Executives: Mark Dunkerley - CEO, President & Director Peter Ingram - EVP & Chief Commercial Officer Alison Croyle - Director of External Communications Shannon Okinaka - CFO, EVP &

Treasurer
Analysts: Andrew Didora - Bank of America Merrill Lynch Hunter Keay - Wolfe Research Kevin Crissey - Citigroup Michael Derchin - Imperial Capital David Segal - Honolulu Star-Advertiser Helane Becker - Cowen and Company Daniel McKenzie - The Buckingham Research Group Joseph DeNardi - Stifel, Nicolaus & Company Michael Linenberg - Deutsche Bank AG Rajeev Lalwani - Morgan

Stanley
Operator: Welcome to the Hawaiian Holdings 2017 First Quarter Earnings Call. [Operator Instructions]. I would now like to turn the conference over to your host, Ms. Alison Croyle. Thank you.

Please go ahead.

Alison Croyle: Thank you, Operator. Welcome, everyone and thank you for joining us today to discuss Hawaiian Holdings' financial results for the first quarter of 2017. On the call with me today are Mark Dunkerley, President and Chief Executive Officer; Peter Ingram, Chief Commercial Officer; and Shannon Okinaka, Chief Financial Officer. Mark will begin with some overview comments.

Next, Peter will take us through revenue performance and Shannon will follow with a discussion on costs and the balance sheet. We will then open the call up for questions and Mark will end with some closing remarks. By now, everyone should have access to the press release that went out

about 4:00 Eastern [Technical Difficulty] available on the Investor Relations page of our website, hawaiianairlines.com. During the course of our call today, we will refer at times 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 as well as on the Investor Relations page of our website.

Before we begin, we'd like to remind everyone that the following prepared remarks contain forward-looking statements, including statements about our future plans and potential future financial and operating performance and management may make additional forward-looking statements in response to your questions. These statements are subject to risks and uncertainties and do not guarantee future performance and therefore, undue reliance should not be placed on them. For a detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statement, we refer you to Hawaiian Holdings' recent filings with the SEC, including the most recent annual report filed on Form 10-K 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, Alison.

Aloha, everybody. Thank you for joining us today. Before we start, I'd like to take a moment to thank Ashlee Kishimoto for the terrific job she's done managing our Investor Relations function these past 4 years. Hawaiian is a much better understood business in the financial community, thanks to her tireless enthusiasm for telling our story. She's gone on to lead our corporate audit team, where we will continue to benefit from her talents.

Turning to the numbers, the year has started extremely well. Our adjusted net income grew to $56 million or $1.04 per share for the first quarter and our adjusted pretax margin grew 0.7 points to 13.3%. Strong demand and benign industry capacity growth across our network have given us a robust operating environment, more than sufficient to offset the impacts of the rising price of oil. On a trailing 12-month basis, we remain the leading airline for punctuality, notwithstanding a tough couple of months in the first quarter. This winter, Hawaii experienced an unusual number of days with wind conditions that dramatically reduced runway capacity, leading to systemic delays.

On top of that, the late arrival of the 2 Boeing 717s we acquired last year also had us running light on spares for our interisland flying. Such conditions put a strain on our frontline team, but as always, their hard work ensured that Hawaiian's peerless reputation for hospitality and operational performance remained intact. In yet another example of our service commitment across the network, Incheon Airport named Hawaiian its airline of the year. We're pleased to have a 63-month contract recently ratified by ALPA. Shannon will take you through the financial implications of this agreement later in today's call.

Equally, we're committed to reaching a market-based agreement with our flight attendants and negotiations with the AFA are currently underway. Looking ahead, industry capacity growth continues to be modest, while demand for the Hawaii vacation remains robust. The price of fuel is higher year-over-year but not so much as to undermine the confidence in our near term performance. Our agenda for the back half of the year revolves around the number of important investments that we're making in the future of our franchise. The largest of these is the introduction of the A321neo fleet now scheduled to commence in October.

The A321neo will transform our ability to serve some slightly smaller U.S. West Coast O&D routes that are impractical with our current all wide-body long-haul fleet while also providing replacement lift for the retiring Boeing 767. Early this month, we revealed a new cabin design for the Hawaiian A321neo aircraft which evokes Hawaii in every detail. You may remember that on our last call, we discussed the adverse impact that the delays to the delivery of the A321neos would have on our 2017 capacity plans. As Peter is going to detail a bit later, we have taken a closer look at our aircraft availability and we have managed to restore some of this planned North America capacity to the back half of the year.

We continue to make good progress on upgrading the premium cabins in our A330s and now have more than half of the fleet reconfigured. The remainder are on track to be completed by early 2018. The feedback on our uniquely designed fully lie-flat seats has been extremely positive as have the revenue results associated with them, so too has the impact of expanding the number of Extra Comfort seats from 40 to 68 per plane. So we're continuing to invest in our people, our guest experience and the long term growth in our business. For another key company stakeholder, our investors, we're increasing our share repurchase program to $100 million and extending the program through May of 2019.

A little later in the call, Shannon will talk about our costs and balance sheet, but now, Peter will address our revenue performance. Before I turn the microphone over to Peter, let me just say how encouraged we're that the strong operating environment we've experienced the last several quarters shows no sign of weakening in the months ahead.

