Executives: Daniel Wong - IR Peter R. Ingram - President and CEO Brent A. Overbeek - SVP, Revenue Management and Network Planning Shannon L. Okinaka - EVP and

CFO
Analysts: Hunter Keay - Wolfe Research Joseph DiNardi - Stifel Helane Becker - Cowen and Company Michael Linenberg - Deutsche Bank Kevin Crissey - Citigroup Stephen O'Hara - Sidoti & Company Susan Donofrio - Macquarie Capital Dan McKenzie - Buckingham Research Group Adrian Schofield - Aviation

Week
Operator: Greetings and welcome to the Hawaiian Holdings Second Quarter Fiscal Year 2018 Earnings Call. At this time, all participants are in a listen-only mode.

A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Daniel Wong.

Daniel Wong: Thank you, Dana. Hello everyone and welcome to Hawaiian Holdings Second Quarter 2018 Earnings Call.

Here with me in Honolulu are Peter Ingram, President and Chief Executive Officer; Shannon Okinaka, Chief Financial Officer; and Brent Overbeek, Senior Vice President of Revenue Management and Network Planning. Peter will open the call with an overview of the business. Next, Brent will share an update on our revenue performance and outlook. Shannon will then discuss our cost performance and outlook. And we'll then open the call up for questions, and Peter will end with some closing remarks.

By now, everyone should have access to the press release that went out at about 4.00 Eastern Time today. If you've not received the release, it is available on the Investor Relations page of our Web-site, hawaiianairlines.com. During 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 or on the Investor Relations page of our Web-site. As a reminder, 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 upon them. For a more detailed discussion on 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 on Form 10-K as well as reports filed on forms 10-Q and 8-K. And with that, I'll now turn the call over to Peter. Peter R. Ingram: Mahalo, Daniel.

Aloha everyone and thank you for joining us today. Today we reported second quarter adjusted net income of $73 million or $1.44 per share, with a pre-tax margin of 13.7%. I'd like to thank my colleagues for another quarter of solid financial results and for demonstrating day in and day out why Hawaiian remains the carrier of choice for Hawaii. Seems like we've spent a lot of time this year talking about challenges facing our business. Higher industry capacity, aircraft delivery delays, increasing fuel prices, flooding in Kauai, and volcanic activity on the Big Island of Hawaii, all come to mind as subjects that have dominated the commentary around our Company at one point or another early this year.

And while these are all realities that we are facing or have faced, we shouldn't lose sight of the big picture, Hawaiian Airlines continues to perform very well both operationally and financially. Our financial performance is strong by historical standards, underscoring as we are likely to end the year among the U.S. industry leaders on a pre-tax margin basis. Our on-time performance led the industry throughout the second quarter, as it has for almost a decade and a half now, and we continue to deliver Hawaiian signature hospitality to our guests day in and day out. I could not be more proud of our team of over 7,000 aviation professionals who continue to deliver this performance.

I mentioned the volcanic activity on Hawaii Island a moment ago, and indeed our second quarter results would have been even better had we not seen the slowdown in bookings during the quarter on our Hilo and Kona Neighbor Island routes in particular. To be clear, there has been a financial impact from the volcanic activity but it is isolated to a narrow portion of our network, and with the exception of an extended closure of Volcanoes National Park, the tourism infrastructure of the state is up, running, and open for business. We have seen some demand recovery in recent periods but we would not say that things are back to where they were before the volcano became more active. So, our third quarter estimates reflect some continuing impact. Our thoughts go out to the residents of the affected area whose lives have been more profoundly affected than our business.

As was the case earlier this year with the flooding on Kauai, our employees have stepped up to support those in our community who are facing real hardship. This is the spirit of Hawaiian Airlines and it is what makes me most proud to be part of this 'ohana. For our part, we're focused squarely on execution and that which we can control. To start, we're now inducting A321s into our fleet at a rapid pace. Since our last earnings call, we have taken six deliveries.

This brings our fleet to a total to eight. Over the remainder of the year we expect to receive another three aircraft, which will bring the fleet to 11 by the end of 2018. As we get to the back half of the year, you'll see more A321-only routes emerge, as we build critical mass with this aircraft. Over time, this allows us to optimize our A330 wide-body deployments on long-haul and large market routes while also enabling the retirement of our remaining 767s. By the end of the year, we expect to have A321s serving 11 routes between the West Coast and Hawaii.

Early results on our A321-only routes are right on target, as is the aircraft's operational performance. In concert with our other fuel conservation initiatives, the A321s will contribute meaningfully to improve fuel efficiency. We are anticipating improvement in ASMs per gallon in the second half of this year and an even more notable improvement in 2019. Transitioning into the A321s and phasing out of our 767s is one of the defining near-term initiatives for Hawaiian. The reward at the end of this transition is a competitive advantage of a fleet ideally suited for each of our network missions, and very soon we'll be at a point where the number of days before our final 767 flight is fewer than the number of days since our first A321neo introduction.

