 20%.

There were so many big movements in our business last summer that perhaps a better way to look at our unit revenue guidances on a sequential quarter-to-quarter basis. Compared to the quarter that just concluded, this suggests a range of very slight sequential improvement to a deterioration of a couple of percentage points.

On a relative basis, the year-over-year comparison on the InterIsland part of the business is a tougher one than Transpacific, so we would expect the declines there to be somewhat more pronounced. System load factor for the quarter should be up by two to four percentage points year-over-year, while yield is currently expected to decline about 20% to 23%.

Our current outlook for CASM excluding fuel is for yet to come in flat to slightly better than what we recorded in the second quarter of 2009. What this equates to however, is an increase of 11% to 13% year-over-year, as we had the benefit of a couple of non-recurring good guys in last year’s third quarter.

Most significantly, last year the carrying value of our frequent flier liabilities on the balance sheet was reduced in the third quarter based on some changes that we implemented in the word redemption levels in the program at that time. We also had a couple of positive items on the benefits and maintenance lines in the prior year that helped lower our CASM.

As for fuel expense itself, we’ll leave you to your one prognostications on changes in the market. Based on the current forward curve, we would anticipate another quarter of substantial year-over-year reductions in our fuel lines, and as a result would anticipate a fairly substantial improvement in overall CASM year-over-year in the third quarter in spite of curve in some of the expense lines that I just discussed.

Looked at sequentially, quarter-to-quarter the forward curve currently suggest fuel prices will be higher in the third quarter than they were on average in the second quarter. If this comes to past, the combination of our guidance on unit revenue and unit cost excluding fuel would suggest the narrowing of operating margins relative to those we’ve achieved in the first two quarters of the year.

In closing, I would reiterate what Mark said earlier, that there is tremendous uncertainty around predictions in today’s world and I’d stress that this guidance is more speculative than we are accustomed to giving.

With that, let me turn the call back to our operator Mary, so that we can open up the line to any questions that you might have for us.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Greene - Morgan Stanley.

William Greene – Morgan Stanley

I’m wondering if you can talk a little about, a little bit more color on the RASM. How much of your third quarter is already booked. You sort of talked of a little bit about this, there is a lot of uncertainty around this, and yet your growing capacity, but you have given some pretty negative RASM outlook. So can you sort of talk a little bit about the underlying assumptions there that led to that outlook?

Mark Dunkerley

Yes certainly, bookings are taking place far closer on our Transpacific business, and has customarily been the case, InterIsland has always been a very late booking market. So, when we talk about uncertainty, we just don’t have a great deal of forward visibility beyond about a month to six weeks.

The second point that I would make is that the growth that we are seeing year-over-year is largely the result of the fact that Aloha and ATA collapsed last year. We actually grew in the fourth quarter and a little bit into the first quarter and so it’s not as if we’re growing now, it’s actually fact achieved more of the annualized effects of us moving into the space vacated by Aloha and ATA.

Then the third thing I would say in general is that, we are seeing some discounting out there in the marketplace that is generally being started by our competitors. It’s a very competitive business. We obviously have to remain competitive with that.

Pete, I don’t know if there’s anything you want to add more about the outlook.

Peter Ingram

I think the only thing I might add to that is that if you are comparing year-over-year, some of the variation you see from period-to-period has to do with what happened last year; and I think some of the price increases that were going in place really didn’t take hold until into the third quarter last year and some of the month’s of the quarter I think we’ve got a tougher comp than we did, maybe in part of the second quarter.

William Greene – Morgan Stanley

Okay, I don’t want to put words in your mouth, but the tone I sense is that at best you’re describing the environment as stable. Certainly you’re not suggesting a lot of improvement sequentially, maybe you disagree with that.

Mark Dunkerley

No, I think that’s a pretty accurate take. Its cappy asset is always by the fact that we can barely see our nose in front for faces given the shot booking window, but in general that’s the way we would describe it.

William Greene – Morgan Stanley

Okay. Then Mark, can I ask you to comment a little bit about the thought process from the Board in canceling the share buyback program, because you didn’t actually execute that much of it, and it’s not clear to me why you wouldn’t just keep it in place to be opportunistic if the stock moves?

