Executives: Ashlee Kishimoto - Senior Director, Investor Relations Mark Dunkerley - President and Chief Executive Officer Peter Ingram - Chief Commercial Officer Shannon Okinaka - Chief Financial

Officer
Analysts: Mike Linenberg - Deutsche Bank Hunter Keay - Wolfe Research Helane Becker - Cowen & Company Joseph DeNardi - Stifel Dan McKenzie - Buckingham Research Steve O’Hara - Sidoti & Company Andrew Didora - Bank of America Rajeev Lalwani - Morgan Stanley Michael Derchin - Imperial Capital David Segal - Honolulu Star-Advertiser Adrian Schofield - Aviation Week Jon Hemmerdinger -

Flightglobal
Operator: Greetings and welcome to Hawaiian Holdings Fourth Quarter and Full Year 2016 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Ashlee Kishimoto, Senior Director of IR. Thank you.

You may begin.

Ashlee Kishimoto: Thank you, operator. Welcome, everyone and thank you for joining us today to discuss Hawaiian Holdings’ financial results for the fourth quarter and full year of 2016. 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. 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 at about 4 o’clock Eastern Time today. If you have not received the release, it is available on the Investor Relations page of our 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 would 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 upon them. For a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking 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 Forms 10-Q and 8-K.

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

Mark Dunkerley: Thank you, Ashlee. Aloha, everyone. Thank you for joining us today. Strong fourth quarter results finished off a record-breaking year for us.

Adjusted net income grew to $69 million or $1.28 per share. While for the full year, adjusted net income grew to $280 million or $5.19 per share. Our adjusted pre-tax margin for the quarter grew 3.8 points to 17.6%, and for the full year, grew 5.2 points to 18.4%. 2016 has been a great year for us in almost every dimension. Strong demand, balanced industry capacity in our markets and manageable fuel prices characterized our business environment.

Our team is taking good advantage of this circumstance, making sure that the investments we made in our business over the past several years continue to deliver the returns we anticipated from them. Our business is stronger and we are growing value for our shareholders. Hawaiian’s stock has outperformed our peers. And in the last year alone, we have seen our share price rise by over 60%. Beyond the finances, 2016 was a year in which we carried a record 11 million passengers, in which we were recognized as the world’s most punctual airline and in which we took home several service awards for Hawaiian’s outstanding hospitality.

So to my colleagues, I thank you for your unwavering dedication in delivering unmatched service to our guests. As the year drew to a close and our 2016 financial results became assured, we were delighted to make profit-sharing distributions to non-officer employees in excess of the amounts required by our collective bargaining agreements. Though 2017 will be a different year than 2016, much will remain the same. From what we can see looking ahead, the strong business environment we have been enjoying will continue. Demands for the Hawaii vacation remains strong and the industry capacity growth is still projected to be modest.

The price of fuel will remain moderate by the standard of recent history though it is forecast to grow versus 2016. What will be changing is the level of investments we will be making to grow our business. The headline investments involve the delivery of our first 3 A321neos and all of the attendant proprietary works surrounding the introduction of a new fleet. This aircraft, as we have detailed at our recent Investor Day is ideal for several of the routes we fly today and many which we do not yet serve. Beyond this, investments in 2017

will include: completing a new maintenance hangar, taking on the bulk of the A330 cabin reconfiguration, which adds lie-flat seats and increases the number of extra comfort seats and enhancements to our technology infrastructure.

Before I get carried away with talk of the future, let me touch on the developments since we last spoke at Investor Day at the beginning of December. We were notified by Airbus of delays to the deliveries of our first 3 A321neos by about 3 months. We now expect to receive these three deliveries in the fourth quarter, all but ruling out our prior plan to have them in service before our busy winter peak. As you will hear shortly, the delay impacts our projected ASM growth for the year and of course the revenues we had anticipated in the fourth quarter. 2016 closes the middle phase of our decade-long plan to revitalize Hawaiian Airlines.

The first phase involved heavy investment and tremendous growth. From 2010 through 2014, we added planes, people and destinations. Our revenues doubled. The second phase, spanning 2014 to the present, has been a period of much more modest growth, allowing us to absorb all that was new, to better master our competitiveness in so many of the new geographies we now serve and to secure the return from the investments we have made. 2017 to the end of the decade will be the third phase.

In these years, we will transform our ability to compete. The investments will be more modest than those we made at the beginning of the decade and the returns we anticipate will arrive far more quickly. On routes between Hawaii and North America, where we already enjoy the preeminent position, the new aircraft will allow us to expand our business and bring the terrific service provided everyday by my dedicated colleagues to more guests. The new aircraft will free more wide-body aircraft for further long-haul expansion, where in the past several years we have demonstrated our ability to compete against many fine global players. With all this to look forward to, we can’t wait to get stuck into 2017.

Peter will now discuss our revenue performance.

Peter Ingram: Thanks, Mark and aloha, everyone. Our quarterly unit revenue results beat our original expectation and we closed the quarter at the high end of our revised guidance, with system RASM improving by 6%. Better than expected domestic passenger revenue as well as stronger cargo results explain the improvement relative to earlier expectations and demand remains strong across our network. My thanks go out to the commercial team for another quarter of solid execution in each of our three geographies, all of which posted PRASM gains for the quarter.