Another important strategic priority for Hawaiian this year is cultivating our new partnership with Japan Airlines. Just last month, our two airlines filed applications with both the U.S. and Japan authorities for antitrust immunity for our proposed joint venture. We hope to win approvals from the relevant governmental authorities in both countries later this year, and assuming we do, we expect to be in a position to formally launch the joint venture in the second quarter of 2019. The customer benefits of this partnership are real, as are the opportunities it creates for Hawaiian and JAL in the years ahead.

In the meantime, we are very encouraged by our first full quarter of codeshare and JALPAK bookings between the two airlines. We look forward to building on this momentum as the year progresses. Other pieces of our 2018 plan are also falling into place. The remodeling of our A330 cabins is now complete with the 24th modification finished during the second quarter. This caps a multiyear effort to introduce a lie-flat seat premium cabin product and increase the number of our tremendously well-received Extra Comfort seats on each aircraft.

Coupled with the introduction of A321neos and retirement of 767s that don't have Extra Comfort seats, the successful monetization of our cabins is a great story that is positioned to get even better. Complementing these product improvements, earlier in the year we implemented technology that allows us to sell Extra Comfort seats through third parties at the time of booking. This is particularly important in international markets where a larger portion of our bookings are made through these channels. On the cost front, we are reaching an important inflection point. Over the last few years, our unit costs have grown as we've invested in our growth and executed some transitions in our business.

We expect to turn the corner on cost performance this year with non-fuel unit cost growth declining sequentially in each quarter of 2018. As Shannon will remind you later on the call, this sets us up for flat to down CASM-ex in the years ahead. Solid cost control is important irrespective of the operating environment, but it's even more important when fuel prices are moving up, and this year we expect total fuel expense to be up about 35% year-over-year. Fleet renewal, our fuel efficiency initiatives, fuel surcharges on our international routes, and our fuel hedging program, all serve to mitigate pressures from high fuel prices, but the more lasting countermeasure is disciplined cost control. We look forward to reporting better results on this facet of our business going forward.

Now as we pause to take stock of where we are at the year's midpoint, we have a tremendous amount to be encouraged about. With various puts and takes throughout the first half of the year, some expected, some not, our 2018 financial results are shaping up to be largely in line with what we anticipated going into the year, if not a little better. I want to thank the entire Hawaiian 'ohana for showing their mettle yet again, in a year that has so far had roads with more curves than straightaways. We're running a strong airline, producing financial results at the better end of the industry, and growing our business profitably. Our performance reinforces the confidence we have earned over time and serves as continuing evidence that no other airline is better suited to win in Hawaii than Hawaiian.

With that, I'm happy to turn the call over to Brent. Brent A. Overbeek: Thanks, Peter, and aloha everyone. Total operating revenue in the second quarter grew nearly 7% to $715 million, a record for the June quarter. Top line growth in all geographies, a robust quarter for our cargo business, and a nearly 20% growth in revenue per PAX from our value-added products, contributed to system-RASM growth of 0.7 points year-over-year.

These are solid results considering that the second quarter of 2017 saw the highest year-over-year unit revenue growth in our recent run of success. Fuel surcharges and foreign exchange collectively accounted for about 1.5 point of our year-over-year system-RASM performance, which helped offset headwinds of about 0.75 point from the Easter holiday shift and a little less than 1 point from demand weakness attributed to volcanic activity on the Big Island. Our cargo business had another remarkable quarter, growing more than 17% year-over-year on strong volume and yield growth. Year-over-year freight transport remained strong, a trend that we expect will continue into the back half of the year. We're also excited to begin our dedicated all-cargo service within our Neighbor Island network next week, as we expand into this line of business.

Value-added revenue per passenger was up 20% year-over-year in the quarter, with strength across all product lines. Extra Comfort revenue per seat continued to grow despite adding 25% more capacity year-over-year. The ongoing deployment of the 321neo fleet will be a driver as we increase Extra Comfort capacity throughout the remainder of the year. HawaiianMiles also provided a significant boost to our value-added revenue stream this quarter. This was the first full quarter of our new agreement with Barclays and we are encouraged with the results.

As part of the new agreement, we were excited to launch our enhanced HawaiianMiles World Elite Mastercard earlier this month, providing additional earning opportunities for our cardholders. We're optimistic that the enriched customer proposition will continue to propel new card applications, deeper engagement, and increased spend from our existing cardmember base. Now turning to each of our geographies; domestic PRASM, which includes our North America and Neighbor Island services, was down 5% year-over-year this quarter. North America markets were the most impacted by the Easter shift and second quarter PRASM was down a bit more than the domestic average year-over-year. Double-digit industry capacity growth between North America and Hawai'i was met with strong demand, but did put some moderate pressure on yields and load factors throughout the quarter.