Mark Dunkerley

Well, I think we always want to be opportunistic in ways that makes sense. I would point out that at the time we announced the share buyback, our stocker was trading at $3.40, and I think we closed today just over $7; essentially a doubling for stock during the period of time.

I would also point out that one of the things that we were interested in at the time was buying back both equity and debt. We’ve had some difficulty getting some of the people who are holding out debt to play along. So I think, we felt this was a good time to suspend this program for the time being.

William Greene – Morgan Stanley

And how do you think about priorities of cash now that you don’t have a share buyback in place then.

Mark Dunkerley

Well, I think the uncertainty of the immediate future puts a larger premium on holding cash than it would have done in any other period of time, and I think that we’re in common with everybody else in the industry. I think we are also mindful of the fact that not immediately, in the next three to four years, we have both some loan facilities that need to be renegotiated and some fleet expansion that needs to be financed. Our view is that we need to have the strongest possible balance sheet when that time comes, so that we get the best access to credit available at the time.

William Green Morgan Stanley

In the second quarter, where was the air traffic liability?

Mark Dunkerley

Peter, you got that?

Peter Ingram

Yes. Second quarter, we ended at about $238 million.

William Green Morgan Stanley

And when you looked to the third quarter, how should we expect that to change?

Peter Ingram

To be honest, we don’t have a specific forecast of that, that we are inclined to share at this time.

William Green Morgan Stanley

Okay, but you added $28 million I think from the mileage say on the quarter, right? So you think you said 30 plus or so additional cash, 28 of that was from the mileage sales, do I have that right?

Mark Dunkerley

Actually the mileage sale that is advanced is not treated as an increase in the air traffic liability at this time. If you look at the deal we have with our credit card partner, we got about $40 million of advance, of which we worked through 20 of it in the first half and 20 will be worked through next year, but that is treated separately on our balance sheet, that 20 that remains from the air traffic liability.

William Green Morgan Stanley

Sorry, I was actually referring to the increase in cash, that $28 million of that was related to the mileage sale.

Mark Dunkerley

That’s correct.

William Green Morgan Stanley

Okay. Then just one last question, I know we asked about this each quarter, but I just thought to ask you again in light of the RASM guidance. You could get more aggressive on some of the ancillary fee options you have before you, why not given the outlook?

Mark Dunkerley

We continually look to see what our competitors are doing. This is a very competitive business. I think there have been some recent changes that we are currently thinking about now. There are some limitations we peculiarly have on ancillary revenue, for example, our 767s come in I believe five different interior configurations that make it more difficult for us to secure pricing for a premium seating on the aeroplanes.

We are not shy about going for ancillary revenue, so I wouldn’t say that our efforts in that regard has come to a standstill. I think we are still working on it and I would imagine that we will be actually pretty aggressive on ancillary revenue going forward.

Operator

Your next question comes from the line of Kim Zotter - Imperial Capital.

Kim Zotter Imperial Capital

Just wanted to touch on how competition is behaving in your markets, especially I guess have you seen any capacity increases further from Alaska, the legacy carriers on the West Coast, and also touching on the Asia, South Pacific, Delta’s new tie up with Virgin Blue, can you kind of discuss that a little bit further?

Mark Dunkerley

Sure. I think on the West Coast to Hawaii there’s some sort of give and take. We’ve seen some additional capacity coming in from as you said Alaska; I don’t know what their reasons were. Certainly their announcements coincided with the outbreak of swine flu which I suspect may have had something to do with it. At the same time we’ve seen some other competitors downscale their capacity leading into the full. So it’s a mixed bag, there’s no established direction, and we are essentially flat looking forward in terms of capacity.

Looking at Asia and the South Pacific, we operate to Sydney, Pago Pago in American Samoa, Tahiti and Manila, dealing with those one after the other. I’d say that Manila is a route that continues to develop. It is broadly speaking, tracking our expectations for a start-up route, which is to say that we’re not yet at the point where we’d be saying it’s a terrific route, but neither were we expecting to be saying that at this stage.

