Hawaiian Holdings' (HA) CEO Mark Dunkerley on Q2 2014 Results - Earnings Call Transcript

| About: Hawaiian Holdings, (HA)

Hawaiian Holdings, Inc. (NASDAQ:HA)

Q2 2014 Earnings Conference Call

July 22, 2014 4:30 PM ET

Executives

Ashlee Kishimoto - Senior Director of IR

Mark Dunkerley - President and CEO

Peter Ingram - CCO

Scott Topping - CFO

Analysts

John Godyn - Morgan Stanley

Katherine O’Brien - Deutsche Bank

Hunter Keay - Wolfe Research

Helane Becker - Cowen and Company

Fred Lowrance - Avondale Partners

Glenn Engel - Bank of America

Bob McAdoo - Imperial Capital

Steve O’Hara - Sidoti and Company

Joe DeNardi - Stifel

Michael Derchin - CRT Capital Group

Operator

Greetings, and welcome to the Hawaiian Holdings Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) I’d now like to turn the conference over to your host, Ashlee Kishimoto, Senior Director of Investor Relations for Hawaiian Holdings. Thank you, Ms. Kishimoto, you may now begin.

Ashlee Kishimoto

Thank you, Operator. Welcome everyone and thank you for joining us today to discuss Hawaiian Holdings' financial results for the second quarter of 2014. On the call with me today are Mark Dunkerley, President and Chief Executive Officer; Peter Ingram, Chief Commercial Officer; and Scott Topping, Chief Financial Officer.

Mark will begin with some overview comments. Next, Peter will take us through the revenue results, network and capacity. Scott will follow with a discussion on costs, the balance sheet and guidance. We will then open the call up for questions, and then Mark will make some closing remarks.

By now everyone should have access to the press release that went out at about 4 O'clock Eastern Time today. If you have not received the release, it is available on the Investor Relations page of our Web site, hawaiianairlines.com.

During the course of our call today, we will refer to adjusted or non-GAAP numbers and metrics. A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found in our press release. Before we begin, we’d like to remind everyone that the following prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them.

For a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements, we refer you to Hawaiian Holdings’ recent filings with the SEC, including the most recent Annual Report filed on Form 10-K, 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 Dunkerley

Thank you Ashlee, aloha everybody and thank you for joining us. For the second quarter we recorded adjusted net income of $0.35 a share which was a 46% increase year-over-year, this was in line with guidance and consensus estimates. Dropping these comments over the weekend I was struck by how little has changed in our messaging near about three months. We continue to enjoy the fruits of an improving trajectory in our business first seen towards the end of last year.

Each quarter results have strengthened substantially built on strong demand across our geographies, stable fuel prices and good cost control. Our effectiveness in turning these good conditions to our advantage has also been in evidence as we’ve grown our ancillary revenue faster than our passenger revenue. We’ve continued to mature all that we have so recently initiated and we’ve implemented a number of improvements in the way in which we do business internally not readily seen from the outside.

Our expectation is that assuming the good macro environment deserts and allowing to the uncertainties of competitive behavior. We should see this positive trend continue and perhaps accelerate for the remainder of the year. As we reach the end of the delivery stream of A330s we're also looking forward to a period of net positive cash flows, work is underway to determine the appropriate capital structure for our business and while we’ve got nothing to announce today we’d likely be making some capital allocation decisions by year-end.

Tempting though it might be to read the base in from last quarter’s script given how little has changed in the meantime, let me instead fill you in on some of the more significant goings on since we last spoke. There are a number of network changes announced during the period. In North America, we launched new seasonal client from Los Angeles and Oakland to Lihu'e and Kona at the end of June, we're pleased with the performance so far.

As our first long haul flights to North America from Kaua'i and the Big Island there are an important step for us in developing mainland services to these two islands. We also added back daily services from San Jose to Honolulu and from Los Angeles to Maui in May. On Los Angeles to Maui we will now have daily year around service plus a seasonal flight in the summer.

Earlier this month we expanded our Ohana by Hawaiian flying with the addition of service from Moloka'i to Maui and from Maui to the Big Island. Also in mid-April, we launched three times weekly service from Beijing to Honolulu and we’re encouraged by the reception we’ve received. China will be an important component of Hawaii tourism in the upcoming years and we are well-positioned to take advantage of this opportunity.

As always the heart of Mahalo to all of my colleagues who continue to do a terrific job day in and day out, providing the unique Hawaiian hospitality on the ground and aboard at our flights and also supporting the operation from the back office. Together they have created an unmatched quality of service that has become synonymous with our business. For the sixth straight years in a row, the readers of Traveler and Leisure have voted Hawaiian Airlines the best airline to Hawaii and we have evidence that our customers overseas have formed certain reviews.