Industry capacity growth between North America and Hawai'i begins to taper off a bit in the back half of the year but remains elevated compared to the same period in 2017. As it currently stands, industry capacity is expected to grow about 8% in the third quarter and about 8.5% in the fourth quarter. Neighbor Island PRASM was up in the mid-single-digit range this quarter. Although below what we originally expected, there is an uptick in the intensity of volcanic activity on the Big Island led to some booking softness to Hilo and Kona. Booking trajectories have improved but they are still below where we were seeing earlier in the year.

In response, we trimmed a few flights between Honolulu and the Big Island during periods where we had sufficient frequency to maintain a robust schedule, meet market demand, and serve those communities. Unlike our North American peers who often contend with winter storms that disrupt service for a predictable period of time, there is no way to predict when the volcanic activity on the Big Island will subside, let alone end. This particular volcano has been active for the last 35 years, with the last eruption that caused significant damage nearly 30 years ago. We'll continue to monitor the eruption's progress and respond appropriately. Helping to offset the domestic PRASM performance was another strong quarter in our international markets.

International PRASM improved 10% year-over-year in the quarter on continued demand strength, higher fuel surcharges, and strong premium cabin performance. Japan and Korea markets performed notably well. As Peter mentioned, our partnership with JAL is off to a good start. Despite only starting to sell the Hawaiian-JAL codeshare in late March, we exchanged roughly 10x more codeshare revenue for travel within the second quarter of 2018 with our new partner than we did with our previous partner during the same period in 2017. Overall, robust second quarter results cap a solid first half of the year.

Looking ahead, the third quarter marks the high point of our capacity growth in 2018, with capacity expected to grow between 7.5% to 9.5% year-over-year. We'll be in the heart of our fleet transition and by mid-August we'll have eight A321neos in the schedule. For the full year, we have narrowed our capacity guidance to be up 5.5% to 7.5% year-over-year, shaving 50 basis points off each end of our prior guidance. Year-over-year RASM comparisons are difficult, remain difficult in the third quarter as we compare against the highest ever absolute system-RASM in the third quarter of 2017. Elevated industry capacity on several of our routes and continued traffic impact on the volcano on the Big Island have a moderating impact on our RASM expectations.

Despite these headwinds, we expect our RASM to be between down 1.5% to up 1.5% in the third quarter. On the whole, we're continuing to compete very well in the face of higher industry capacity and we remain on track for another year of solid top line growth, despite setbacks from natural disasters and aircraft delivery delays. We've built a durable airline that can overcome these challenges and more. And with that, I'll turn it over to Shannon. Shannon L.

Okinaka: Thanks, Brent. As Peter said earlier, we continue to produce solid financial results as we grow and invest in the business. Between share repurchases and dividends, we've returned more than $35 million to shareholders this year. A quick recap on share repurchases; we have a $100 million program in place through the end of 2019, under which we have bought about $23 million to date. In the second quarter, we were slower to repurchase shares as we reviewed our expected uses of capital for the remainder of 2018 and beyond.

We remain committed to the program going forward. As we expect will be the case for our peers, rising fuel prices pressured earnings this quarter. Operating expenses were up nearly 17%, most of which was due to a year-over-year increase in fuel expense of about 50%. We expect a similar year-over-year increase in total fuel expense in the third quarter. Helping to offset this were realized gains from our fuel hedging program of nearly $11 million, net of premiums.

Based on the latest fuel forward curve, our fuel hedges are expected to settle at a gain of more than $28 million, net of premiums, for the full year. We remain disciplined in our approach to fuel hedging, with a focus on decreasing operating and economic risk. On the financing front, we entered into two Japanese yen denominated loans this quarter, collateralized by the two A321s we received in 2017. The A321's popularity makes it a highly financeable aircraft and the Japanese debt market was a compelling option for us given very attractive interest rates and because yen-denominated loan repayments create a natural hedge to our Japanese yen revenue exposure. Going forward, these loans have the potential to cause the movement in our non-operating income each quarter as we account for the impact of exchange rate changes between the U.S.

dollar and Japanese yen on our balance sheet. We will exclude this impact from our adjusted results to provide clearer comparisons. Shifting to our cost performance and outlook, we're seeing sequential improvement in non-fuel unit costs, as expected. We're beginning to put some of our A321s' delivery delay costs behind us and are starting to see the benefit from improved productivity as we put more A321s into service. In the second quarter, CASM ex-fuel was up 4%, which was at the bottom of our original guidance range and 2 points below the midpoint of our revised guidance range.

