Q3 2019 Earnings Call
Greetings and welcome to the Hawaiian Holdings' third quarter fiscal year 2019 earnings call.
At this time all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero and telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to our host a lot of James managing director of IR for Hawaiian Holdings. Thank you you may begin.
Thank you Diego Hello, everyone and welcome to Hawaiian Holdings' third quarter 2019 earnings call.
Here with me in Honolulu, our Peter Ingram, our President and Chief Executive Officer, Shannon Okinaka, Our Chief Financial Officer, and Grant Overby, Our 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. We we'll then open up the call for questions and Peter will end with some closing remarks.
By now everyone should have access to the press release I went out at about four o'clock eastern time today, if you've not received the release. It is available on the Investor Relations page of our website Hawaiian Airlines dotcom.
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 at the end of today's press release.
Listed on the Investor Relations page of our website.
As a reminder, the following prepared remarks contain forward looking statements, including statements about our future plans and potential future and financial operating performance.
Management May also make additional forward looking statements in response to your questions.
These statements are subject to risks and uncertainties and do not guarantee future performance. Therefore undue reliance should not be placed upon them.
We refer you to Hawaiian Holdings' recent filings with the FCC for a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward looking statement.
This includes the most recent annual report filed on Form 10-K as well as subsequent reports filed on Form 10-Q , an 8-K.
I will now turn the call over to Peter.
Hello, Hello, everyone and thank you for joining us today.
As you have seen in our press release today, our team executed extremely well during the peak summer period and demand to from and within Hawaii remains robust.
In the face of increasing competition, we reported strong results, which surpassed what we had expected at entering the quarter.
More precisely we are well above our initial guidance range on RASM, well CASM ex fuel cell in line with our expectations at the beginning of the quarter.
We posted adjusted net income of $81.5 million and adjusted EPS of $1.72 per share.
Our third quarter adjusted pre tax margin was 14.6%, which brings us to an adjusted pre tax margin of 11.1% year to date.
These results were solid considering the competitive capacity increases we have seen across our network over the past two years.
A time when many of our competitors have enjoyed a more benign capacity environment across their networks.
And once again these results demonstrate the resilience of our business model and the competitiveness of our airline.
My Thanks as always go out to my 7300 fantastic colleagues, both on the front lines and in the back office for their contributions to this performance and for continuing to run the best operation in the business.
I'm also pleased that we continue to make progress towards a variety of objectives, we set out for ourselves this year.
During the third quarter, we achieved an important milestone with us sales launch of our main cabin basic product.
Main Kevin basic sales for our Los Angeles Long Beach, and Sacramento non stop routes were launched on September 20, Threerd for flights commencing on October 20 Onest.
And we continue to roll out the product across our North America network in the ensuing weeks.
Bringing main cabin basic to market was a complicated initiative and my thanks go out to all of the people in our organization, who have collectively contributed thousands of hours of effort to this initiative.
And bringing it in on time and on budget.
With main Kevin basic we now have the ideal product in our portfolio for those guests who value the lowest possible price for travel and quite importantly, a new competitive tool against other carriers offering basic economy products today.
During the quarter, we took delivery of our 14th and 15th Athree 21, Neos continuing to build out of our fleet to support our North America gross growth strategy.
As we've noted before the Athree 21, Neo is perfect for our network not only because it is the right size for the mid size origin and destination markets that were more challenging to make work with our previous all widebody fleet.
But also because it is the most fuel efficient airplanes flying between North America and Hawaii.
Clear evidence of this is a 3.3% year over year decline in our fuel consumption this quarter compared to a 0.4% system capacity reduction.
Three deliveries remain on our current Neo order book two scheduled for the fourth quarter of 2019, and our final one in the first quarter of 2020.
I should also note that all of these deliveries are scheduled to be from mobile, Alabama and as a result, we're not expecting any impact from the announced tariffs on European aircraft.
On the international front, we were disappointed with the tentative DLP ruling to approve our partnership with gel without antitrust immunity.
Despite the clear benefits from our cooperation with gel to date, we believe we need a tie to realize the full consumer benefits of the partnership.
As many of you already know we requested an extension of the deadline for our replied to the show cause order until November 12 to allow us appropriate time to better articulate the need for ATI to deliver the public benefits of the joint venture is capable of.
We have been granted this extension by the duty and are working closely with gel to supplement our application to address the concerns identified by the DLP and its order.
In the meantime, we're continuing to pursue opportunities as they arise and along these lines. Our team is busy planning for the inauguration of our new route to frugal woke up toward the end of November .
The response, we have received from the community in Fukuoka has been overwhelmingly positive and we're excited to bring back non stop service to the Hawaiian islands to the residents of Fukuoka.
Initial bookings are strong.
Giving us confidence so we can mature this new route quickly.
We were formally awarded the additional Henrietta slot for which we had tentative approval. When we last spoke and we're on track to start the additional service in March of 2020.