An hour ago, we inked an MOU covering the conversion of our order for six A350-800s into six A330-800neos and deferring their delivery. There are many terms to be more clearly fletched out in the negotiations leading up to the formal purchase agreement with the salient details are that the A330-800 aircraft will start arriving in 2019 instead of 2017. We’ve retained the element of flexibility in terms of tailoring deliveries to our needs as we get closer into these days.

Lastly, though we’re not permitted to talk to about the financial terms of the transaction, I can say that our capital expenditure commitments declined in absolute terms and are put further into the future under this new deal. With the period through the end of 2018, this reduction amounts to US$500 million. The A330-800neo represents an elegant solution to the cap which would occur if the Airbus decides not to produce the A350-800. From the cockpit through the passenger cabin, the aircraft is the same as what we operate today giving us crew training, scheduling and capacity commonality. At the same time, it has greater range which will allow us to open markets deeper into Asia and for the routes we already operate it is considerably more fuel efficient.

With that, let me turn it over Peter.

Peter Ingram

Thanks Mark. Operating revenue for the second quarter grew to $576 million, a 7.8% increase year-over-year while passenger revenue increased 5.3%. Load factor for the quarter was 79.6%, a 1.3 percentage point decrease year-over-year, while yield increased 5.7%. Combining these results, PRASM increased 4.1% year-over-year while the faster growing category of other revenue contributed to raising overall RASM by 6.7%. These results were in line with guidance provided at the beginning of the quarter.

Continuing with prior practice, I will go over the results by geography starting with North America to Hawaii which represented half of our passenger revenue in the quarter and where we posted another quarter of good results. PRASM was 4% on the basis of strong yields despite a 4 percentage point decrease of load factor of unusually high levels in the same period last year.

As we expected, year-over-year improvements moderated sequentially through the quarter as year-on-year comparisons became tougher and industry capacity kicked slightly higher. We expect industry capacity to grow in this geography to be up approximately 9% in the third and fourth quarters. Demand remains strong and for our part, we’re comfortable with the additions that we have made to strengthen our competitive position off the West Coast particularly from Los Angles and the Bay Area.

The seasonal direct flights to Kona and Lihu'e that Mark mentioned earlier are booking well and we expect them to be accretive to our overall North America summer PRASM. North America has been an area of strength for us in the past several quarters and we anticipate it to continue albeit with year-over-year PRASM changes more moderate against tougher comps.

Our Neighbor Island routes continue to perform well, generating 24% of passenger revenue this period and recording a sixth quarter in a row of year-over-year PRASM increases. Specifically PRASM was up 8.3% on a 0.4 percentage point increase in load factor. Demand for local travel remains strong and we expect the trend of good yield performance to continue through the third quarter.

International routes accounted for 26% of our passenger revenue with PRASM declining 1.6% year-over-year on a 0.9 percentage point increase in load factor. These results continue a trend of sequential improvements driven in part by lapping of the period last year where the strengthening U.S. dollar undermined the value of our foreign currency sales. In this quarter, the year-over-year impact of currency was just 5 million net of hedges.

Absent the currency effects and the benefit of hedges our PRASM would have been up approximately 2% in this area of our business. And assuming we see no dramatic changes in the dollar value of foreign currency that concern us, we’d expect the international PRASM will turn positive in the remainder of the year. This reflects the maturing of our relatively new international routes as well as some of the network and adjustments announced earlier in the year that have only been fully in affect since the beginning of July. With further maturing of our collective new routes still ahead of us, we’re excited about the contribution of these routes for our overall business, even in the environment that have a stronger U.S. dollar.

Before concluding the revenue discussion I’d like to highlight a couple of other bright spots in the quarter which helped boost our revenue performance. Our cargo team continued to raise the bar posting an excellent quarter with revenue up 24% year-over-year to $19 million. These results were better than our expectation going into the period and were highlighted by a record breaking month of June that featured our four highest cargo traffic days ever. And going forward we expect to continue to build on the steady improvement we’ve seen in our cargo business over the past three years, albeit at a more moderate space of year-over-year improvement as our network expansion slows.

We’re also setting new standards for ourselves with respect to the sale of preferred seats. After posting our first million dollar month of preferred seat revenue in March we surpassed that threshold in each month of the second quarter. Now this performance has been enabled by selling preferred seat upgrades in advance starting late last year instead of only operating the product that check-in and also expanding the sale of preferred seat upgrades to our Neighbor Island flights.