Domestic PRASM, which includes North America and Neighbor Island, grew 8.7% for the fourth quarter on strong demand and balanced industry capacity. For the periods which we are able to compare our performance against competitors on North America to Hawaii routes, we have outperformed the industry on an absolute basis and have improved this revenue premium year-over-year. Given our strong performance in the back end of 2016, there is a good chance that this trend continued to close the year, although we won’t be able to confirm this for a few months as the competitive data is lagged. Our North America routes posted a double-digit PRASM gain this quarter. Industry capacity growth on routes between North America and Hawaii has been minimal in recent periods.

And looking ahead, we continue to see relatively flat industry capacity in the first half of 2017 based on published schedules. The team is executing very well in this part of our network. And looking ahead to the first quarter, we expect the positive trends and momentum to continue. There is some variability in performance as we move through the months of the quarter. January and February will post strong year-over-year PRASM gains, while March will be affected by Easter moving to the second quarter in 2017.

Overall, we expect another strong performance in North America for the quarter. In the Neighbor Islands, our fourth quarter PRASM was up slightly from last year, as the series of tactical initiatives yielded benefits and as we came closer to lapping the expansion of competitive capacity in the second quarter of 2016 in the Honolulu-Lihue and Honolulu-Kona markets. Looking ahead, industry capacity based on published schedules is expected to be up in the low double-digit range in the first half of the year due to recent additions from both Hawaiian and our primary competitor within the state of Hawaii. Our international PRASM grew 4% this quarter from last year, which is a sequential improvement from third quarter results. Overall trends on the international routes remain solid.

And during this period, we lapped the negative foreign exchange and fuel surcharge impacts from last year. Japan was strong and the new services launched from Tokyo were immediately accretive to our international PRASM. Looking to the first quarter, we expect another period of international PRASM growth and sequential improvement from the fourth quarter. Industry capacity growth on our international routes is expected to be moderate, demand continues to grow in maturing markets and we will continue to benefit from the accretive new Tokyo routes. And this includes the full quarter of our second daily Haneda flight, which is a split service between Kona and Honolulu.

Partially tempering our performance will be the post-election strength of the U.S. dollar, particularly against the Japanese yen. As a reminder, we do have some foreign exchange hedges which helped to mitigate the currency impacts. Our value added revenue per passenger grew to $23.90 in the fourth quarter, up $1.65 from last year. As in recent quarters, the primary drivers of growth are the continuing strong sales of HawaiianMiles, particularly from our co-branded credit card relationship, which is doing very well and our successful Extra Comfort seat product.

As I foreshadowed at Investor Day, our Extra Comfort sales topped the $50 million threshold for the full year. Looking ahead, we anticipate this number to continue to move up as we add additional inventory of Extra Comfort seats to our fleet over the next couple of years. Cargo turned the corner in the fourth quarter with improvements in domestic and Asia markets and grew $2 million from last year. Looking ahead, we expect to see continued growth in our cargo business as these positive trends continue and are enhanced by the launch of our Neighbor Island cargo freighters in the coming months. Let me turn to the outlook for 2017.

In the first quarter, we expect our capacity to grow 2.5% to 4.5% from last year. With the delivery delay of the A321neos, we have been forced to refine our capacity plans for 2017 and we are now expecting full year capacity growth of 1% to 4%. We expect our positive revenue trends to continue. We are forecasting a fourth consecutive quarter of RASM gains, with projected range of up 4% to 7% year-over-year. Strong passenger revenue, propelled by steady demand for travel to Hawaii, balanced industry capacity growth, solid execution and the continued strength in other revenue, underlies this expectation.

Although our year-over-year comps get tougher throughout the year, we are carrying terrific momentum into 2017, which gives us confidence in our ability to keep building on the strong performance we have seen in recent periods. Fourth quarter results represent the strong finish to an exceptional year with industry leading unit revenue growth. The improved results allow us to grow our business and invest in our fleet and network to strengthen our competitive position. We look forward to 2017 and beyond with a balanced network, an optimal fleet for each of our missions and the award winning hospitality delivered by our frontline colleagues each and every day. Now let me turn it over to Shannon to discuss our costs and the balance sheet.

Shannon Okinaka: Thank you, Peter. Our fourth quarter results complete an exceptional year of earnings growth, margin expansion and balance sheet strengthening. The financial improvements in 2016 allow us to continue investing in our business and growing long-term shareholder value. Excluding the $95 million of special items this quarter and the enhanced profit sharing for all of our employees that Mark discussed earlier, our costs were in line with the expectations we set at the end of October. Let me briefly go through the special items this quarter.

$17 million related to our accretive long-term fleet strategy to exit the 767s early and replace them with A321neos and includes a $49 million non-cash impairment charge on the owned aircraft and a $21 million charge to early terminate an agreement with the maintenance vendor. We also recognized a $5 million profit-sharing payment to employees for their service in prior years and $20 million related to ongoing labor contract negotiations. As a reminder, our fourth quarter costs were elevated from last year due to increases in wages, from both volume and rate, benefits related to increased healthcare premium rates, aircraft rent due to the additional leased aircraft, rental rate increases at our Honolulu and Los Angeles stations, maintenance from a 6-year check on one of our A330s and purchase services as we continued to make investments in our business. These items totaled about 6 percentage points of the year-over-year increase in CASM ex-fuel this quarter. In non-operating expense, our interest expense decreased $5 million from last year as we continue to benefit from the debt prepayments we made earlier in 2016.