The one-time maintenance and labor increases that led us to raise the midpoint of our guidance range came in lower than anticipated. In addition, aircraft induction delays and timing shift for certain investments into the back half of 2018 further lowered our second quarter CASM. With the first half of the year now behind us, we are at an encouraging inflection point in our 2018 unit cost story. Looking ahead, we expect third quarter CASM ex-fuel to be up between 0.5% and 3.5% compared to the same period last year. This includes headwinds totaling about 2 percentage points from contractual increases in maintenance rates and costs related to the startup of our Neighbor Island cargo business that Brent mentioned earlier.

Altogether, year-over-year CASM ex-fuel growth should be flat in the back half of the year, resulting in a full year increase between 1% and 3%. Consistent with our prior guidance conventions, these CASM ex-fuel ranges exclude any assumptions related to the amendable contract with our flight attendants union. In May, I highlighted the momentum we are building in controlling and driving down costs. In addition to the structural unit cost benefits we'll receive from transitioning of fleet from 767s to A321s, we are also focusing our attention on labor, fleet maintenance, cost of sales, and overhead. I'm encouraged by our unit cost performance outlook this year and I'm confident these improvements will continue.

One of my key goals is to ensure that good, disciplined cost management is fully entrenched in our DNA. In fact, I'm confident that over the next couple of years we'll deliver flat to down unit cost year-over-year as we continue to grow long-term shareholder value. In closing, our 2018 results are shaping up quite well despite a few curves in the road. We have built a strong, durable airline with a solid financial foundation that has proven its resilience time and time again. I'm proud of this quarter's performance and look forward to the second half of the year.

This concludes our prepared remarks and I'll now turn the call back over to Daniel.

Daniel Wong: Thank you, Peter, Shannon, and Brent. I'd also like to thank 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 if time permits, questions from the media. As a reminder, please limit yourself to one question, and if needed, one follow-up question.

Dana, please open the line for questions.

Operator: [Operator Instructions] Our first question comes from the line of Hunter Keay from Wolfe Research. Please proceed with your question.

Hunter Keay: So, the CASM-ex, you guys talked about flat to down in I think you said over the next couple of years, and then you said in the years ahead. Given you're going to be exiting at negative CASM out of this year, is there any reason why that should not apply to next year as a whole?
Peter R.

Ingram: Hunter, I think we'll stick by the comments that we've got out there already. It's premature for us to give more specific guidance for 2019. But we're obviously expressing confidence about the cost trajectory of the business over the next couple of years and we do have a good position we'll be exiting this year from. So, we have every reason to believe we are going to deliver on that.

Hunter Keay: Okay.

Thanks Peter. And then I was hoping you might be able to share with us some statistics at a very high level, I know this is competitive so I don't want to drill you down too much, but what percentage of your interisland passengers have credit card or HawaiianMiles account? And if you rather me ask the question sort of a backwards way, what percentage of your loyalty plan members or your credit card holders are residents of Hawaii? Either one of those, any metrics you can share on that would be great. Thanks. Peter R. Ingram: I'll give you a couple of facts that we have said publicly before.

One, we actually have more HawaiianMiles members on the U.S. mainland than we do here in Hawaii. That's obviously not to say we don't have deep penetration of the program here in Hawaii. It's just we've got a population of about 1.4 million people and there's a lot more people on the mainland United States. So, we are excited that we have opportunities for the HawaiianMiles program and for the credit card in both those geographies, and really designed our loyalty program and the credit card benefits around serving both of those vitally important audiences for us.

In terms of the mix of traffic on our Neighbor Island flights, what we see as local itineraries, so people just buying in Neighbor Island segment is something north of 60% of what's on the airplane and the rest comes from – the biggest portion of the rest is connections from our network and then obviously we've got connections from our interline and codeshare partners.

Hunter Keay: Thanks Peter.

Operator: Our next question comes from the line of Joseph DiNardi from Stifel. Please proceed with your question.

Joseph DiNardi: Peter, if you look at Department of Transportation data for you guys, it shows that I think your profitability on the international side is about breakeven.

I know there are some issues with using that, but speak to how accurate it is, if you'd like. But I guess what I'm interested in is, how big of a catalyst is the JAL JV for improving the profitability on that side of your business? And I think what you've said is that you expect all aspects of the network to earn their cost of capital. So, can you just talk about what you view that business' or that side of the network's cost of capital to be?
Peter R. Ingram: So, let me start by saying, we don't as a matter of policy from a competitiveness standpoint talk about the profitability from period to period in a specific geographic region of the business. We have said, as you accurately attributed to us, that over the long term each of the routes and each of the parts of our business needs to be profitable, and sometimes there are different factors affecting each.

One thing I will say about the international is, we for a long time had the practice of talking about the three geographies that we operate in. Of the three, the international is quite clearly the least homogenous in terms of how it performs. And so, we have different factors that affected it. It tends to be longer haul. So, it's more fuel sensitive.