With respect to Sydney, what we’ve seen is some fairly important shift to do with the decline in value of Australian Dollar versus the U.S. Dollar, which is adverse to our interest and we’ve seen also some introductory fares between Australia and the West Cost of the U.S., where it’s enticing some, probably Hawaii bound travelers to consider the U.S. West Coast.

We’re nonetheless I think pleased with Sydney as a route destination for us and we think its part of our network. Pago Pago and Tahiti are mature routes and they are doing just fine.

Kim Zotter – Imperial Capital

Did you guys have any material impact from the H1N1 in 2Q, I’m assuming probably not?

Mark Dunkerley

No, not really, there was a case to be made that it could have affected us badly if people decided to stay at home or well if they decided to come to Hawaii rather than Mexico. I think when the dust is all settled we think it’s essentially had no impact one way or the other.

Kim Zotter – Imperial Capital

Finally just one quick question for Peter; the advanced mileage sale in other revenue, what was that, how much was in other revenue?

Peter Ingram

Sorry, the advance sale, the piece that will be satisfied through delivering miles next year is not recognized through revenue at this point. So by the end of the quarter there is about $20 million that we effectively treat as debt on the balance sheet, which will work through next year as we deliver miles under our contract.

There were some improvements in other revenue related to the sale of frequent flier miles, and that really has to do with the change in the price we charge for a mile, both under our credit card deal and under other frequent flier deals as we’ve sort to realign those prices to market conditions.

Operator

Your next question comes from the line of Bob McAdoo - Avondale Partners.

Bob McAdoo - Avondale Partners

Just one brief question. In prior quarters you’ve given us a little bit of a sense of what’s going on with tourism generally, what the hotel occupancy is and how that’s impacting overall cost of vacations and traffic generally to and from the islands, can you kind of go through that, a current version of that description?

Mark Dunkerley

Yes sure. I think in terms of demand for the Hawaii vacation, things are essentially stable. We’ve seen a leveling off of the declines of people visiting Hawaii. April was kind of a big watershed for Hawaii, which of course accrued before it was evident in the rest of the economy. So what we saw through March was about a 15% decline in domestic arrivals in Hawaii, because we are now dealing on a kind of, comparing a weak period to weak period, that number is down around minus 3%, something like that.

Hotel occupancy is still pretty much down. I think Oahu is the strongest of the islands, big island and Kauai a pretty weak and Maui somewhere in the middle and we are continuing to see aggressive discounting by the hoteliers, looking to attract customers to come to Hawaii. So, it feels stable at the moment.

Operator

Your next question comes from the line of Steve O’Hara - Sidoti & Co.

Steve O’Hara – Sidoti & Co.

In going back to the other revenue, in terms of going forward like a per ASM basis, is this a good rate to use going forward, till the end of 2010 we’ll say?

Mark Dunkerley

Predicting to the end of 2010, I think is a little bit further than we are inclined to do, but I would say the trends have affected the run rate of other revenue and the cargo lines are generally what we see going forward in the horizon that we’re willing to speculate on.

Steve O’Hara – Sidoti & Co.

In terms of the fuel price, can you just tell me like what the oil and fuel price is right now, you guys are seeing?

Peter Ingram

I think we’re probably in the last few days up in the 180, maybe a little bit north of that with taxes; 180, 190’s with taxes. It has moved around a lot. We’re probably right now at about where we were at the end of the second quarter where things came down a little bit in the early part of this month and have now come back up as you’ve seen in the market, but that’s where we are right now.

Mark Dunkerley

And unhelpfully a lot of our fuel is sort of priced either in a lagged month basis or a lagged two week basis and when you see a lot of volatility you can get some pretty funny sounding results given what’s happening in the price of fuel in the spot market.

Steve O’Hara – Sidoti & Co.

Okay. Then lastly, you mentioned the helpful benefits that happened in the third quarter last year, where were those exactly in terms of where might we see some really unfavorable move this quarter?

Peter Ingram

The one that I called out first related to the changes in the frequent flier valuation as on the commissions and other selling expenses line, and there were a couple of items as well in maintenance and in the wages and benefits.

Operator

Your next question comes from the line of William Greene – Morgan Stanley.