Peter Ingram: Thanks, Mark and aloha, everyone. First quarter unit revenue performance exceeded our original expectations and the year-over-year gains comfortably position us to surpass all U.S. carriers for the fifth consecutive quarter.

RASM growth of 7.6% reflects strength across the board, with contributions from domestic and international passenger operations, cargo, HawaiianMiles and Extra Comfort. I applaud our commercial team for another period of outstanding execution in the marketplace. Domestic PRASM, including North America and Neighbor Island, posted double-digit gains, demonstrating strong demand for our service. This marks 5 consecutive quarters of positive domestic PRASM. North America routes were the catalyst for this strong performance.

Our North America capacity was slightly down in the period as we modestly pulled back our schedule to fund aircraft availability for additional Tokyo flying that we started in the back half of 2016. Competitive capacity, meanwhile, was basically flat. For much of 2016, our North America performance benefited from improvements to load factor and this was a contributing factor again in the first quarter. Notably, however, in this period, we were able to produce a majority of our revenue improvement from yield which bodes positively going forward as year-over-year load factor comparisons become more challenging beyond 1Q. Bookings were strong throughout the period which led to less discounting than the previous year and when sale fares were available, they were slightly higher than last year's levels.

This explains much of our overall improvement relative to original expectations. Heading into the second quarter, we will see a benefit from Easter moving into April which contributes to a very strong first month of 2Q. And we're encouraged by the steady trend of bookings for May and into the summer which suggests to us that our momentum remains very much intact while acknowledging comparisons get even tougher in the back half of the year. Neighbor Island PRASM was slightly weaker year-over-year in the quarter, although better than we expected given a 9% increase in industry seats which was weighted towards the back end of the period. This capacity growth will reach the mid-teens in 2Q as a fuller impact of our competitors' capacity increases is reflected.

As we've stated many times, we have a very strong franchise in this geography with an unparalleled depth and breadth of schedule. In the short term, we can expect a degree of continued pressure on unit revenue from the higher industry capacity, but we expect our performance to remain strong on an absolute basis. For our part, we continue to execute on our plan for the Neighbor Island business. Our 19th and 20th Boeing 717s entered service during the first quarter. As previously explained when we acquired these airplanes, we're using them to add some capacity in the peak mid-day period when connecting traffic from our long-haul flights routinely leads the Neighbor Island load factors in the high 90s.

We're already seeing the benefits with stronger connecting traffic flows in the first quarter and we'll continue to tweak the schedule for optimal results. The contribution -- the combination of our strong schedule, the right aircraft and the unmatched hospitality of our frontline teams provides us with tremendous confidence for any competitive environment. Turning to international routes, we posted another positive quarter, with PRASM growing 6.8% from last year. Japan remains an area of strength. As a reminder, we added more Tokyo service last year.

Narita to Honolulu launched in July and the second Haneda flight was added in December, split 3 times per week to Kona and 4 times to Honolulu. This new flying was immediately accretive to our international PRASM. We also saw year-over-year gains from our Australia routes, including Brisbane which benefited from the departure of our direct competitor towards the end of 2016. Our new lie-flat Premium Cabin product is continuing to roll out with an initial emphasis on international routes and the early returns are quite encouraging, both in terms of guest experience and revenue performance. We expect the sequential improvement of our international routes to continue in the second quarter.

The postelection appreciation of the U.S. dollar subsided early in the new year and the foreign currency outlook is stabilized at manageable levels for now. Slightly higher fuel prices have reached a level where fuel surcharges return to the Japan routes. Overall, we're encouraged with our positioning in this part of the business going forward. Our value-added revenue per passenger grew to $24.04 in the first quarter, up $1.32 year-over-year.

Extra Comfort seats remain in strong demand, with results beating expectations. As we discussed at Investor Day, the modification of our A330s and the subsequent introduction of the A321neo will meaningfully increase our capacity of Extra Comfort seat in the next few years, so it's encouraging to see results continue to improve even in this period of transition when we don't have a consist seat inventory on all our routes from day-to-day. Finally, our cargo business continued to build on the momentum of the latter part of 2016, with first quarter revenue growing by $4 million from last year. In select markets, our superior service and favorable competitive capacity allowed us to generate some rate improvements which is a contrast to the recent industry trend. Looking ahead, we're gaining confidence that these positive cargo results are a trend, not an aberration.

Let me now turn to the outlook for the second quarter. We expect our capacity to grow 3% to 5% from last year. Most of the growth will come from the Japan flying I mentioned earlier with a small amount of the increase attributable to the additional Neighbor Island flights that were enabled by our recently added 717s. For full year 2017 ASM growth, we're slightly tweaking our expectation back up to a bit to a range of 2% to 5%. I'll take a moment to explain this since last quarter, we adjusted this number down from the range we disclosed at Investor Day.

Our original plan assumed a boosting capacity from the delivery of the first A321neos. During our last earnings call, we amended our outlook to assume that it was unlikely that these aircraft would enter service before the very end of the year. Since that time, we've been able to adjust our aircraft availability to add back some post-Labor Day flying in North America that we weren't initially sure that we could fund. So essentially, what we're doing here is getting closer to the schedule we initially intended to fly when we were doing our 2017 planning. We continue to build on our momentum even as year-over-year comparisons begin to lap improvements from 2016.