Foreign exchange can be a big tailwind or can be a headwind, depending on certain periods, and that varies from country to country within where we serve. We've done I think a very good job of building the international business over the last decade. Japan in particular is vitally important to that as they are by far the largest source of international visitors to Hawaii. We are pleased with what we have built in Japan and we are really excited about the opportunity to build on that further with the partnership with JAL.

Joseph DiNardi: But Peter, is it fair to say that it's been a few years since you think the international side has been profitable or earned its cost of capital?
Peter R.

Ingram: I didn't say either of those things.

Joseph DiNardi: Okay. How much of the Pacific revenue is tied to fuel surcharges that you would kind of view as formulaic that are kind of controlled by the government? Do you have that?
Brent A. Overbeek: Joe, Japan in particular is quite formulaic, albeit slightly lagged. And so, we'll see that generally move and cover most of the cost of fuel on a slightly lagged basis.

And that would be between 50% and 60%, probably about 50% of our international revenue would be tied into that.

Joseph DiNardi: Okay, thank you.

Operator: Our next question comes from the line of Helane Becker from Cowen and Company. Please proceed with your question.

Helane Becker: Brent, I'm wondering if you can answer this question.

As we think about the volcano and the impact second, third quarter, can you kind of say what the RASM impact was for the third quarter maybe, so that we have a good sense in how it looks for 2019 assuming the activity moderates?
Brent A. Overbeek: I think it's tough to predict kind of the recovery. From what we've seen initially, we saw a more material slowdown on bookings kind of further out from departure as people were trying to understand the situation, particularly people not familiar here with Hawaii, as they were trying to understand the situation, and more discretionary trips were probably impacted in Neighbor Island bookings closer to departure. And so, we have seen kind of both of those improve as we worked our way through the second quarter. Nonetheless, the impact has been a bit more material in the third quarter as a little bit more of that discretionary traffic was booking in May and June for the third quarter.

And in terms of 2019, I think it's premature to speculate as to what that means in terms of, A, what's going to happen with the volcano, and B, how that's going to materialize in the marketplace.

Helane Becker: So, would you say it's sort of like 0.5 basis point of impact for the third quarter?
Brent A. Overbeek: No, I think it would be north of that. But again, it's a bit premature, and seeing how the volcano evolves in the weeks and months ahead.

Helane Becker: Okay.

And then just, do you think people from the Mainland or from Japan who are avoiding the Big Island were going to other islands?
Brent A. Overbeek: We've seen a moderate uptick in traffic for travel to Kauai, particularly post floods, and there we have seen that traffic recover well. As well into Maui we've seen traffic going to there as well. So, I would say, yes, we've seen some recovery into islands away from the Big Island. Peter R.

Ingram: And just to clarify some points around the impact of the volcano, one of the things that was challenging for the tourism community here in general or really in the period when the volcano was getting a lot of media coverage was not the world's best understanding of the geography of the Hawaiian Islands. The affected area from this latest round of volcanic activity is about 10 square miles on the Island of Hawaii, which is about north of 4,000 square miles in total. The Hilo airport is 20-odd miles away from it. Kona is probably closer to 100 miles away from it. And most of the area that is sadly been affected is a long ways away from where tourists generally go.

So, I think there's two things that we can't predict. One is what the volcano will do next. The other one is, how that is covered in the media. And it is really the combination of those two that caused some of the bookings weakness in the second quarter. As Brent said, we've seen that start to abate but not completely go back to where it was before.

Helane Becker: Okay, great. Thank you so much for that, Peter. I appreciate it.

Operator: Our next question comes from the line of Michael Linenberg from Deutsche Bank. Please proceed with your question.

Michael Linenberg: Two questions here. Brent, you gave us the FX and fuel surcharge impact on RASM, I think the 1.5 points. I think that was on a system basis. Would you be willing to give us that on the impact to international only?
Brent A. Overbeek: I don't have that in front of me, Michael, but I would put it at – kind of working backwards on math, I would put it, given that international represents about a quarter of our revenue, I think that would be a safe assumption.

Michael Linenberg: Okay, good. And then just my second question, and this is either to you and/or Peter, if we go back a few years when JAL and American announced their JV, in their press release they did indicate the size on a revenue base. They indicated it was about 1.5 billion back then. And obviously it's got bigger since then. I think in your filings, I don't think you've put a revenue number around that.

Would you be willing to just give us kind of a rough sense of kind of in year one what the size of that JV is, so we can think about the potential upside in modeling, et cetera?
Peter R. Ingram: Mike, I don't have – I don't know exactly what we said or didn't say in our filing right now. So I don't want to put a number out there that's not public. Let us take that one off-line and maybe we can come back to you and see what we can communicate that's consistent with what we said publicly up to this point.

Michael Linenberg: Okay, great.

Thank you.

Operator: Our next question comes from the line of Kevin Crissey from Citigroup. Please proceed with your question.