And as we mentioned in our December traffic release, our other non-operating expense was higher than expected due to a non-cash loss from the translation of our foreign currency denominated bank accounts from the strengthened U.S. dollar at year end. Moving to the balance sheet, our cash position remains strong, with $610 million in cash, cash equivalents and short-term investments. With our $500 million cash target, we are in a great position to continue investing in our people and our business. In December, we further bolstered our continued liquidity by renewing and expanding our revolving credit facility to $225 million from $175 million, lifting restricted covenants and adding wealth [ph] authority collateral, allowing us to leave more of our aircraft unencumbered.

Our leverage ratio at the end of the fourth quarter was 2.0x adjusted debt to EBITDAR, which is in the middle of our target range of 1.5x to 2.5x. We also continued to make investments in our people and contributed $31 million this quarter to our pension and other post-retirement fund for a year-to-date total of $58 million, well in excess of our minimum requirement. These contributions provide important tax savings and lower our pension liability and future minimum payments. Turning to our outlook for 2017, for the first quarter, we expect CASM ex-fuel to grow 3% to 6% from last year, which excludes any assumptions for an amendable labor agreement. We expect our CASM ex-fuel to be elevated from last year due to the following factors, which totaled 4.5 percentage points; Wages and benefits increases from both volume and rate, totaling 2.5 points, Aircraft and passengers servicing from volume and rate increases in clearing and ground handling totaling 1 point, Aircraft rents for the June A330 lease and the additional two 717s delivered in November, totaling 0.5 point, And other rental and landing fee rate increases at Honolulu Airport and the new hangar totaling about 0.5 point.

For the full year 2017, we expect our CASM ex-fuel to grow in the mid single-digit range, excluding any assumptions for our amendable collective bargaining agreement. And as I mentioned at Investor Day, we continue to look for opportunities to lower our long-term cost structure. I am pleased to tell you that in 2016, we were able to successfully renegotiate several large supplier agreements, resulting in a savings of $280 million over the life of these contracts. In exchange for agreed upon cash prepayment totaling $82 million, we will receive lower rates on certain long-term services from suppliers. We expect the long-term cost savings to far outweigh any near-term charges, including the $21 million impairment charge that I mentioned earlier.

We are already seeing the benefits of these changes. And in the first quarter, we expect the maintenance line to be down a couple of million dollars from last year. Our strengthened financial position facilitated these cost savings opportunities and we intend to continue to look for other opportunities to drive long-term cost savings. Based on the fuel curve as of January 17, we expect our economic fuel cost per gallon for the first quarter to be between $1.60 and $1.70, an expected $11 million increase in our costs from last year. For the full year, our economic fuel cost per gallon is expected to be between $1.75 and $1.85, an $81 million increase from last year.

As of December 31, we have hedged approximately 35% of our projected fuel requirements for 2017 and expect our fuel hedges to settle as a gain position of a couple of million dollars as we begin laughing last year’s drop in fuel prices. We continue to maintain a disciplined approach to our hedging programs in order to manage our operating and economic risk. We expect our fuel consumption to increase from last year in the range of 4.5% to 6.5% for the first quarter and 2.5% to 5.5% for the full year. For 2017, we expect our effective tax rate to be in the range of 37% to 38%. Our cash tax rate is expected to be slightly lower at approximately 34% of pre-tax income as we used up our remaining NOLs in 2016.

We continue to look for tax savings opportunities. And looking beyond 2017, we expect our cash tax rate to be significantly lower driven by the accelerated depreciation expense from the upcoming A321neo deliveries. We continue to expect our CapEx to be in the range of $410 million to $420 million for the full year 2017 as we made pre-delivery payments for upcoming aircraft deliveries and invest in our business. As a reminder, in the fourth quarter of 2017, we are taking delivery of 1 A330 and 3 A321neos, which we expect to fund in cash. We also plan to return 1 B767 at the end of its lease in the fourth quarter.

At the beginning of the decade, we embarked upon a plan to revitalize and transform our business by investing significantly in new aircraft and growth into new geographies. Lower growth in the last 2 years allowed us to ensure our investments delivered returns and strengthened our competitive position in the new geographies. The investments we have made have bolstered our financial performance, strengthened our balance sheet and grown value for our shareholders. Looking ahead to 2017 and the remainder of the decade, the investments we are making will be much more modest and delivered quicker returns than those at the beginning of the decade as our focus this period is on North America to Hawaii, a geography where we already enjoy a strong competitive position. We are confident that our investments in the growth and long-term sustainability of our business will continue to improve our financial position and grow shareholder value in the years ahead.

This concludes our prepared remarks. And with that, I will turn the call back to Ashlee.

Ashlee Kishimoto: 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 are now ready for questions from the analysts first and then the media if time permits.

As a reminder, please limit yourself to one question and if needed, one follow-up question. Operator, please open the line up now for questions.