In 2Q, we expect RASM to improve for a fifth consecutive quarter with a forecasted range of a 5.5% to 8.5% over last year. Demand remains robust. Industry capacity growth remains manageable. Our commercial team continues to execute very well and our frontline teams continue to give us a great product to sell with their unrivaled hospitality. And with that, Shannon will now talk about our costs and the balance sheet.

Shannon Okinaka: Thank you, Peter. Solid first quarter results give us confidence as we progress through this transitional year. Supported by our financial performance and the demonstrated experience of our team, we're realizing returns on our investment and continuing to grow long term value for our shareholders. In the first quarter, we adopted a new accounting standard which led to the reclassification of certain pension costs from operating expense to nonoperating which resulted in revised 2016 basis for CASM ex-fuel and special items. This change had virtually no impact on year-over-year comparisons.

With a $0.880 as the base for the first quarter of 2016, our unit cost for the first quarter of 2017, excluding fuel and special items, increased 6.7% over the same period last year. The biggest driver of the increase was the ratification of our pilots' contract which drove about 2 percentage points of year-over-year unit cost growth due to a net increase of about $7.5 million in weighted and benefits expense. We also recorded a $19 million special charge related to a onetime increase in pilot benefits. While we're talking about the pilot contract, an important item to note is the agreement to freeze and settle the postretirement medical benefit plan for active pilots. Later this year, most likely in the fourth quarter, we anticipate making a onetime cash payment of approximately $100 million to settle the related liability on our balance sheet.

This contribution provides security for these employees while contributing immediate tax savings and reducing future risk and cost for the company. We had a lot of moving parts in our CASM reporting this quarter, but excluding the impact of ratification, CASM ex-fuel and special items would've increased 4.6% over last year which is in line with our original guidance. Another item to note on the income statement was our nonoperating expense which included a $2.8 million gain related to the noncash conversion of our foreign bank account to U.S.D. On a year-over-year basis, we continue to benefit from the early retirement of debt in 2016 through interest expense savings of $3 million compared to last year which we will begin to lap in the second quarter. Before looking ahead, I'd like to explain the idiosyncrasy of our first quarter effective tax rate.

We adopted accounting standard update 2016-09 this quarter which changed the way we recorded the book-to-tax difference related to stock compensation, mainly the increase in the stock price between the dates of granting and distributing the shares. The impact of this change in the first quarter was a credit of $5.2 million which resulted in our first quarter effective tax rate being 28.3% and had a $0.10 impact on adjusted EPS. Looking ahead, we expect our effective tax rate to be closer to 38% in each of the second, third and fourth quarters resulting in a full year effective tax rate between 36% and 37%. While this accounting change had no impact on our cash taxes, we're expecting our cash tax rate to be meaningfully lower than our book rate, largely driven by the deductions associated with cash contributions we will be making to postretirement benefit plans and other pilot-related cash payments. Moving to the second quarter.

We expect our cost headwinds to remain similar to what we saw on the first quarter, with essentially the same drivers. Headwinds totaling 4.5 percentage points include increases in aircraft rent, totaling 1 point; wages and benefits, primarily due to contractual rate increases, totaling about 2.5 points, 2 of which is related to the new pilot contract; 0.5 point is related changes in the mix of flying, more specifically, the additional international capacity added in 2016; rental and landing fees from volume and rate increases at Honolulu Airport, totaling about 0.5 point; and purchase services due to the growth in our operations totaling about 0.5 point. We also expect a shift in the timing of recording our incentive compensation, resulting in a 1 percentage point increase in the second quarter. All that being said, we expect CASM ex-fuel to increase 4.5% to 7.5% from the second quarter of last year and continue to be in the mid-single-digit range for the full year 2017 which excludes special items and any assumptions related to the amendable flight attendant's contract. This full year guidance remains the same as previously noted even with the inclusion of the pilot contract as we remain diligent about cost control and continue to pursue initiatives that improve our cost structure.

We continue to expect to incur A321neo induction costs as we prepare for our deliveries in the fourth quarter, with our focus on finding efficiencies and productivity improvements elsewhere in the business. For example, despite increased flying, we continue to see reductions in our maintenance spend as a result of cost saving initiatives and investments we have made. On the fuel front, similar to first quarter results, we expect our economic fuel cost per gallon for the second quarter to be between $1.65 and $1.75 based on the fuel curve as of April 10 and expected increase of $16 million in fuel costs from last year. Our guidance for full year economic fuel cost per gallon continues to be between $1.75 and $1.85. As of March 31, we hedged approximately 35% of our projected fuel requirements 4 quarters out and expect our fuel hedges to settle at a gain position as we continue to lap lower fuel prices from last year.