Kevin Crissey: Wanted to understand your outlook for capacity growth in the next couple of years. You talk about flat to down CASM-ex.

Are we talking about a similar growth rate of capacity in future years as in this year?
Brent A. Overbeek: No, Kevin, we haven't guided capacity out kind of beyond 2018. I think we feel really good and comfortable with our ability and the flexibility that we've got to be able to manage that capacity growth, either up or down kind of dependent on how situations warrant, but I think we've got – we are comfortable with the flexibility that we've got today. And I think as we look at 2019, that will likely come down a bit from where we are at right now.

Kevin Crissey: Okay, thank you.

Peter R. Ingram: And just to add to that a little bit, this year we've got the 321s coming in. There we've seen some delays but we've able to maintain most of our capacity guidance for this year despite the delays by substituting some other airplanes. As we go into the back part of this year and into next year, we start to see more of the 767 requirements. And so, that just from a fleet perspective caps down our capacity a little bit, but we are still finalizing the plans for next year.

So, we don't have a specific guidance number but I expect ASM growth in 2019 to be a little less than what we had in 2018 on the basis of our fleet profile.

Kevin Crissey: Terrific. Thanks. And can you talk about the way customers purchase tickets in Japan and whether that has changed over time? I think I remember block purchases and certainly more travel agencies. I'm not sure if that's still the way things are being done.

Maybe you could talk about how that distribution pattern differs from your other parts of the network?
Brent A. Overbeek: Sure, Kevin. It is a bit different than other parts of our network, albeit it has evolved over time. And so, there's a bit more packaging business that gets done with blocks with some of our bigger partners, albeit that has generally declined over time. And so, if you compared it to where the market was three or four years ago to now, that evolution looks more and more like the rest of our international distribution, albeit it's a bit unique still in terms of blocks being a higher percentage of our overall onboard traffic.

Kevin Crissey: Perfect. Thank you so much.

Operator: Our next question comes from the line of Steve O'Hara from Sidoti & Company. Please proceed with your question. Stephen O'Hara: Could you just talk about, with the CASM-ex profile going forward, how much of that is driven by the aircraft and the improving network structure with the 321s, 330s optimized versus I guess better cost control generally? Thank you.

Shannon L. Okinaka: This is Shannon. I'll answer that. Yes, you are right, we are going to get some structural unit cost benefits from changing out the 767s for the A321s. We haven't given specific guidance for 2019 or beyond that, so I don't want to get into percentages or portions.

But we are also seeing unit cost benefits and improvements from some of the other things that we've talked about, labor productivity, contract negotiation, overhead, and cost of sales, we have got initiatives in a lot of different areas. So, the unit cost discussion that we are having about 2019 and beyond being flat to down is really a combination of all of that together with the fleet changes. Peter R. Ingram: And just to underscore that a little bit, fleet transitions are always a challenge whenever you go through them. You have to go through them from time to time to move on to the fleet that is better suited for your future.

But you end up with inefficient crew deployments on the way winding down in a fleet, inefficient crew deployments as you are building a fleet up to critical mass, and that's obviously affected the 2018 numbers, and we are through that more as we get into the beginning and certainly deeper into 2019. The other thing I would say about the last couple of years of our cost performance is, one of the things that we have highlighted as a profit enhancer for us, and we have highlighted it as such because it absolutely is, is the reconfiguring, remodeling of our A330s. That actually took seats out. So, even though it was profit accretive, it didn't do us favors in terms of cost per ASM. That's obviously fully in the base now with the last one of those completed.

And so, there's a number of things like that, but I think Shannon is also very right to point out that we are very focused on just managing the business as well as we can and making sure as we go through and build our detailed plans for 2019 that we are also just managing the nuts and bolts of a budget and a cost structure, and we expect that to reflect itself in a better cost outlook going forward. Stephen O'Hara: Okay. And then just maybe on the JV and where that stands, I mean, has there been any change in maybe your optimism that you get approval based on some of the increase in protectionist rhetoric or is that something that wouldn't be affected by or potentially affected by that?
Peter R. Ingram: We submitted the application in the second quarter. We have been and remain optimistic about approval.

We think there are very real customer benefits of combining our business with JAL's in a joint venture and we know that the DOT has approved joint ventures for many of our network carrier competitors in a variety of geographies, and we think that our application stacks up very well. So, that really hasn't changed with anything over in the political, geopolitical situation in the last little while. That is what we felt before we submitted the application. It's in there now, we still feel that. Stephen O'Hara: Okay.

And then maybe just on maybe longer term modeling outside of fuel, I mean can you talk about maybe your ability to improve your margins or what you think is maybe an appropriate margin improvement on an annual basis aside from fuel and maybe contract negotiations and things like that?
Peter R. Ingram: Look, our focus is on making sure that we are absolutely competitive across all the geographies we operate in, and we make business decisions, whether it's fleet deployment or product decisions or staffing decisions, based on looking to optimize the trade-off of revenue and cost in the business. How that plays out over the long term is really difficult to predict with a lot of precision, but I think we have demonstrated that we have built a defensible, competitive position in all the geographies we serve and we think that positions us well for future success. Stephen O'Hara: Okay. Thank you very much.