William Green – Morgan Stanley

Yes, I just wanted to follow-up on the competitive situation. You guys have had a number of quarters here now where you’ve had quite a bit of success beating the numbers, etc. and as we see often in this industry, successful will attract some competition.

So can you talk about how you think about the competitive environment and its evolution in Hawaii, and specifically how are you going to position Hawaiian to in effect be operating from the position of strength as that competition inevitably starts to look at more Hawaiian markets?

Mark Dunkerley

Well, we have at the moment sort of three pillars to our network. We have InterIsland, where we enjoyed the largest market share. We think our product is competitive today. We will continue to work on the kind of nuts and bolts of our operation to make sure that the sort of competitive edge that we perceive that we have today remains an edge of at least the same margin going forward.

With respect to Transpacific, it has always been a competitive marketplace, there is no time, at least since I’ve been here, would we ever have been able to look at the marketplace and feel that with we’re anything other than just incredibly competitive. We deal each and every day with all of the major carriers. There are in essence no barriers to entries, as seen recently by number of new entrants.

I think our ability to remain competitive rests on a number of different things. Firstly, we’ve got to have competitive costs and we work very hard to try and achieve that. We’ve managed to achieve that in most of our cost areas, but not all. We continue to be focused on being cost competitive.

We also recognize that being based in Hawaii and being Hawaiian Airlines has some pluses and minuses, but one of the great pluses is this is a market that we know better than our competitors do. So we are focused on our customer service, which as I started the call with we think is second to none. We’re also very focused on the product that we provide and we believe that for people wishing to come to Hawaii, we provide the best product.

We’re growing our international operation. We are growing in a measured way over time, we’re not rushing into it. Obviously international is in general down worldwide at the moment. I think we’d take a longer-term view. We’re fortunate having a relatively stronger balance sheet that we can take a longer term view and less of a short-term view, and I think we will look to continue in a measured way to expand our international operations to provide some further diversification to our route network.

William Green – Morgan Stanley

All right, that’s helpful. Maybe I can take the other side of it and that is, you even mentioned that some of your competitors which have been aggressive in the Transpacific market, some of them are under some distress, and how could or could Hawaiian take advantage of any of that distress, are you in a position to do that or does it really work that way given the uniqueness of the markets you serve?

Peter Ingram

Well, I think it’s a terrific question, because it is something that we think long and hard about. We realize that things don’t stay static for very long in this industry, even when you use words like stability, which in course at this call I’ve used several times.

I think one of the great advantages we have at the moment is that we are in a position to keep our eyes focused on the long-term at a time when many of our competitors are focused on the here and now. I think that advantages manifest in all kinds of different ways.

It’s not terribly tangible, but I can tell you that within Hawaiian’s management, we are thinking today, two years down the road, five years down the road, and where we need to be. We are not having to be so focused on the ends of our noses and what we have to do to get through this year. That can change very quickly, so I certainly don’t want to suggest that I’m boasting that that will always be the case.

We are looking at markets which we think maybe unattractive to anybody right now, but with the benefit of taking a long view, may end up being good markets when the economy recovers. We are not in a position yet to make any decisions on that score, but it’s something that we continually actively look out.

William Green – Morgan Stanley

Okay. Just one last question. This isn’t really a question about guidance, but you have been profitable here, and as we look to 2010 and we start to make our own assumptions, I realize some of this is lapping, but the ASMs are growing. Can we assume given profitability and a long-term outlook of measured growth in the international space, you should grow 2010 ASM; I mean, is that a fair starting point?

Mark Dunkerley

Yes, I think that’s right.

Peter Ingram

Yes. We should have a little bit of growth in 2010. As you know, we start seeing the A330 arrive next year and that will give us some incremental fleet capacity if you have a 767 going back to less odds, but there should be a little bit of growth overall.

William Green – Morgan Stanley

And sorry, I forgot; are your deliveries next year already financed or are you still looking for finance?

Mark Dunkerley

They’re financed. We have two deliveries in 2010 and one in 2011 that are coming from operating lessors and so that financing is in place.

Operator

(Operator Instructions) Your next question comes from the line of [John Weiner - Weiner & Co.]