We're maintaining a disciplined approach to our hedging program in order to manage our operating and economic risk. For the second quarter, we expect our fuel consumptions to increase from last year in the range of 6.5% to 8.5%. For the full year, we're raising our fuel consumption expectations to be up 4.5% to 7.5% due to the increased North America flying that Mark and Peter mentioned and higher passenger and cargo loads. Moving to the balance sheet. Our cash position remains strong with $740 million in cash, cash equivalents and short term investments which positions us favorably for our continuing and upcoming investment.

This quarter, we contributed $6.4 million to our pension plans even though our required minimum contribution was 0. In addition to removing significant liabilities from our balance sheet by settling our IAM and salary pension plans and a portion of the pilot postretirement medical plan, we expect to continue making contributions in excess of minimum requirements to reduce both our pension liability and future required payments. Our adjusted debt-to-EBITDA leverage ratio remains in the middle of our target range at 2x. We strive to remain within range of 1.5 to 2.5x while ensuring we maintain the appropriate level of cash after pension and postretirement contributions and settlements, other contractual payments and fleet and other capital expenditures this year. We continue to expect our full year 2017 CapEx to be in the range of $410 million to $420 million as we continue investing in our business and funding growth through our A321neo deliveries.

We previously characterized 2017 as a transition year. And while it continues to be so, we're executing on our plans and we're seeing results that exceed our initial expectations, both on revenue and cost. With our sustained financial strength, we continue to invest in our business. We look forward to improving our competitive position in markets we currently serve as we expand into untapped markets. This concludes our prepared remarks and with that, I'll turn the call back over to Alison.

Alison Croyle: Thank you, Mark, Peter and Shannon. Also, thanks to all of you for joining us today and for your continued interest in Hawaiian Holdings. We're now ready for questions from the analysts first and then the media if time permits. [Operator Instructions]. Operator, please open the lines for questions.

Operator: [Operator Instructions]. Our first question comes from Mike Linenberg of Deutsche Bank.

Michael Linenberg: Mark, a 13.3% pretax margin in the March quarter, I mean, that's impressive. I think you're going to be one of the few airlines that can actually expand margins year-over-year. Look, a lot has happened with your network.

I mean, there's been an evolution. There's been a lot of change over the years. When we think about seasonality, like what -- sort of, holding fuel constant, what are your best quarters now? Like seasonally, what are your strongest quarters? What are the tough quarters?

Mark Dunkerley: So counting them down, all other things being equal, third quarter is best, fourth quarter is second best, second quarter and then first quarter. So you can rightly surmise, I mean, we're really very encouraged by the environment we're operating in right now. And I think what's encouraging us further is the fact that as we look into the next few months, we don't see that environment changing in any way.

Michael Linenberg: Okay. Great. And then just one other and maybe we can take this one offline. But when I think about the A321neos coming in and replacing 767s, can you just remind us, were they -- from a trip cost comparison, how many seats do you lose? I mean, do you take a revenue hit there? But then you have the Extra Comfort seats. Like how should we think about that replacement?

Mark Dunkerley: Well, the first kind of threshold matter is that you should think of it as a great opportunity for us.

I mean, we're very excited about this aircraft fleet type. We're frustrated by the delays, but this is a fleet type that we're going to operate for the next 20 years and we're under no doubt that it is the aircraft that really will improve our competitiveness in some key markets. It's got 189 seats in our configuration. It's got roughly the same ratio of premium seats to economy seats in it. Its trip cost is lower than the 767s.

It's partly replacement, but it really actually provides opportunities for us to compete in markets we don't compete in today. And we'd be happy to provide you more granular detail. But this call, as you rightly pointed out, probably isn't the place for it.

Operator: Our next question comes from Hunter Keay of Wolfe Research.

Hunter Keay: So Mark, when companies refer to a year as a transition year, that usually means that margins are coming down before they kind of go back up again.

So obviously, knowing only what you can know about visibility of demand in revenue and the economy and what not, are you implying that we should think about margin starting to reexpand again in '18 when you used the year transition year? And if not, what do you mean when you say those words?

Mark Dunkerley: Yes, I mean, we can't quite sort of give you guidance for '18. But I think as we look at '17 -- let me put it this way. We see '17 as being a year in which we're going to be incurring some costs without the commensurate benefits as we invest in the future of the business. And when we look at '18, we think those benefits will be flowing. So there are things like fuel and currencies that can obviously swamp results one direction or another.

But in terms of this sort of call franchise, this is a year in which we're incurring costs without benefits. Next year, we should see those benefits starting to flow.

Hunter Keay: Okay. Yes. That makes sense.

And then one thing that the other mainland airlines have going for them on the RASM side is they're digging out such a deep hole, that they're really only kind of getting back what they once lost. But you guys are actually now approaching kind of the high RASM watermark that you hit in 2014 at about $0.135. So again, just knowing what you can know for now, but when you factor in improvements to the product and Extra Comfort and some of the gauge stuff that you've talked about, how much more inherent pricing power do you think this company has over the next 2 to 3 years, above where you've been in the past based on these changes that you've seen and that you're implementing right now in this transition year?

Mark Dunkerley: I'm going to turn that question over to Peter to answer, but I'll start just by saying that I think one of the foundational things that is in our result is some terrific execution, the commercial team and also some of the products that we had planned and have now brought in, things like the lie-flat seats on the international and increasing number of Extra Comfort seats on the A330s that have gone through modification. But in general, I think it's been largely around great execution and to that point, I'll turn it over to Peter.