In the third quarter, we’ll take another step forward with the introduction of our extra comfort product on all our A330s which will expand the inventory of extra leg room seats on this fleet from 40 per aircraft and have them at a higher price point which reflects some additional product features that create both a compelling customer value proposition, as well as something that is accretive to the business without reducing our seat count.

And with that, let me turn the call over to Scott.

Scott Topping

Thank you, Peter. As listened earlier and to recap the quarter, we reported an adjusted net income of 22.4 million or $0.35 per share a strong improvement compared to last year’s adjusted net income of 12.6 million or $0.24 per share. Our earnings per share this quarter reflects the dilution of 8.3 million shares under convertible notes and related warrants due in March 2016 that can now be converted.

Our return on invested capital for the trailing 12 months end of June 30th was 13.5% before tax and 8.1% on an after-tax basis. Second quarter total operating expenses excluding fuel increased 22.7 million resulting in a 5.8% increase in the CASM ex-fuel year-over-year which was in-line with the guidance issued at the beginning of the quarter.

As a reminder our costs were elevated in the second quarter due to several projects and one-off items, included were maintenance related costs associated with cabin modifications for our extra comfort product and additional labor costs related to FAR 117 flight time and duty rules for pilots. These items totaled $8 million or 2.4 percentage points of the year-over-year increase in CASM ex-fuel this quarter.

Turning to the balance sheet, we ended the quarter with 564 million in unrestricted cash, cash equivalent and short-term investments and 69 million available in our undrawn revolving credit facility. We are working on replacing and increasing the availability under this facility which matures in the fourth quarter. Our CapEx in the quarter was approximately 165 million which included 150 million related to payments for aircraft and aircraft related items including upcoming deliveries.

Also during the quarter, we contributed $4 million to our pension plans. As we’ve note in the past our cash position is strong and we expect to enjoy positive free cash flow in upcoming years, assessing our optimal capital structure in this new environment is a work in progress at the moment and you can expect more details from us later in the year.

Let me now switch gears and move to our outlook for the third quarter and full year. Year-over-year ASMs are expected to be up 1% to up 3% in the third quarter. For the full year, we have lowered our ASM outlook and have narrowed our guidance range by a point. The new range is now up 1% to up 3% due to refinements in our schedule for the second half of the year.

Regarding movements in our fleet, let me remind you of our delivery schedule for 2014 where we are affectively up only one incremental out aircraft this year. In the first quarter we expect delivery of two A330s that essentially replace two aircraft that left our fleet in late 2013. In the second quarter we took delivery of two A330s and retired one 767 at the end of the quarter. There are no deliveries or retirements in the third quarter and finally in the fourth quarter we take delivery of one A330 and retire one 767.

In terms of financing, we have pre-financed the remaining A330 delivery this year through the W2C and with an attractive interest rate of 4.13%. We expect to finalize clients in the near-term for the financing of our remaining A330s delivering in 2015.

Turning to the top-line revenue is expected to increase year-over-year in the third quarter with RASM up 3% to up 6%. We expect CASM ex-fuel to be up 1% to up 4% in the third quarter. For the full year, we’ve narrowed our CASM ex-fuel range and expect it to be up 3% to up 5%. We continue to expect the 2014 full year effective tax rate to be in the 38% to 40% range, and we do not expect to pay any material cash taxes in 2016.

Sticking to our normal practice, we are not going to give fuel price guidance at this time, but we expect our fuel consumption to be up 0.5% up 2.5% year-over-year for the third quarter. Our expected full year CapEx is slightly lower than previously projected with an updated range of $460 million to $465 million. As mentioned earlier we have financing in place for all of our A330 deliveries in 2014 totaling approximately $370 million.

That is the end of our prepared remarks, with that I will turn the call back to Ashlee.

Ashlee Kishimoto

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

Question-and-Answer Session

Operator

Thank you. At this time, we’ll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of John Godyn from Morgan Stanley.

John Godyn - Morgan Stanley

Hey, thank you for taking my question, the A330neo announcement I think is a pretty big deal, so I was hoping to just dig into that a little bit more, Mark I don’t know if you have kind of any of these sound bites at your fingertips but is there anything you can tell us about how you view the prospective operating economics of the A330neo versus the A350-800 on like-for-like routes?

Mark Dunkerley

I can give you a sort of a little bit of wet finger in the air assessment, we’re going to see a double-digit percentage reduction in direct operating cost and we think it place us somewhere in the realm of two-thirds to three quarters of the way between what we had expected, the difference between the 330 now classics 200s and the A350, so we’re going to be getting the majority of the benefits will flow going to the A330-800 at the same time of course with lower capital cost.