Operator: Our next question comes from the line of Susan Donofrio from weighty capital. Please proceed with your question.

Susan Donofrio: So, just a question on cargo revenues, and Brent, probably for you, can you just talk a little bit about how you're doing with that? And then, when we think about going forward with further cooperation with JAL, would the cargo be included in that as well? If you could just give us some color, that would be great. Brent A. Overbeek: So yes, in general on the cargoes, as we mentioned in our prepared remarks, has done very well.

We've seen really solid strength through the latter part of last year and through the first half of this year. Probably most noteworthy is the performance in our international markets where we've seen strength in tonnage and in yield coming into the U.S., and so we are encouraged by that. Japan in particular has been quite strong for us. We look forward to the back part of the year as we induct the Neighbor Island freighters, and while that will start off relatively small with just a couple of flights each night within the Neighbor Islands, we'll continue to kind of ramp that product up through the latter part of the year and into early next year. In terms of the relationship with JAL, cargo is certainly an area we are going to look at, and it will be an area where if we can find some mutual synergies, we'll do that, but that is something that's a bit premature to talk about until we get things approved with the DoT.

Susan Donofrio: Got it, okay. Thank you.

Operator: Our next question comes from the line of Joseph DiNardi from Stifel. Please proceed with your question.

Joseph DiNardi: Peter, just on capacity, how you're thinking about that over the next couple of years? It seems like maybe recently you would have preferred to grow more than you have.

You've been short-aircraft a little bit. To the extent that that changes and you have the aircraft you want, the demand environment seems pretty strong, should we think about you guys maybe growing at this type of rate going forward, just kind of how you are thinking about that? Thank you. Peter R. Ingram: So, as I said to one of the questions earlier, I think 2019 will be a little bit lower than this year with somewhat big capacity growth was bunched up as we have taken A321s in a bunch which is in some ways not optimal, and given that the deliveries have shifted around, it wasn't even entirely by design. We did have them spread out a little bit more in terms of the earlier delivery profile.

But it does get us up to critical mass, which we are approaching now, and we are excited about that from a cost and efficiency standpoint. Longer term, I don't want to sort of be too prescriptive about what capacity growth is going to look like. I think if we continue to deliver pre-tax margins and profitability towards the top end of the industry and if we see good opportunities to grow profitably, then I think it should very much be in our plans to continue to grow. We want to do that at a pace that we make sure that it is profitable growth and that will be the focus of the management team to make sure we continue to execute on that.

Joseph DiNardi: Okay, that's helpful.

And then just on the demand side, can you just talk about how you guys think about forecasting demand on the U.S. side, on the North American side of your business, and whether there you're running into any capacity constraints in terms of hotel rooms within Hawaii?
Brent A. Overbeek: Joe, I think if you've looked at this year, certainly industry capacity and seats into Hawaii is well documented, have been up kind of double-digits. If you look at hotel occupancy rates, they have nudged up and in some places, particularly in the Neighbor Islands, they've seen a disproportionate benefit there largely as there has been a bit more seats there. But at every point in time kind of when we look historically across kind of visitor growth rate and occupancy rates in Hawaii, we found a way to continue to grow visitors into the state, and despite quite high occupancy rates, the secondary market with the likes of Airbnb and other products have enabled us to continue to grow visitors to the state despite really a relative lack of growth of hotel rooms over the last little while.

Peter R. Ingram: One other thing that makes the supply situation of accommodations hard to track here is that hotels aren't the whole picture anymore. We've had timeshares, and timeshares continue to be an area where there has been some growth, certainly more growth than in hotels. Brent alluded to the alternative accommodations of vacation rentals and things like that. And it's an interesting trend, particularly for North America, that a decreasing proportion, and I think it's less than half now, of visitors from the Western U.S.

are actually staying in hotels when they are here in Hawaii. So, we have from time to time worried about the lack of growth of hotels, but at the same time we have had long-term worries about that. We have seen visitor arrivals continue to grow and demand continue to grow. And so, it is not something that we think is necessarily a burning issue for the hearing now.

Joseph DiNardi: Thanks Peter.

Operator: Our next question comes from the line of Dan McKenzie from Buckingham Research. Please proceed with your question.

Dan McKenzie: I've been kind of punching in and out, so my apologies if this has been asked, but my question really just ties to JALPAK, what has been done so far, what is left to do, and I'm just wondering if the revenue contribution from this potential demand stream has begun to impact the P&L at this point?
Brent A. Overbeek: So, we are still in kind of our infancy in terms of rolling that out. We rolled out our agreement with JALPAK in the front part of this year.