Peter Ingram: Yes.

Thanks, Mark and hey, Hunter. What I would say is we're encouraged as we now go into a fifth consecutive quarter of RASM improvement. We're comparing 2 periods where we executed very well last year as well. As we -- we're obviously not going to give guidance beyond the current period. But as we look out longer term, one of the things we would point to is the Premium Cabin performance and I would include 2 things in that.

One is the first-class cabin or business-class, depending on which market where we use a different name, where we have done a very good job of increasing our paid load factors and driving revenue there even before the product change with the lie-flats coming on. But we're really just starting to scratch the surface of the lie-flats as we roll that out to a handful of markets. We've got more extra Comfort Seats rolling out as we talked about over Investor Day, basically increasing the seat count on the A330s with the modifications and having a similar proportion on the A321s as we go forward. So that's a driver we continue to see. And although we're lapping what, as Mark characterized, was very good execution and revenue management and other commercial areas, I think we see continued opportunities to build on the momentum we have.

And so we're encouraged that there is more that we can do even as the comparisons do get tougher.

Operator: Our next question comes from Helane Becker of Cowen and Company.

Helane Becker: So I just have some like, I don't know, easy questions. There are a lot of wide-body aircraft available that seemed -- or at least according to other airlines, there's a lot of cheap wide-body aircraft available. So why wouldn't you think about maybe getting some of those and growing faster than you're currently growing?

Mark Dunkerley: Well, I think a couple of things.

First of all, whenever you talk about aircraft, I think it's important that we don't think of it in terms of fixing short term issues because you're really buying onto long term obligation. And if you do look at a wide-body aircraft, for example, just reconfiguration costs alone will typically be in the $10 million to $15 million an aircraft just to bring it into approximately the configuration that matches the rest of your fleet. And that's a number that has to be amortized over not just 1 or 2 years, but realistically, 6, 7 years or so on. I think we would be right now wanting to grow faster than the delays in the A321neos have imposed upon us and that is frustrating. That said, we do think the long term that is the right aircraft type which will not only increase our presence on the U.S.

West Coast but it actually frees up existing wide-bodies for longer-haul flying. So I think we will, within a year, be starting to see some wide -- some net new wide-bodies in our fleet, if you like, for the longer-haul stuff as the 321neos replace some of the wide-bodies on the shorter sector to the U.S. mainland. Separately, I think the -- it is an interesting time in the wide-body dynamics. We're at a point in which new generation aircraft are coming in increasingly replacing older generation airplanes and that does give us an opportunity to think about the next decade.

Helane Becker: Okay. And then the other question I had -- that's really helpful. And then just one point of clarification, actually. When you talk about long haul, do you mean like the places in midcontinent, like a Dallas as an example? Or do you mean places in the opposite direction from you, so going west to like, I don't know, randomly like Tahiti or whatever, Hong Kong, something like that.

Mark Dunkerley: Yes.

It's a good question. I think we sort of have a mid-haul which we consider to be the U.S. West Coast which is 5 to 6 hours from Hawaii. Anything over about 8 hours, we consider to be long haul. That would include midcontinent in East in North America and anywhere in the Pacific gets you over 8 hours.

Helane Becker: Great. Got you. And then the other question I have is on the Neighbor Islands, one of the questions that we tend to get is about the growth. And I think you mentioned it or Peter mentioned it in his remarks or your remarks about kind of what you're seeing there. But I guess investors are concerned about your ability -- I don't know why they would be.

But I guess we get why do we think you can defend your growth in the market. And obviously, your tenure in the market and your product is just 2 answers. But, I mean, do you get that same question? What do you hear from people?

Mark Dunkerley: Yes. I think we have competition everywhere we fly, including in the Neighbor Islands. And being an airline at the scale that we're, we just don't have sort of barriers to entry behind which we can actually hide.

Instead, our success and our track record comes from meeting the competition and providing a product that pound-for-pound is better value than those of our competitors. And I think we have the same confidence in our ability to compete and to hold onto our market position in the Neighbor Island market as we would do in any of our longer-haul markets that we operate.

Operator: Our next question comes from Joseph DeNardi of Stifel.

Joseph DeNardi: Peter, just wondering if you could talk a little bit about your first-class, I guess, call it the paid bid upgrade program. I think you've had that in the market for a little while now.

Can you just talk about what you've learned from that and how you're applying some of that to revenue management? And then what is the first-class paid load factor at this point?

Peter Ingram: Yes. So the product you're referring to, Joe, is something we call Bid Up and it is available on our North America to Hawaii flights. It allows people to bid for -- people who have tickets in the main cabin to bid for available first-class upgrades in the days leading to departure. We've been really pleased with the performance of that. It is not a huge proportion of the overall cabin.

It actually ends up being, on average, a little over one seat per flight that gets occupied as a result of that and there's a little bit of variation from market to market. Overall, our paid load factor is very similar and in some cases, even higher than our main cabin load factors. So paid Premium Cabin load factor. North America, I believe in the first quarter, we were above 90% paid load factor. So it is a bit of a different model for us.