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

Mark Dunkerley: Hello, Mark. Hey, Mark.

Operator, we can’t hear Mike Linenberg. We are getting a feedback.

Mike Linenberg: Can you hear me on my phone?

Mark Dunkerley: Yes, we can hear you now. Great.

Mike Linenberg: Oh, sorry about that.

I think in Peter’s comments, you have talked about the fuel surcharge basically being a bit of a negative in the December quarter. Are we now seeing – am I sensing that we are above the threshold as it relates to fuel surcharges and where fuel prices are now? Are we seeing that in this quarter or is there a lag effect? When do we start seeing that come back into the fare structure [indiscernible]?

Peter Ingram: Yes, thanks Mike. In the fourth quarter and in the first quarter, we still have some negative impacts from fuel surcharge. The overall impacts are for fuel surcharge and ForEx in both quarters are less than 1%. And as we look at the forward curve, I believe it’s in the second quarter where we expect the fuel surcharge to start kicking in, in a couple of the geographies, particularly in Japan.

Mike Linenberg: Okay, great. And then, just my second question on the cost guidance for the year, I think previously, it was sort of low to mid single-digits CASM gain CASM ex for the year, and now it’s mid and presumably that’s because you have had to scale back your capacity. But when I think about the capacity scaled back, it’s a new airplane site, right? It’s inducting a new airplane. And with that comes ramp up cost, there is a learning curve. And so I am not sure if that’s actually what’s driving that or if there is something else.

I mean, I know, Shannon, you did run through a whole bunch of items that are impacting cost this year, but I am just – I am wondering why the change from the previous guidance?

Mark Dunkerley: So Mike, it’s Mark and I will let Shannon answer it in greater detail. But basically, I think you’ve got it right. I think what’s happened is that we don’t get the benefit of the ASMs, but we don’t avoid really any of the costs, because these aircraft come in the fourth quarter. So, there is a little bit about – little ability for us to delay the onset of some of these costs until little bit later in the year basically a quarter’s worth, not all of them, but some of them. But we get the costs of induction.

We don’t get any of the – either the ASMs or the revenues. But Shannon, do you want to answer that?

Shannon Okinaka: Right. That’s almost exactly what I was going to say. And Mike, just so you remember, too, what we talked about is – at the Investor Day was we are trying to keep our business as usual cost at that low single-digit range. But we do have quite a bit of investment on top of the 321 induction, we have the hangar investment.

We are still making IT investment. So, none of that piece moved. So it was really a matter of the denominator there changing with the delay of the 321neos.

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

Hunter Keay: Hi, can you hear me?

Mark Dunkerley: Yes, we can hear you fine, Hunter.

Hunter Keay: Alright, great. So to the A321 delays, what kind of assurances, which I assume by the way are GTS engine-driven. What kind of assurances the Airbus is giving you there won’t be further delays which are a big deal for you usually on the CASM, that’s one thing. But this is the central part of your Analyst Day presentation was really the fleet and the changes those are going to drive. So how do you feel about this new delivery target being met? And are you going to pursue penalties from Airbus now or if things get worse, are you entitled to them?

Mark Dunkerley: Okay.

So the first thing I’d say is that, yes, this is a very important airplane for us and we think it’s going to really transform our business between Hawaii and the U.S. mainland. We are certainly not stepping away from our enthusiasm for the airplane. The second thing I would say is in the viewpoint of it – of an aircraft that we are likely to operate to 20 plus years, 3-month delay is irritating, but doesn’t in anyway fundamentally undermine our confidence in the airplane or our excitement about getting it. I think Airbus is giving us their best belief as to the delivery of these aircraft.

It’s tied to the release of an improved component in the Pratt GTF engine. So I think their level of confidence is reasonably high. That is not to say that it’s a cast-iron guarantee, but we have every expectation of getting the aircraft on the timeline that has now been established. And as to penalties and remedies, I think it’s sort of premature for us to be talking about the contractual terms that we have with them, with Airbus and our ability to enforce them. I would simply say that at the moment our focus is on getting the aircraft in the right shape in our fleet as quickly as we can.

Hunter Keay: Okay. I think that’s a fair answer, Mark. Thanks. And then on the $20 million crew you took for the proposed CBA, can you tell us – is that for the pilots? And I would imagine so. And then can you give us an update on where you are with that.

Does that mean that you have what I think what analogy we are doing now are like tentative tender agreements. Is that what you have in place right now? And if so, can you give us a timeline on when you expect it to be a TA, when you expect a vote? And if that vote should be passed, what the impact of the full year CASM would be in the event that contract is ratified. So there is a lot of assumptions embedded in that question, I guess, but....

Mark Dunkerley: Yes. Let me try and knockoff the big one and then I will send it to Shannon.

So first of all, I think it will be an overstatement to say that we are – to a point where we are sort of tentatively agreed. I think we are in discussions with our pilots association, our pilots’ unions. I think those discussions are ongoing. We are under the interest [ph] of the National Mediation Board. It is the company’s desire to achieve an agreement as quickly as possible.