John Godyn - Morgan Stanley

Okay, that’s very helpful and then just I think one of the compelling features of what you’ve done here is certainly reducing CapEx and pushing out deliveries. I am curious though how this affects the team’s long-term ASM growth rate. I believe in the past and correct me if I’m wrong, we’ve talked about this sort of theoretical mid single-digit ASM growth rate over the long-term. Is that still a number that kind of characterizes the growth opportunities, the Hawaiian piece in front of it?

Mark Dunkerley

Yes absolutely. When we ordered the A321neo it was partly on the expectations of the 350-800 would at the very least be late and so part of the 321neo order protected the back half of this decade in terms of being able to grow at that single-digit percentage. This new order fits within that overall picture and as I mentioned we have negotiated a degree of flexibility that will allow us to modulate our rate of growth according to conditions much closer in. At the same time during this period of time we’ve got a bunch of 767s retiring and so the combination of the retiring airplanes, the 321neos and the 330-800s coming in allows us to get to that mid-low, so it’s a low single digit rate of growth that we’ve in turn highlighted.

John Godyn - Morgan Stanley

Great and then just last one, you had mentioned that this opens up the opportunity for a discussion on capital returns maybe sooner than we had expected. I’m just curious of course it’s a board decision, I’m curious as the management team sort of works with the Board, do you have any perspective on buybacks versus dividends, we’ve seen a few different strategies from airline peers out there and I’m curious what your take is? Thanks.

Mark Dunkerley

Well, certainly I mean to be candid I wish I could tell you more but I think it’d be premature for me to be out there voicing an inclination to one particular allocation of capital over another one. We are working on it. We want to do this in a very kind of thoughtful way, recognizing what the future holds. We are in a position where that is front and center of the work that is taking place at the moment internally.

John Godyn - Morgan Stanley

Great, thanks a lot.

Mark Dunkerley

You bet.

Operator

Thank you. Our next question comes from Michael Linenberg from Deutsche Bank.

Katherine O’Brien - Deutsche Bank

Good afternoon it’s actually Katherine O’Brien filling in for Mike, thanks for the time. So just given what some of your U.S. peers have been noting on international yield weakness particularly in trend specific, have you had to reconsider any of the reach you’re currently serving? It seems like they’re going really well from your earlier commentary or how to kind reconsider any plans for future growth. Are you not really seeing any of that weakness in your market specifically?

Mark Dunkerley

We certainly have seen some weakness and we took some decisions earlier this year to make network changes in the face of those weaknesses. I would say that very much in keeping with the overall theme of our comments today there has been no real change in our operating environment over what we’ve seen over the last six or so months. And so what I would say is where we are now one does not constitute a surprise to it’s not a disappointing situation if anything. We're seeing some maturing of some routes which is helping us improve things of what they would otherwise be. As to our strategy for growth it's still very much there in the markets in which we operate. We very much like our cost and service proposition. So in none of the markets that we operate are we sitting there saying, thinking to ourselves that we have fundamentally uncompetitive product.

Katherine O’Brien - Deutsche Bank

Okay, great. And then if you have some time for one more quick one, so I realize most of your North American capacity is off the West Coast but that was a market that we saw some issues in over the past several years and things have really turned around, can you give us any update on West Coast specifically to Hawaii capacity and you see how many competitive changes and I realize that present comps gets tougher but overall profitability of that unit would you say that's holding up or improving based on demand, any comments will be really helpful.

Mark Dunkerley

Sure, we don’t comment on the profitability of individual geographies, we’re a small company it’s important for us to maintain the degree of competitiveness for our competitors who also be listening on this call no doubt. What I would say is that after a period of time in which there was a clear excess capacity, some of that capacity came out we’re getting back into a period where capacity is growing off the West Coast to Hawaii. I said a chunk of that is actually us we’ve inaugurated some new routes. We have reasons to believe that the market can absorb that capacity and so far the results that we’ve seen from the network changes that we’ve made in North America have been very positive.

Peter Ingram

Catherin this is Peter just to reiterate what I said on the call I think we're satisfied with the demand we’re seeing that is as Mark said absorbing the capacity some of which was seasonal for the key period. So we’re pretty comfortable with the competitive environment on the West Coast and we think we're in a very [indiscernible].

Operator

Thank you. Our next question comes from Hunter Keay from Wolfe Research.

Hunter Keay - Wolfe Research

Little bit more on the cash deployment as it relates to the way you talked about. I’m kind of curious, it seems a little early for you guys to be talking about that right now. I’m kind of curious the timing as to why you’re bringing it up right now and as it relates to that you said I think before you were going to be cash flow positive next year but then you said earlier Scott, you are free cash flow positive in the upcoming year.