Most of those sales are advanced sales of the first-class fares. We have the Bid Up. We have upgrades at the airport and then we will also have some Frequent Flyer that are redemptions for miles. So it is primarily, the people seating in those seats have paid to sit in those seats.

Joseph DeNardi: And then, Shannon, I'm wondering if you could talk about -- I think for the whole industry, really, there's an accounting standard that changes next year that will require you to use the fair value method to -- in terms of estimating the cost of miles that you issue and sell.

Can you just talk about what impact you expect that to have on Hawaiian? It seems like there's quite a bit of variability airline to airline.

Shannon Okinaka: Yes, Joe. I think you're right. There is quite a bit of variability. One being caused by, I think, right now different airlines are on different methods to begin with.

So there will be a different level of impact. And you're absolutely right that, for us, there will be a pretty significant impact and we're going through that analysis right now. The biggest driver of the change will be the change in our accounting for Frequent Flyer mileage sales. And there is -- there will be a fairly significant restatement and according with that accounting change. We don't have everything quantified yet.

We're still going through that process this year. In addition to that onetime change at the -- from the beginning of the reporting period, there will also be a change that I'll have to discuss and explain in just how we account for those miles. So right now, we're on the incremental cost method which measures our liability on the cost to fly that additional passenger using a Frequent Flyer mile. And you're right, we'll be moving to the fair value, what's the fair value of that mile more from a revenue perspective. But we don't have it quantified just yet and I believe -- I'm guessing towards the third quarter, maybe at Investor Day later this year, I'll probably -- I'll have a lot more to share at that point on the impact to Hawaiian Airlines quantified.

Operator: [Operator Instructions]. Our next question comes from Andrew Didora of Bank of America.

Andrew Didora: Shannon, a question on the full year CASM guide remaining unchanged given the pilot deal of -- pretty impressive. Can you give us a little bit more detail on where the cost came out of? Is this sustainable? Or is it more of a maintenance timing issue that might just get pushed back into 2018?

Shannon Okinaka: Part of it is maintenance. I wouldn't necessarily call it timing.

What we've been doing -- spending quite a bit of effort on is looking at our -- some of our maintenance plans and schedules. And adjusting our maintenance -- planning some of the work that we do in certain checks to better optimize for how we're flying the aircraft, this is actually quite a long process working with the OEMs as well as the FAA to change really our maintenance program. And what that's allowed us to do is push back some of the work that we perform in certain checks. So while it looked like timing, it's not really timing because we're actually getting more green time from them maintenance group that we're doing. And that actually is what allowed us to free up some of our wide-bodies to provide the additional ASMs to revenue -- for revenue flying later this year.

So specific to 2017, some of it is the maintenance work moving out of '17 with the additional green time. And some of it is just ASM, the increase in the ASM. But also, we're also pretty diligently looking at different ways to remove costs. So again, we're looking at some of our big contracts, renegotiating some of the big contracts, getting savings out of that. We're also investing quite a bit into productivity improvements which we're factoring in.

And to be quite honest, at the beginning of the year, where we had the chance to put in some of those types of savings until we have a better feel for where they'll come out in the year and that's what you're seeing. So it's a good combination of structural cost improvement, we think, like removing the postretirement medical, but just general management improvements looking at contracts and productivity.

Andrew Didora: And then, Peter, just on the revenue guide. Which -- in 2Q which regions do you expect to be strongest? Is it still North America given the Easter shift? And when you look at your network, excluding the Easter shift, would all your regions be sequentially improving 1Q to 2Q?

Peter Ingram: So both North America and international are improving year-over-year and their -- they both have pretty healthy year-over-year improvements. On a sequential basis, I think the biggest improvement is international.

But obviously, from -- you go back to the numbers I said for North America for first quarter, even if it's not up as much sequentially, it's still a very strong year-over-year performance, so performing very well.

Mark Dunkerley: Yes. And to Andrew's question, I think the Easter shift does not explain our improvement in -- it helps, but it's not the dominant factor.

Peter Ingram: Yes, I think that's right. April is better.

One thing I would comment about the Easter shift that was interesting is we really like the way this year lays out better than last year because March wasn't as negatively impacted as we perhaps feared from the Easter shift because we still have the benefit of some spring break flying. And locally, here in Hawaii, we have a holiday called Kuhio Day that gives us a long weekend. Separating Easter away from that helps April and didn't really hurt March as much as we thought. So the Easter shift is helpful, but it's not the whole story of the quarter. We really see strong bookings across the quarter.

Operator: Our next question comes from Dan McKenzie of Buckingham Research.

Daniel McKenzie: Peter, if I could just follow up. I think the Easter shift was around 100 basis points or less than 100 basis points potentially to the second quarter PRASM, just to clarify that point.

Peter Ingram: Yes. I don't know that we gave a specific number on that.

But I would say that, yes, it is a fairly minimal number like that overall.

Daniel McKenzie: I think that's what I recall from the last earnings call. That's why I threw that out there. A couple of questions here. With respect to the fleet, just given the changes, is the plan still to take delivery of 8 A321s in 2018? Or does that move around somewhat now?

Mark Dunkerley: So as far as we know, that remains the same.