I don’t think we believe that we would benefit from being sort of hung up the way is to get result. My personal hope is that we can get to a point where a tentative agreement can be signed and where we can put it out where they can – the union can put it out to their membership for a vote. But I think that’s probably about all the color we can add at this stage about the negotiations. So with that comes sort of an unwillingness to speculate about the timetable.

Shannon Okinaka: And Hunter, I will add a little bit more on the $20 million accrual.

I wouldn’t necessarily take that as being at a certain place in the negotiation. There are just certain triggers or requirement that once triggered, requires us to do certain accounting. And that’s all it really was. I wouldn’t necessarily say that it indicates that we are very close to an agreement or anything like that. It’s just that certain requirements are triggered for accounting purposes and we have to accrue that $20 million.

Hunter Keay: Okay. And just on the CASM impact, is it a little early to ask about that, do you want to put some math there right now or no?

Shannon Okinaka: Of the pilot agreement?

Hunter Keay: Yes.

Shannon Okinaka: No. We are not ready to state anything on that quite yet.

Hunter Keay: Okay.

Thank you.

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

Helane Becker: Hi guys. Thanks for the time.

Mark Dunkerley: Hi Helane.

Helane Becker: Can I just have two questions, one on the maintenance hangar, can you just say where you are in terms of completing that. And then the other question I have is with respect to the local economy, can you just talk about how that economy is doing, because I feel like some of the retailers that reported, talked about them lower than expected revenues in the Hawaiian markets specifically and I am just wondering if that’s – and it didn’t look like it was lower tourism and based on the HTA numbers, so just trying to figure that out? Thanks.

Mark Dunkerley: Sure. No worries. The hangar, so the story of the hangar is one of the state was responsible for constructing the hangar.

They signed up with the general contractor that failed to deliver the hangar as specified and they abandoned the contracts with the hangar half complete. Since then, we have reached agreement with the state that we are going to take over the completion of the hangar. Where we are right now is that we have our engineering team just about finished going over listing of all the defects and deficiencies, of which there are sadly many, in the construction to-date. As soon as we get our full handle on that, then we will be in there finishing out the construction of the hangar. We hope that this is going to be a matter of months to complete.

But again, until we finish our work, determining on what deficiencies are, it’s a bit premature to give an exact date for when we can have it finished. But it is our plan that we are certainly looking at this as a 2017 event. With respect to the local economy, I think the local economy is doing very well. And we too have seen some numbers around retail that seem to swim against the tide of other very positive numbers not only at Hawaiian Airlines, but also in terms of number of visitor arrivals and so on. So it’s our belief that this is more a reflection of the changing nature of tourism than it is any leading indicator of softness and demand for the Hawaiian vacation.

Helane Becker: Okay, alright. I just kind of wanted to get that, so okay. Thanks very much for your help.

Mark Dunkerley: Thanks Helane.

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

Joseph DeNardi: Yes. Thank you. Peter, just a question on competitive capacity, you mentioned, Island is up a decent amount, is it fair to just think about that as kind of a one-time event there associated with your competitors kind of changing their network and that normalizes once you lap that change or is there something more to be worried about there?

Peter Ingram: That’s difficult for me to say. I can tell you what I know which is that our competitor has taken delivery of some Q400 aircraft and have a couple more coming. What we understand is that they intend to grow their flying with that aircraft.

And I think it will really be a function of how they perform in the marketplace that determines what future investments they may or may not make. From our standpoint, we have got an extremely strong competitive position. We believe we have the best product. We have tremendous service delivered by our frontline colleagues. We – the 717 is, in our mind, the single best aircraft for Neighbor Island flying.

And we think we are extremely well positioned to compete with whatever competitors may come our way in the Neighbor Island markets.

Joseph DeNardi: Okay. And then just on the North America side, I mean the outlook there seems pretty benign, you are obviously putting up some pretty strong RASM numbers, not trying to make argue against yourself, but is it just a matter of time before that changes, like for somebody to add capacity or are there schedule issues that prevent – present a barrier to entry that just isn’t appreciated?

Peter Ingram: There is no hard barriers to entry. I think we have, as we talked about at Investor Day, some of the revenue trends that we have had seen in 2016 are unique to us as we have grown our revenue premium. I would be keen to get those A320 once as soon as possible and add a little bit more Hawaiian Airlines capacity.

And we have a couple of routes in mind for those. But for the foreseeable future, we think the North America routes look good and we expect them to continue to perform well this year.

Joseph DeNardi: Great. Thank you.

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

Dan McKenzie: Hey. Thanks guys. For those trying to get a sense of the core RASM trends, how much of an impact is the calendar shift, if the holidays impact first quarter RASM. And then just similarly, how much does the shift of Easter offset that benefit, so depending on the airline, it seems like those numbers can shift around quite a bit, I am just not quite sure how that plays out for Hawaiian?

Peter Ingram: Yes. So I don’t know when you talk about the calendar shift, you may be talking about fourth quarter where the Christmas week was a little bit compressed.

We really – as we have said on our guidance for the fourth quarter, we didn’t see a lot of calendar shift affecting December and December came in strong as we were expecting then. January looks good. As far as Easter goes with the Easter shifting, it does create the scenario that I talk about where March will still be a good month. But it will be year-over-year, the weakest month of the quarter, based on our current expectation. I would think that the overall impact of that is something on the order of 1 percentage point, maybe not even that much.