So as the two questions are related to each other I guess is why you’re talking about cash deployment now and do you expect to be free cash flow positive next year?

Scott Topping

Okay Hunter, I’m not trying to understand exactly what you mean by why we're talking about it now, are you asking that question with respect to why we’re talking about it before we have anything announce or why we're talking about it now given how you imagine our cash flows are going to move over the next few years.

Hunter Keay - Wolfe Research

Yes, it’s a fair question thank you for asking me that. So I guess the timing of it is related to the aircraft order right and what I am really trying to get at to does it have any impact on your 2015 free cash flow again? Do you guys expect to be generating free cash flow next year or good amounts of free cash flow next year because if you don’t the implication therefore is going to be you're going to be deploying cash that you do on the balance sheet or that’s going to come into the business through debt. So which is fine if you want to do that by the way, but I’m just kind of curious as to know the timing of this sort of tease if you will on the free cash flow, you’re not the only company by the way to talk about [indiscernible] before they do it, there's nothing wrong with that, I was just kind curious to know why you’re bringing it up today in the context of maybe the aircraft order and as it pertains to next year’s free cash flow.

Mark Dunkerley

Well a couple of things I would say yes, 2015 I think continues with a (good from) [ph] positive cash flow perspective. The second thing I would say is that almost kind of regardless of what our near term outlook is, we are always mindful of what we think are the best capital allocation strategy is and what we are recognizing is that we’re going into a new period, a period that feels very different from the period that we've just -- that we’re exiting this year. And I think it's entirely appropriate in fact, I think it’s a responsibility of management to take pause and think about how things have changed and whether that occasions a change in our capital allocation strategy.

The third thing, I would say is, we have -- obviously a lot of interest from shareholders and analysts to what our strategy is and we’re trying to be transparent about that and I think we’re indicating that we’re coming upon a time where it will be a good thing for everybody if we can more clearly articulate what they can expect to see from us.

And then lastly and perhaps most importantly, our results have been good. We are building cash balances today and there are -- it is bringing forward the date that we might otherwise think about how we might allocate cash and voice that are different than we have done in the past.

Hunter Keay - Wolfe Research

Yes. That’s really helpful. Thanks for that Mark. And I guess, one more question you mentioned something about some internal changes that we can’t see from the outside, can you give us a good idea of some examples or should I say what those are, what inning are you in, in terms of these changes or the procedural (or whether that characterize) [ph] it’s headcount related footprint, I have no idea but what are you talking about and what inning you are on this things and is there a financial benefit to them?

Mark Dunkerley

Yes. Taken as a reverse order, I am hopefully there is a financial benefit to them, there better be. As I look around the room, again I see some of my colleagues, the -- we've moved from being a relatively small regional player into a run where we’ve grown very, very quickly, we’ve inaugurated a whole bunch of new routes and perhaps unsurprisingly our internal processes will build around frameworks either IT platforms or even organizational relationships which aren’t entirely well suited to our larger size and more complex operation.

So a lot of what we’re talking about here is new applications that we’re developing, we got things like our revenue accounting system is getting an important makeover which will give us better access to information from which to make decisions. We’ve got a real push on productivity in the workplace where we are looking at ourselves in a -- as we’ve now become larger to see where we can get additional productivity benefits that are now available, that previously weren't. There are whole bunch of these kinds of activities, they don’t all start one year and come to an end 18 months later, they are more continuing, I put it in the scripts, largely because a lot of news going on behind the scenes of Hawaiian Airlines. And we do think that there’ll be some substantial benefits that will come from that as they mature.

Operator

Thank you. Our next question comes from Helane Becker from Cowen and Company.

Helane Becker - Cowen and Company

Thanks very much for your -- hi everybody thanks for the time. Just a couple of questions, Peter I think you alluded to the fact that some of the 9% capacity increase is seasonal, do you have what you think is the estimate for seasonal versus permanent?

Peter Ingram

Helane, I don’t have a number on it, but I can tell you that we’re doing some seasonal flying out of both Los Angeles and Oakland to Lihue and Kona not it accounts for a couple of aircraft worth of flying. And we’ve got a second daily LA, Maui that comes out around late [indiscernible] as well and that we’ll maintain the regularly LA, Maui throughout the four seasons. So there is -- those are that seasonal bits that are coming out. And then at Christmas time where we’ve got some aircraft availability we have a little bit of extra flying that will come in primarily out of Los Angeles at that point in time, which [indiscernible] flying to Honolulu.