We're focused on getting the first 3 through the door and we've not been notified of any changes to the delivery schedule for 2018.

Daniel McKenzie: Perfect. Okay. And then, I guess, Mark or Shannon. It seems that the leverage is right where you guys want it.

And just given my free cash flow forecast for this year, it seems like you're willing to use financing as a source of cash to return to shareholders. And first of all, is that -- am I thinking about that correctly? And then secondly, is there sort of a philosophical change here on how you plan to return capital? In other words, are you thinking about -- does it reflect a change in how you're thinking about the success of the business or in how you're thinking about potentially the financing that you're getting just in light of the business that achieve financing? Just wondering if you can shed some more thoughts behind the $100 million increase to the buyback.

Mark Dunkerley: Yes. I'm not sure we've necessarily -- I agree with your premise. I think we're -- we have cash targets and we've got some leverage targets.

We've announced that we're going to be paying down some pension obligations and some of these other bits and pieces. We've got aircraft coming in. As we look at things like aircraft financing, I think the decisions that we would make would be more around what we think the market looks like and how we see having a sort of a balance to our balance sheet as opposed to feeling that we're sort of borrowing money in order to return to shareholders. But let me turn it over to Shannon to answer it more precisely.

Shannon Okinaka: And Dan, let me just clarify one piece in the buyback store.

Authorization for our current program was going to expire in late April of this year, so what we were announcing was the board approval to extend the current program 2 more years to make 2019. And with that, we're bumping the authorizations back up to the $100 million we had spent, about $60 million or so, on the original program. So extending it 2 years and also increasing it back up to $100 million. And yes, I completely agree with Mark. And I wanted to say that I don't -- we haven't had any wholesale change on how we view the buyback program or returns to shareholders.

I think we're still in the space where we have a lot of usage for cash. I talked a lot about the pilot -- the cash that'll outflow that will result from the pilot contract. So I think we're still in a space where we're looking at the best usage of cash. Return to shareholders being one component of that, but not any more important or not placing any more emphasis than we had in the past at this point.

Operator: Our next question comes from Kevin Crissey of Citigroup.

Kevin Crissey: Maybe it's a tack on from Helane's question earlier. When we think about your capacity growth over time, how do you determine that? Your business is a bit unique. Your markets are a bit unique. So when you're sitting down and planning capacity in fleet for the next few years, how do you think about -- what determines that capacity growth rate aside from the hiccups about getting aircraft and the timing of that? But in general, how do you think about your capacity growth rate?

Mark Dunkerley: So, I mean, we have a sort of nominal low single digit -- low to mid single-digit target that we have periodically talked about which doesn't exactly provide a great deal of help and guidance because it is a sort of long term view. I think to answer it slightly more precisely, we look at the markets in which we think we're going to participate in and I think where we're a little bit different from other airlines lies in 2 important respects.

First of all, we're a leisure carrier and travel for leisure purposes has grown faster than travel for business purposes and is set to continue to grow faster than for business purposes. So as a leisure-focus carrier, the overall sort of global demand for travel is a higher -- is taking place at a much higher rate than it is for a carrier that, for example, focuses traditionally on business travel. Secondly, within that, the areas where the fastest rates of growth for leisure travel I've seen is in Asia and we lie on the virtual doorstep of Asia. And so that gives us, I think, another approachable market whose underlying growth rate is in excess of what we would see traditionally, for example, traveling around the low 48. So I think that is how we look at the market and our opportunity to grow.

And once you sort of put that in a blender, it does come out as a kind of a mid-ish single-digit number over the longer term.

Kevin Crissey: And then if I could follow up with as you look at your point of sale, particularly in international markets, well, I guess exclusively in international markets, where -- what's the percentage of kind of U.S. dollar denominated or sold through a U.S. agency or U.S. point of sale versus foreign point of sale?

Mark Dunkerley: For most of our international flights, we're very heavily foreign point of sale.

And I mean, we're in the sort of 80%, 90% kind of range.

Kevin Crissey: And is that -- how much of that have you been able to migrate to the direct booking versus through an agency? I imagine it's still pretty heavy agency.

Mark Dunkerley: I'd turn that over to Peter.

Peter Ingram: Yes. Kevin, it varies by country and we're seeing the direct business grow.

In the Australia, New Zealand, it is now comfortably over 20%. The business comes to us direct through our .au site and that number has been growing over the last few years. It is still in the single digits in Japan and some of the other Asian markets. The Internet business and direct business is a relatively small proportion. But I think over the long term, we would expect all of those to grow.

And one of the investments we made in modernizing our websites a couple of years ago was focused around really truly internationalizing our site and having a well-designed user experience so that we could capitalize on those trends going forward.

Operator: Our next question comes from Rajeev Lalwani of Morgan Stanley.

Rajeev Lalwani: Two questions for you. I guess both for Peter. Peter, can you talk about what you're seeing on competitive capacity? You talked a little bit about 2Q, but maybe beyond into 3Q and specifically on -- in North America and from the international side.