So there is other things balancing it out again and again January has really come in strong. So that may be a little bit of calendar shift from 4Q into 1Q as well.

Dan McKenzie: Okay. So the extra peak travel days that got moved into January this year from December last year really don’t impact the first quarter revenue – core revenue, as I hear you talk?

Peter Ingram: It helps some. It was something we were curious about as we were going into the Christmas period, because I think the way the calendar laid out with Christmas and New Year’s day on a Sunday that there was a concern expressed by some of the other carriers, not so much by us going into the fourth quarter, that it was really going to compress a lot of the flying into that one week in December and may be have a negative impact on January.

Certainly, for us as, hasn’t had a negative impact on January. And we thought we had pretty good December results. So overall, it’s a little bit hard to discern that there was much of an impact one way or another.

Mark Dunkerley: Yes. And I would just add to that.

I mean I think we would be drawing it out more if the back half of January and February look to be demonstrably weaker than we have seen in the first couple of weeks. And we are not seeing that. It’s a strong revenue environment even in the periods unaffected by any calendar shift.

Dan McKenzie: Okay, understood. And then I guess for – my second question here.

Where are we exactly in the rollout of extra comfort today and what percent of the revenue base is that impacting? And I recall that your Investor Day from a year ago, the revenue improvement was going to be up, I think 20% to 40%. And I guess I am just wondering are we closer to that benefit being a 20% improvement or closer to that 40% on that revenue base that it’s impacting?

Peter Ingram: So I am not entirely sure what you are referring to with the 20% and 40%. Let me tell you where we are in terms of extra comfort. As I mentioned in the call, we generated $50 million in extra comfort revenue during 2016. We expect to grow that number this year.

And part of the growth we talked about was a longer term trend with the modifications we are making to the A330s that add to lie-flat seats, also increase our capacity of extra comfort on those aircraft from 40 to 68. And we have got other improvements in terms of – or other increases to that inventory with the A321s coming later on where the A321s will have extra comfort seats as well and the 767s that are leaving our fleet do not have the same capacity. We have essentially got one row of bulkhead seats on that aircraft that we sell as a preferred seat. So I am not going to give a specific guidance number for 2017. I expect some growth with the inventory expanding.

I will caution that one of the challenges we have with being in the midst of the A330, rollout of aircrafts coming on with the lie-flat and the extra comfort modifications is that you don’t have a consistent product day in, day out. So, you can’t go and sell all of those 68 seats in advance in every market, because there are some places we don’t know whether they are going to get a 40-seat extra comfort aircraft or a 68-seat extra comfort aircraft. But suffice to say that, that product is doing very well. It is going to grow this year. And we expect over the next couple of years that it’s really going to be a catalyst for our other revenue improvement.

Dan McKenzie: Yes. I guess I was just trying to get a sense of the trajectory. So today, it’s impacting, whatever it is, 25% of the routes. At the end of ‘17, it’s going to impact perhaps 35% of the routes. Is there – I guess, is there some perspective you can share along those lines?

Peter Ingram: Yes.

So I guess what I’d say is we have got 23 A330s in the fleet right now. We will have 24 by the end of 2017. Of those aircraft, 6 of them by the end of 2016 had the 68 extra comfort seats and the remainder had the 40 extra comfort seats that we had before. And we will be down to low single-digit number of aircraft that don’t have the modification by the end of 2017. So over the course of the year, we will go from 6 aircraft with the remodel to let’s call it 18 or 19 aircraft as we enter next year.

So you will see us being able to sell that consistently on more routes as we go through the year.

Mark Dunkerley: And we have a plan to specify which routes we are going to sell 68 extra comfort seats once we have the confidence that we can deliver that product everyday. And it’s a rollout, a continuing rollout through the year.

Peter Ingram: And for those of you in New York, that plan includes our New York route getting that aircraft in February of this year. So we will have lie-flat seats and more extra comfort inventory coming to an airport near you very soon.

Dan McKenzie: Okay. Thanks, guys. Appreciate it.

Operator: Our next question comes from Steve O’Hara of Sidoti & Company. Steve O’Hara: Hi, good afternoon.

I was just wondering if you could just talk about, so load factor, you have done a great job in 2016 raising that up. And I am just wondering if you think there is more room to improve on that further in 2017?

Peter Ingram: Yes, Steve. Thank you for noticing that. I would say there is some more room certainly in the first quarter where the load factor improvement trends really picked up steam starting in really accelerating in the second quarter. So I think you will see some load factor improvements in Q1.

And going through the rest of the year, I think most of our revenue improvement is candidly going to have to come from yield improvements. And on a positive note, we are seeing some traction in a number of the markets. So, we think there is an opportunity to grow revenue there. Steve O’Hara: Okay. And then just on the Hawaiian miles revenue is that in passenger revenue or is it in cargo? And did you say what the amount was for the quarter?

Peter Ingram: No, we didn’t say the amount for the quarter and the answer is both.

Unfortunately, the accounting has us record some of that in passenger revenue. It gets deferred as we sell the miles. And there is a piece based on the existing accounting that we recognize immediately in the other revenue line. Steve O’Hara: Okay. And then just as you accrue them or record them in revenue, you are recording some level of cost along the way, is that the way it works?