John Weiner - Weiner & Co.

I’m not calling about any financial metrics. I’d like to ask some future questions, because not to sound like a cheerleader, but I’ve come to feel comfortable on the day-to-day operations of this entity. Anyway, could you talk about your Korean Airlines code share or joint venture?

Then the other day I was at Terminal 2 picking up a friend coming in on a local flight, but I was watching your morning departure going out on to Honolulu, the 08:30 I think or 08:00, and I was struck by the demographics, because I must have saw about four town cars or suburbans pull up and see the grand parents, the children and the grand children. Now if I had to make a movie here, I would call it The Last Round Up. Has there been a demographic trend which looks like it could continue for quite some time with regards to your departures to the West Coast.

Secondly with the A330, referencing Mark’s comments about going into markets, I mean could we be talking about an 08:00 AM departure from JFK on an A330 which has the range and payload characteristics you need to get them in typical Hawaiian style into their hotel rooms by 01:00. Anyway that’s it, congratulations.

Mark Dunkerley

Well, thank you very, very much for those kind words. Let me just run down your questions quickly. Our relationship with Korean as a code-share. We have it at the moment up for regulatory approval; we would hope to get that regulatory approval shortly. It is part and parcel of our strategy to expand our international and further long-range flying in a measured way. We are looking forward to code-sharing with Korean; it’s a terrific company, and we’re all really excited about it.

As to the question about demographics, we haven’t seen a massive shift in demographics. We do by the way have big demographic shifts throughout the year. It is the case that during school break periods we see a lot more family travel than we do at other times of the year, but we haven’t seen any sort of systemic change to the thoughts of people who come to Hawaii.

Then lastly in terms of East Coast to Honolulu flying, frankly our 767-300ERs today could make New York to Honolulu. One of the things that people appreciate about the size of Pacific for example, is it’s actually further from Honolulu to Manila, than it is from JFK to Honolulu.

We have looked at the East Coast for many, many years now. The issue for us on the East Coast is not worrying about whether or not we could fill an aircraft with traffic; the issue is that we haven’t seen the economics turn out to be compelling to have us get into that market, but it is something that is actively on our list of opportunities that we look at.

Operator

Your next question comes from the line of Bob McAdoo – Avondale Partners.

Bob McAdoo – Avondale Partners

Yes, a couple of other things. What’s going to be the seating configurations for the A330, as we start thinking about ASM calculations?

Mark Dunkerley

294 seats in the A330, of which how many are in upfront?

Peter Ingram

18 will be upfront.

Mark Dunkerley

I think its 24 upfront. 18 he says, 18.

Bob McAdoo – Avondale Partners

Then the other thing is, when do you actually pull one aircraft out for your winglet line, and how long does that last, and what should we do for adjustments there?

Mark Dunkerley

Okay, the winglet bound aero planes start in September of this year. They go through the spring of next year. There are a couple of breaks in the winglet schedule, so that we can get effectively the use of an airplane for some of the peak periods like Christmas. The ASM impact of that is part of what Peter gave you for the third quarter. Peter is there anything you want to add to that?

Peter Ingram

Yes, I would say that the impact is going to be more in the fourth quarter of this year. There would be a little impact in the first quarter of next year and then into the second we should have the winglet line completed by summer as Mark said.

Operator

(Operator Instructions) Well management, it looks like there are no further questions. I’ll turn the call back over to you for any closing comments you might have.

Mark Dunkerley

Well thank you Mary, and thank all of you for listening and asking such great. Obviously we’ve had a pretty good quarter. We think we are pretty well positioned to face the challenges that lie ahead, whatever they may be. With that, we look forward to talking to you in a quarter’s time and updating you on our progress then. So thank you all.

Operator

Thank you. Ladies and gentlemen that will conclude today’s teleconference. If you would like to listen to a replay of today’s conference, please dial into 303-590-3030 or toll free 1800-406-7325 and enter the access code of 4117171#.

We thank you again for your participation and at this time, you may disconnect. Have a nice day.

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Source: Hawaiian Holdings Inc. Q2 2009 Earnings Call Transcript
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