Helane Becker - Cowen and Company

Okay. And then as part of that, I think you guys went to five a week from Delhi-JFK-Honolulu does that go back to Delhi at some point?

Peter Ingram

Yes. We actually…

Helane Becker - Cowen and Company

Did it already happen?

Peter Ingram

It will -- it is, it should be daily right now in the peak of the summer. What we did, we first started this actually last fall, we reduced a schedule down to five times per week, seasonally we saw positive benefit out of that adjustment, and so we made a similar adjustment both during the spring trough as well as doing it for the fall of 2014 and actually with a little bit more lead time. So our sales were better aligned with the capacity we ultimately flew in. And those sort of work well, we’re happy with the trend we’ve seen in terms of JFK results and we'll fly it seven days in the peak and make the appropriate adjustments going forward.

Helane Becker - Cowen and Company

Okay and then you might have answered this one when you answered Katherine's question, but do you have the sort of similar numbers for competitive capacity for international? I feel like the Hawaii airport people said, international was down about 3.5% for the next three months.

Peter Ingram

Yes, I don’t have that on my fingertips Helane, and we can try and get that for you. It’s a little bit difficult to think of international in the same way that we think of Neighbor Island and North America just because you’ve got such desperate markets that aren’t homogenous, and so when you see incremental flying like we added earlier in the year from Beijing, it actually has zero effect on what we do out of Australia or Japan. But we can try and get you a cumulative number and hopefully Ashlee can make some sense out of it before you.

Helane Becker - Cowen and Company

Okay thanks and then just one little one. As we look at the numbers for the fourth quarter, is there -- you have a tough comp for the fourth quarter on unit revenue. Is there a chance fourth quarter is more like flat to down a little bit rather than up?

Peter Ingram

Helane, I don’t think we’re going to start guiding for the fourth quarter, quarter yes. We’ll give you the third quarter number and we’ll think about the fourth quarter as we get a little bit closer to it.

Mark Dunkerley

And clearly we’ve guided for the full year.

Helane Becker - Cowen and Company

I guess you come back into it. Alright, well Mark I am glad your joy session to them came off without a hitch.

Mark Dunkerley

Yes, so was I, so was I.

Operator

Thank you. Our next question comes from Fred Lowrance from Avondale Partners.

Fred Lowrance - Avondale Partners

Good morning to you guys over there, just couple of quick questions for me, one, just curious to hear why you shifted away from talking about passenger RASM and only looking at your total operating revenues PRASM that’s typically something we see from guys like Spirit or Allegiant who have a huge 30% to 40% chunk of their revenues coming from ancillaries? And then sticking on the RASM front, is there any way for you guys to quantify for us how you thought about the impact of route terminations in Fujiko and Taipei, how that impacted your thought process about RASM for the third quarter?

Scott Topping

Yes let me take those, Fred, first of all in terms of the guidance we were really just trying to simplify it. I think having multiple numbers out there we were concerned it was going to create some confusion and so we went with RASM which is obviously the more comprehensive number and helps give you guys a sense of where things are going to come in terms of overall operating margins and pretax margins when you start summing it up.

In terms of the network changes, certainly that is all part of what goes into the calculus of our guidance. We actually have a small enough network that we tend to build things up on a roof by roof basis and obviously some of those things are in and not in versus prior year and so that’s all in the mix. I wouldn’t want to go into describing the sort of components of the elements of change for similar competitive reasons to what Mark cited earlier about why we don’t want to dwell into too much detail in terms of the moving parts.

Fred Lowrance - Avondale Partners

All right, and I think in first quarter maybe as Mark mentioned that those routes that you did decide to terminate had deteriorated a little bit more during the first quarter. Is it safe to assume that as those approached their end in April and June respectively or that those routes, the economics on it continued to deteriorate or is that not actually the case?

Scott Topping

Well, two pretty different cases in there. Taipei was cancelled fairly early in the quarter, so it didn’t have a significant impact on the quarter. Fujiko, we operated throughout the quarter and I think the situation you are describing would generally describe it, but it wasn’t a meaningful change in trend between the first quarter and second quarter.

Operator

Thank you. And your next question comes from Glenn Engel from Bank of America.

Glenn Engel - Bank of America

On the other revenue side, you were 70 million better than a year ago and I think you had said the cargos [indiscernible] accounted for about 4 million of that, so what drove the other revenue up some much and how sustainable is that?