Peter Ingram: Now you are going one step further in the accounting, so I am going to turn it over to Shannon.

Steve O’Hara: Okay.

Shannon Okinaka: The liability or expense side is treated differently than the revenue. It’s actually completely separate. We are on an incremental cost method of accounting for our flyer liability, so we just take the number of miles outstanding at any point in time and multiply it by what we calculate to be the incremental cost to fly a person using that mile. So the liability is based on the number of miles outstanding times some incremental cost factor.

Steve O’Hara: Okay, okay. I think I understand that.

Shannon Okinaka: Actually, we can talk to you about it in more detail. Steve O’Hara: Yes, no, that’s fine. Okay, thank you very much.

Mark Dunkerley: You bet.

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

Andrew Didora: Hi, good afternoon everyone. Just have a follow-up on the interisland capacity. I guess, first, I know you did – I believe you were adding some mid-day 717 flying, wondering how that has ramped up.

And then second, are there any further initiatives that you plan to help counter what Island Air is doing with the new planes that they are getting?

Mark Dunkerley: Yes. So the additional 717s have not yet entered service. They will do in February and March of this year. We are going to remain competitive both from a cost perspective, from a price perspective and from a schedule perspective. And where it’s appropriate, we will be increasing services to make sure that, that statement remains true as we see how Island Air develops in the market.

Andrew Didora: Got it. And then Peter, I know you talked about in your prepared remarks that you have some hedges to help mitigate the yen impact going forward here. But I guess just when you go back and look at some of your historical booking levels, when you have seen such a drastic move in the currency in a short period of time, do you see any change in booking trend from the Japanese traveler into Hawaii?

Peter Ingram: It’s a great question and something we have talked about. Surprisingly, we have not with some of the moves we have seen in recent years, seen an impact on the overall level of demand, particularly for Japanese tourism to Hawaii. I would say that this move was pretty quick, but we have also come back part of the way.

So I think the yen went from about ¥102 to $1 on Election Day up to as high as ¥119. I think in the last couple of days, we have been in the ¥113 or ¥112 range. So, it was a pretty quick move at first, but it’s come back a little bit. And I will leave it to you guys to project whether markets settle down a little bit now going forward.

Andrew Didora: Okay, thank you.

That’s all I had.

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

Rajeev Lalwani: Hi, thanks for the time. Peter, a couple of questions for you. First, you know that a fair amount of confidence and just your RASM improving throughout the year just by comps and FX headwinds and so on, can you just talk about why that is, what you are seeing and what some of the drivers could be?

Peter Ingram: I think some of it is – that as we talked about at Investor Day, I think our improvement in 2016 was not just a function of the market giving us more.

It was a function also of us executing well in that environment. And I think there were a number of things that we did to execute well in terms of how we sell, how we market our services, how we execute in the revenue management department that ramped up throughout the year. And I think we will see greater benefits on that. And I think our team is very focused on continuously improving our understanding of the market, our execution day-to-day. And we don’t see a reason why we shouldn’t be able to continue posting gains going forward.

Rajeev Lalwani: And my other question was also the comment you made earlier Peter, around the strength in RASM in some of the Hawaiian markets and that was sort of leading the industry, is that the same case when you look at margins and meaning is it leading the industry overall in the Hawaiian market and is that – or is it underperforming and is that lighter, there is not this being pushed that capacity, if that makes sense to you?

Peter Ingram: So Rajeev, I think my comment in the prepared remarks was that we had, had industry leading RASM performance. That was comparing our RASM as an airline relative to the other carriers that we compete with in North America and the ones that you follow. I do think – we also, if you look at 2016 over 2015, we will probably be very close to, if not the absolute leader, in margin improvement as well. So I think it does translate into margin improvement.

Rajeev Lalwani: Okay.

I guess specifically in terms of the Hawaiian market, I know RASM is pretty strong, but our margins incredibly strong as well or is it less so and that’s maybe what’s keeping capacity away?

Mark Dunkerley: Yes. It’s Mark here. We don’t comment on specific geography margins. I think what we feel very comfortable saying is that we like our position in Hawaii to North America. And we wouldn’t trade it for anybody else’s position in the marketplace today.

But beyond that, we don’t address margins by geography.

Rajeev Lalwani: Understood. Mark and Peter, thank you so much.

Mark Dunkerley: You bet.

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

Michael Derchin: Hi everybody, great, great year, congratulations.

Mark Dunkerley: Thank you.

Michael Derchin: I would like to just talk about that we are in the early days of the Trump administration and there is a lot going on, a lot of activity, a lot of discussions about changing tax policies, changing – making rules less cumbersome, bilateral negotiations, etcetera, I mean there is a lot of discussions, I wonder if you have your early thoughts on how that might affect you and the airline industry going forward?

Mark Dunkerley: Well, I mean I think at the moment, there are a lot of views as to what might happen. Obviously, three days or four days into the new Trump administration, we don’t have a suite of policies yet that we can react to very directly. But I think to the extent that what we end up saying is an investment in infrastructure and the desire to reform our air traffic control system, I think very positive policy direction for the new administration.