We are certainly encouraged with the volumes we have seen out of there. As they get more and more familiar with selling our product, we think that there is a lot more opportunity in front of us. Like you said, early results are good, but we think there's more opportunity in front of us. I think one of the things that's been most encouraging to us out of JALPAK has been their propensity to sell higher-value products. So, whether it would be premium cabin or products like Extra Comfort, they've done a very nice job with their distribution channel with being able to sell those higher-value products onboard our equipment.

Dan McKenzie: Okay. So, when you say you like the volumes, can you just help us size what the volumes are and kind of what inning we are in at this point and where we should think about that going? And then just I guess related to that, once the JV is ultimately approved and implemented, is there sort of another leg to that demand side of the story. Brent A. Overbeek: I'm not going to give you a specific number. I'll say I think we are probably somewhere between the second and third inning on our evolving relationship with them.

Once we do get immunity, obviously assuming we do, that just increases – it's another catalyst for us to work even further with them and that they will further share in the benefits, the revenue and profit benefits of our relationship with JAL.

Operator: Our next question comes from the line of Hunter Keay from Wolfe Research. Please proceed with your question.

Hunter Keay: Thanks for getting me in again. Do you guys get data from Bank of Hawaii around how your credit card holders spend money broken down into spend bucket, like gas, groceries, travel, stuff like that?
Peter R.

Ingram: Yes, we do get some data on the spend categories.

Hunter Keay: What's the biggest category?
Peter R. Ingram: It's been a while since I've looked at it.

Hunter Keay: Is it gas?
Peter R. Ingram: Hunter, let me follow up with you.

I don't want to just sort of pop-up with some speculation on here. It's been a while since I've looked at it. But certainly what I would tell you is, as we were launching the redesigned card, which Brent mentioned on the phone, we focused on creating some incentives for people to spend more and engage more with the card, and the incentives we put on the consumer card were around gas, groceries, and dining, which are big everyday categories for our credit card and really for any credit card, and we think that the combination of those benefits really helps the engagement. And in fact, we've got HawaiianMiles partners. So we have extra incentives with here in the island for our members here.

So, you can go to a Hele gas station and you can get extra HawaiianMiles when you use your HawaiianMiles credit card at Hele, on top of what you get on the credit card. When you go to Foodland, there are extra incentives for engaging with the HawaiianMiles program on buying your groceries. And we have a variety of dining programs throughout the state. So, a lot of things that we have done to really increase the utility of the HawaiianMiles program for our local members in particular. As well we have some national partnerships for our broader base.

Hunter Keay: What I'm getting at, Peter, thanks for that, is like if 40% of the spend comes on gas, I'm wondering if given that how high fuel prices are in Hawaii, if you actually see some needle-moving revenue from your credit card when gas prices go up? So, just another way high oil prices help airlines, I'm wondering if this actually is one of them. Peter R. Ingram: Yes, I think you may have that number a little bit exaggerated. It sounds like…

Hunter Keay: No, I know. I made that up.

That was ridiculous. I know, but you see the point. So okay, that's fine, we'll follow up later. Thank you.

Operator: We have finished the list of analyst questions and have time for one media question from the line of Adrian Schofield from Aviation Week.

Please proceed with your question.

Adrian Schofield: Just a question on the turboprop freighters, just is the plan still to launch with two aircraft and then add a third later in the year?
Brent A. Overbeek: Yes. So, Adrian, we are going to start with two aircraft. We'll have kind of one live every night and we'll have one spare.

I mean, one of the important things as we get this product up and running is we want to ensure – we've got a great customer service reputation on being able to serve cargo customers today. As we launch this product, we want to make sure we are able to do that. So, we are highly spared up initially as we get this up and running, and as we get the third airplane out in the latter part of the year, we'll continue to grow the business.

Adrian Schofield: Okay. And just one more thing I'm just a little curious about, with the volcano, do you think we'll reach a point where the volcano activity actually becomes a positive for tourism to [indiscernible]?
Peter R.

Ingram: Adrian, I think it may take a little time, but candidly, the volcano hasn't been a tourist attraction for much of the last 35 years. And in fact, for those of you who have had the opportunity to visit Volcanoes National Park, it's really a remarkable place when you can get into it, and it is fascinating to see that. So, I think it will get to that again over time, and in fact we have seen people taking boat tours and helicopter tours to go and look at the volcano. All of that takes time, and obviously with the activity picked up as it is right now, you want to make sure that those tourist attractions are well-managed and safe and properly accessible for people.

Adrian Schofield: Great.

Thanks a lot.

Operator: Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Peter Ingram for closing remarks. Peter R. Ingram: Mahalo for joining us today. We are very excited for the second half of 2018 and look forward to speaking to you again at the end of the next quarter.

Aloha.