Peter Ingram

One of the other components besides cargo that is meaningful is the frequent flier which really has -- there is two elements to what is driving that. Obviously as you remember from last quarter we had our new credit card deal which is a very significant third party sale of miles contract for us. So we’re growing the cash we get as part of that deal. There is also as we entered into the new contract, they change in accounting that leaves us with about a third of that being running through the other revenue line versus 10% of the smaller number previously that was running through the other revenue lines so that is part of what you’re seeing in there and then I would say that there are a handful of other things that individually don’t rise to the level of materiality to talk about but things like vacation packages and rental cars and some of the other products that we are selling are increasingly important in aggregate but individually they don’t total up to the sort of big numbers that we tend to talk about in our script on this call.

Glenn Engel - Bank of America

That comment implies that your PRASM with gains were understated and your other revenue gain was overstated by the change in accounting.

Peter Ingram

Yes, there is some shift between the lines because of that change in the frequent flier accounting.

Glenn Engel - Bank of America

And would I expect a similar gap between PRASM and RASM in the third quarter as the second or it will be slightly smaller?

Peter Ingram

Yes, that credit card deal came in place at the beginning of the year and sort of built up as we’re able to market the card more aggressively late in the first quarter so you’ll some of that, that same behavior through the third and fourth quarters and then should be a more normalized trend going into 2015.

Glenn Engel - Bank of America

For the first time you laid out your currency hedges and can you just talk about the strategy and do you lock in currencies these options, have you…

Mark Dunkerley

Yes Glenn, we use forward contracts for the most part in the currency hedging we go out anywhere between 18 to up to 24 months on a declining basis we start going into any quarter with about a 60% hedge and then that trails down to something like 20% when you get out to 18, 18 to 24 months, we have a small budget of options that we use to manage the tail risks around these forward contracts because they can as you know go against you, but that’s fairly small.

Glenn Engel - Bank of America

So this is going to be a formulated program like your field program where you’re just going to lock in at certain percentage each quarter.

Mark Dunkerley

Yes, it’s similar to that, just a little longer tenure.

Glenn Engel - Bank of America

Thank you.

Operator

Thank you, our next question comes from Bob McAdoo from Imperial Capital.

Bob McAdoo - Imperial Capital

Just a couple of quick ones. Do you think that the free cash flow going forward, what should we think about as maintenance CapEx on an annual basis?

Mark Dunkerley

This year, it’s just under 60 million, kind of 50 to 55 million to 60.

Bob McAdoo - Imperial Capital

What do think about going forward, do you see that same kind of a number?

Mark Dunkerley

That’s kind of this year but I think you should expect it to trail down as we go forward.

Bob McAdoo - Imperial Capital

So use 45 next year, that kind of trail down or more or less?

Mark Dunkerley

We haven’t done the -- gone through the budget process but that’s not an unreasonable number.

Bob McAdoo - Imperial Capital

Okay, and then how many seats would have been on the A350 as compared to the currently 330 or the new A330s.

Mark Dunkerley

About 320 seats, 315 to 320 on the 350 800 and using exactly the same configuration because this is the same fuselage as the A330 200, the A330 Neos will have 294 seats.

Bob McAdoo - Imperial Capital

Okay, and could you just go back over, I got a little bit tangled up when we start talking about the percentage change of what an A3 -- the new A330 does versus the old A330 in terms of what it [will be discounted] typical flight what’s the trip cost reduction.

Mark Dunkerley

It’s double digit reduction in trip cost and as compared to where we are today with the A330 200, it will be about two thirds of the way between what we would have achieved with the A350 800 for far lower capital cost.

Bob McAdoo - Imperial Capital

Okay and when you say it’s double digits better than the current A330 is that including the impact of it probably going to cost a little more than the current A330 or is that just the directly the variable operating costs.

Mark Dunkerley

That’s the variable operating cost.

Operator

Thank you, our next question comes from Steve O’Hara from Sidoti and Company.

Steve O’Hara - Sidoti and Company

Could you just talk about -- I know you’re looking for decent RASM improvement in 3Q and you had good growth in 2Q and if I recall you were using a new revenue management system, I’m just kind of wondering what the impact of that was or have you seen that impact yet?

Scott Topping

Yes, Steve it is, it’s kind of hard to tease it out specifically because there’s so many other moving parts going on, you can’t do these experiments in a vacuum in our business. I think we have -- I would say we've definitely seen the benefits of the revenue management system, I think it is the nature of these systems changes and the associated process change that goes around it that because they rely on history you should see incremental improvements overtime. So I think one we are seeing benefits, two, that doesn’t mean that there is no more benefits to achieve going forward.

Steve O’Hara - Sidoti and Company

Okay. That makes sense. And then just on the cargo improvement was that I guess I am wondering is that market share you’re taking or is that just are you seeing a better cargo environment in general?