And to the extent that the new administration takes on the sort of far-reaching broad level of consumer regulations that actually limits the ability of airlines to compete and meet the needs of individual customers, I think that too, would be a positive. Early days in the administration, we have got to see what comes up. With respect to bilateral relationships, we are unapologetic supporters of open skies. We want to see – we want to have the ability to compete and to take our brand of service overseas without...

Michael Derchin: Thank you very much.

Operator: Ladies and gentlemen, those are all the questions will be taking from analysts. We will now be taking questions from the media. [Operator Instructions] Our first question comes from David Segal of Honolulu Star-Advertiser.

David Segal: Hi everybody.

Mark Dunkerley: Hi David.

David Segal: Hi. While the question I was going to ask, obviously I am at the end here, so a lot of questions have already been asked, so let me maybe refine a couple, just maybe two questions for you. Regarding the Haneda-Kona route, I know you talked about often times in past Mark, about a time for a route to mature, but is the Haneda-Kona route, is that an exemption because of maybe either pent-up demand and the fact that you have been flying to Haneda since 2010?

Mark Dunkerley: What I would say is that the early indications for this route are extremely positive. I would caveat it only in so far as we started the service during the peak time of year, which is a sensible thing to do. When you are an airline, you want to make sure that you get off onto a good foot.

We will be in a better position to be able to declare a victory once we go through some of the shoulder periods of the year when demand is naturally lower. And if we continue to perform well, then I think this would be a tremendously successful route. The early indications based on not only the days that we have already operated this route, but also forward bookings are positive. But it’s a little bit early for us to focus.

David Segal: Okay.

And regarding the A321neos, when you start to receive those over the next few months, I mean is it more likely that you use your existing wide-bodies to increase frequencies and to the markets that you now serve or do you think that you will start targeting new markets, perhaps sometime during the year?

Mark Dunkerley: So I think the A321neos are going to do three things. One is they are going to provide additional growth to allow us to fly more flights, bring more visitors into the islands and also provide more travel options with the [indiscernible]. The second thing they are going to do is they are going to replace the 767s. And that’s going to be more of a substitution. The third thing they are going to do is they are going to enable us to substitute out some of our A330s for more intercontinental long-haul flying.

Overall, when you look at the fleet that’s coming in, the 18 that we are committed to just know, things that you currently say is overall level of capacity is going to go up, the number of flights are going to go up. I think we will see both increases in frequencies on existing destinations and some additional destinations. None of this is sadly going to be possible in 2017 as far as the moment because the arrival of the aircraft is really right at the end of the year.

David Segal: Okay. Thank you.

Mark Dunkerley: You bet.

Operator: Our next question comes from Adrian Schofield of Aviation Week.

Adrian Schofield: Hi there.

Mark Dunkerley: Hi.

Adrian Schofield: I apologize.

I missed the very start of the call, but I think Peter mentioned that the Neighbor Island cargo operation, you hope to get that up and running in the coming months, so I am just wondering if you could quickly just go into that a little bit more about sort of where things stand with that operation, I guess maybe that you have verification you are needing from the FAA?

Peter Ingram: We don’t have every certification in hand. We have as I have mentioned on previous calls Adrian, it’s a complicated series of transactions, because each one of these airplanes, because they were modified from passenger ATR 72s, have a series of supplemental type certificates and each one of those needs to be approved on the FAA registry to get it over. We have a sufficiently clear line of sight on completing those that we expected to be done in the next few months and have them over here flying later this year. We don’t have a sufficiently clear line of sight for me to give you a specific date at this point in time. But we are confident that we are getting close.

Operator: Our next question comes from Jon Hemmerdinger of Flightglobal.

Mark Dunkerley: Jon, are you there?

Jon Hemmerdinger: Hello, yes. I had it on mute. Hi, guys. How are you?

Mark Dunkerley: Good.

Jon Hemmerdinger: Hey, I don’t know if you have said this real quick. But with the revised timeline for the A321neos, when we probably enter service? I think deliveries are in the fourth quarter now we are saying, but when will they go into service?

Mark Dunkerley: We are hoping to get them in a couple of weeks before Christmas. But that is, by no means sure at this stage. And we will update that when we get a little bit closer to the date. But really, if you look at the context of 2017, this will be a 2018 event.

Jon Hemmerdinger: Okay. And the other thing, you had just kind of a longer term question. You had mentioned that you were looking at whether the A330 would be able to reach Europe. And I spoke to you guys about this last year and you said you were looking into it, you weren’t quite sure. Any thoughts on that? And any new thoughts on whether it would be viable to fly there?

Mark Dunkerley: No.

I mean, I think that conversation was in the context of the A330-800neo and we have had no update on the performance capabilities of the aircraft. And therefore, we haven’t been able to advance our thinking on that.

Operator: Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the call back over to Mr. Mark Dunkerley, President and CEO, for closing remarks.

Mark Dunkerley: Okay. Well, thank you everybody for joining us today. 2016 was a great year for us as we continued to successfully execute decade-long plan to grow value for our shareholders and indeed to grow our business. Our business is stronger giving us a great deal of confidence for 2017 and beyond. So, thank you very much for taking the time to join us.

Aloha.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.