Peter Ingram: Yes, sure. I don't have the precise details in front of me. I would say in North America, as we look out towards the end of the year, there has been a little bit of capacity increases have been announced not so much frankly from the markets we serve, but we have seen some increases from midcontinent and some of the other markets that are -- we look at as the North America seats but not necessarily competing directly with us. In the international, it is a little bit of mixed bag and you really have to look route by route and country by country. We're seeing a little bit more capacity announced in Korea.

China is generally pretty stable. There had been some capacity that is already come in to Japan, but a lot of that was already in there including our own capacity. And in Australia, it really is a case where I referred in my comments to the capacity, the competitive capacity, that came out of Brisbane. That was late last year and so we'll see that which are reflected on year-on-year numbers throughout the year. But haven't seen anything more recent than that, that affects the going-forward period.

Rajeev Lalwani: Okay. And given that -- I think, Peter, you're saying that they're not coming from regions that you overlap with. Does that mean we should assume that it's not real competitive capacity, i.e., it won't really impact your numbers too much?

Peter Ingram: Yes, it is certainly less direct. I mean, some of that capacity does affect traffic that would've flown over Los Angeles or San Francisco, so it may have second-order effects. But a seat added from Dallas or Chicago doesn't affect us as directly as a seat added from Los Angeles or San Francisco.

Rajeev Lalwani: Okay. And then one more for you, Peter, if I can. As it relates to the 2Q guide that you provided, can you give a little more color as far as the components? I think you said Easter was 100 bps or so. What about FX? Surcharge? Anything else that I'm not thinking of that creates some of that strength that you're pointing to?

Peter Ingram: Yes. The FX and the fuel surcharge, we didn't point that out in our remarks in part because we've really gotten to a point where it is a lot flatter year-over-year, so there really isn't much of a year-over-year impact from that.

So I think what you're really seeing is continued strength in the performance of our markets and strong execution in the marketplace by our team.

Operator: Our next question comes from Michael Derchin of Imperial Capital.

Michael Derchin: I just wanted to -- obviously, a little bit more on the A321neo delay and you coming up with additional capacity. It sounds like to serve the peak holiday period in -- around Christmas. How do you go about doing that? Or have you assumed you might get an A321 that you could use?

Mark Dunkerley: Yes.

Now our planning -- let me take that -- your questions in reverse order. Our current plan is, sadly, we don't think we're going to be able to get an A321neo in the air this side of New Year's. Once we take delivery of the aircraft currently slated for October, there's an induction period in which we have to get all kinds of important things done like our ETOPS certification for the aircraft and so on. So that stuff isn't in the current plan. What we have been able to backfill into that last part of the year is by -- there's a couple of things.

One is there are a couple of 767s that we're coming up on checks that we had provisionally decided perhaps not to extend. We've now decided to extend them. It is to allow us to keep capacity in the market during that period of time. And then as Shannon mentioned earlier, as we've worked through our maintenance planning, some of the intervals between some components of some of the checks have been able to stretch out, allowing us not to have some aircraft in scheduled heavy maintenance during this period and therefore, giving us the opportunity to use them over this critical period of time which is, you rightly point out, it is part of our sort of seasonal peak and important for us to have.

Operator: Our final question comes from David Segal of Honolulu Star-Advertiser.

David Segal: I was just going to ask the A321 question that was just asked, so I'll kind of switch gears here. For Shannon, I just wanted to check the cost that was attributable to the pilots' contract for the quarter. Was that -- so is that $19 million? Or is there some other cost involved too in the quarter?

Shannon Okinaka: Dave, yes, no, the $19 million, that's part of it. And that's what we consider a special charge. There was also about $7.5 million in the wages and benefits line attributable to the new pilot contract for the first quarter.

David Segal: Okay. And the $19 million, we refer to what's an -- the -- that was also attributable to the pilots' contract as well?

Shannon Okinaka: Correct. And those are -- so the $7.5 million is more a recurring cost. The $19 million are more onetime charges relating to things that happen at ratification and so we don't expect those to recur. Those are more of a onetime basis and that's why we call it a special charge.

David Segal: Okay. And then, Mark, this question doesn't have anything to do with the financial aspect. But obviously, what happened at United Airlines recently have a lot -- created a lot of buzz. And just was wondering what your thoughts were on what happened with the passenger and what Hawaiian's policy is regarding compensation and making room for employees who need to fly.

Mark Dunkerley: Yes.

I mean, I think this is now, I think, a pretty well-worn story. The whole circumstance, I think, was unfortunate. I don't think any carrier would sit there and consider themselves completely immune from difficulties that can happen on the ground. At the same time, I think what it does is it has all of us looking at our policies and procedures. What I would tell you is that in this particular area which has to do with involuntary denied boarding, Hawaiian Airlines has a fantastic track record.

We're essentially the airline at the best end of the industry in terms of avoiding sort of situations. That shouldn't be -- I mean, that's great to have that track record. Of course, we continue, as we do always, to look at our policies and procedures and to make sure that there are things that we can learn when these things happen.

Operator: Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back over to Mr.

Mark Dunkerley, President and CEO, for closing remarks.

Mark Dunkerley: Thank you, operator and thank you all for joining us today. As you can see, we're off to a terrific start in 2017 and we've got much to look forward to in the months ahead. So thank you very much for joining us today.

Operator: This concludes today's conference.

You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.