Scott Topping

I think what we’ve done and this has been a continuing trend for a couple of years. We have as the network has grown and we’ve been able to add points internationally and attract cargo internationally that’s being part of the benefit I think we have improved our effectiveness as a team and I’m really quite proud of what Hawaiian cargo has accomplished for us in terms of selling in our more mature markets whether it is off the West Coast. The A330 is marginally better cargo airplane than the 767 in terms of its lift capability and because we’ve done a consistent configuration with all large cargo doors whereas our 767 fleet has historically been more of a high hodgepodge, that means we can promise the product every day and know we’re going to be able to deliver it because we know that every airplane that shows up has the same capability.

So I think all of those things contribute to it. The overall cargo environment I don’t think is particularly robust if you look at how we’ve grown cargo revenues as a proportion of our total business it has outpaced the rate of growth of our domestic competitors certainly and I think if you read the press clippings about people talking about the global cargo environment there is generally a consensus that it has been a slow recovery at best for the air cargo business. So we must be improving our market share in that environment.

Operator

Your next question comes from Joe DeNardi from Stifel.

Joe DeNardi - Stifel

Thanks, good afternoon. So I’m curious on the $500 million in CapEx savings, seems a little light to me given that you’re expecting for A350, so I mean is there anything offsetting that and then maybe longer term do you think this put you guys in a position where you can generate positive sustained free cash flow or should we still expect some cyclicality as the A330 is coming.

Mark Dunkerley

Okay. I really can’t go into the calculations of the 500 million, the standard confidentiality agreements between manufacturers and airlines, however that number is the right number. As to does this kind of forever change the cyclicality of our cash flows I think the answer is no. We’re reducing the cash out and delaying it which has obvious benefits. We’re growing [indiscernible] certainly what we're doing at the momentum, the amount of cash coming in is also a great benefit.

We have got tremendous flexibility in our order book so that we can kind of tailor our capital obligations to how well we’re doing and how much cash that we're generating. But closing year-on-year will leave the cyclicality going forward, the answer is yes.

Joe DeNardi - Stifel

Okay. And then Mark I mean obviously you guys made some changes earlier in the year [indiscernible] dramatic since then, so can you just talk about are there still routes in the network that are may in that that you’re taking a look at for a pretty satisfied with everything at this point.

Mark Dunkerley

We’re satisfied with everything at this point. There is still some in development and obviously but the development seems satisfactory.

Joe DeNardi - Stifel

Okay. And then Peter on the competitive capacity trends that you went through, how has that changed over the past couple of months. Have they gotten better or worse kind of as the last few months have gone?

Peter Ingram

There hasn’t been a dramatic change I think on the margin there has probably been more additions nothing reductions but I wouldn’t characterize it as a big way one direction or the other. I think it is more different airlines adjusting to opportunities that is as they see them in the marketplace.

Operator

Thank you. Our last question comes from Michael Derchin from CRT Capital Group.

Michael Derchin - CRT Capital Group

Hi. I wanted to ask you on the A350-800 had one of the reasons we’re taking it was it gave you the opportunity to fly some really long haul kind of markets like maybe Brazil or China Mainland, what’s the new range on the A330 NEO with the new engines, how much range do you have and how many kind of what percentage of the kind of the longer term new-new markets out there can you still do with that plane?

Mark Dunkerley

The A330-800 NEO won’t have the same range as the A350-800, but it’s sufficiently close with the few markets that fall outside the range circle for the A330-800, but inside the range circle for the A350-800. It is sufficiently small but we think that this is very positive development for us.

Michael Derchin - CRT Capital Group

Does that have a [indiscernible] have a London capability from Honolulu nonstop?

Mark Dunkerley

I think some of the analysis still has to be performed on that. It will depend fairly substantially on what the seating configuration we have in the airplane is, in an environment where we thin out some of the seating configurations because we want to have for example either a larger business class cabin or one with more space for longer haul travelers. Then it probably we look forward in range.

Michael Derchin - CRT Capital Group

Yes, I am asking that for your employees by the way, Mark.

Mark Dunkerley

Yes, absolutely.

Operator

Thank you. At this time, I will turn the call back over to Mark Dunkerley for a closing comment.

Mark Dunkerley

Okay, thanks everybody for joining us today on this call. Before we go, I would like to share with you the date for our upcoming annual Investor Day, it’s going to be held the morning of December 3rd in New York with further details to follow in the upcoming months. Obviously, we hope to you all then if not before. Take care and thanks so much for joining us on the call.

Operator

Thank you, this does conclude today’s conference and we disconnect your lines at this time. Thank you for participation.

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