This new flight promises to add diversity to our flight times, giving our Tokyo gas more options.
And enabling increased connecting opportunities for guests in parts of Japan without convenient service today.
These connections in particular will benefit from our JV. If we are permitted antitrust immunized coordination opportunities with gel.
At the beginning of 2019, we expressed confidence in our ability to continue to compete and win and to continue to be the carrier of choice to from and within Hawaii.
And our team is justifying this confidence by relentlessly focusing on delivering authentic Hawaiian hospitality to our guests and executing our specific network missions better than any of our competitors.
Our ability to not only sustain but grow our revenue premium over the other us carrier serving Hawaii in a heightened capacity environment highlights the strength of our proven formula.
As we move toward the end of 2019 I'm pleased to note of we're delivering on the key priorities that we established at the beginning of the year, while also posting strong financial and operational performance.
We are delivering products, our guests value with our North America Neo expansion the launch of our new and kept main cabin basic product, our new route to Boston and the growth in our Japan franchise.
We have made strides towards our aspiration of making travel effortless with the launch of our new mobile App lobby improvements in Honolulu, and the neighbor Islands and other investments in our guests day of travel experience.
On this initiative, we have additional projects underway that will deliver an even better day of travel experience in 2020 and beyond.
We are on track to generate important structural cost savings through our cost transformation initiative, which Shannon will elaborate on later.
And we are building our foundation for the future with technology improvements process autumn optimization and investments in our facilities.
Looking forward through the ended the year and into 2020, I see us continuing to focus on some of these same initiatives.
At our main hub in Honolulu, we're embarking on a phased approach to overhauling, our check and lobby to increase throughput and enhance our guest experience.
We're currently working collaboratively with our landlord the state DLP to finalize plans for this project.
We are committed to delivering our cost transformation initiatives and 2020 will be an important year with analysis, ending and realization of savings ramping up.
We'll take the final three Athree 21 deals on our current order and continue to prepare for our first seven eight sevens in the early part of 2021.
And from a network perspective will return to Fukuoka, and a little over a month and expand our presence in Tokyo next spring as we continue to fortify our successful Japan business.
How our team has handled increasing competition over the last two years convinces me that we are competing from a position of strength.
I'm proud of what our team has accomplished and optimistic that we have all the elements in place to be successful over the long term as the carrier of choice to from and within Hawaii.
I'll now turn the call over to Brent to talk about our revenue performance.
Thank you Peter and Aloha, everyone.
Our third quarter revenue results reflects robust demand across our network and strong execution by the Hawaiian team.
Our topline revenue capacity and resulting RASM were all roughly flat year over year. She is a great result in light of the competitive incursions on multiple fronts and a 7% increase in our own networks ESM weighted state average stage length.
Despite industry capacity in our North America, and neighbor island geographies, increasing 7% year over year during the quarter.
Our domestic PRASM was down only 2.4% year over year.
We saw strong close in demand and solid pricing in North America during the back half of the third quarter.
While our year over year traffic increase was largely expected in light of the weather events. During the third quarter of 2018, we were encouraged by the relative yield strength in August and September that exceeded our initial expectations.
Our Athree 21, Neo roots and new service to Boston are also developing as expected and we're pleased with our performance thus far.
Based on the most recent data available to compare relative revenue performance on the West coast to Hawaii, not only did we maintain our double digit PRASM premium relative to our competitors, but we were able to moderately expand that premium.
This reinforces the benefits of a strong North American network.
Optimally configured aircraft.
In a singular focus on the Hawaii traveler.
The outlook for industry capacity shows a 9% growth next quarter and while we expect some yield pressure from the increased capacity, we're confident in our ability to continue to compete effectively across a variety of market conditions.
As Peter mentioned, we achieved an important milestone with the launch of sales for our main Kevin basic product on September 20 Threerd.
Prior to the launch of main Kevin basic the lowest fare product. We had offered was our full service mid cabin product.
The introduction of main Kevin basic to our product portfolio will further strengthen our ability to compete in North America and will mitigate some of the downward pressure on yield.
Although we are in the very early stages. We're encouraged by the performance of the product to date and we have every reason to believe that the 15% $25 million annual benefited. This initiative. This initiative will be achieved.
I'd like to Echo Peters granted to the team involved in Lunching main Kevin basic.
I'm extremely proud of the collaboration.
Dedication and commitment of each of the team members, which resulted in the successful launch of this complex and important initiative.
Demand for neighbor Island travel remains solid however, we continue to see pressure on yields due to the widely available promotional pricing in the market.
The outlook for the fourth quarter has industry capacity growing 11.6% year over year, which we expect will have a continued impact on yields.
We are well equipped to compete in this geography for several reasons, we have a breadth and depth to our neighbor island schedule that meets the needs of local travelers.
Strong loyalty program based here in the islands.
The ideal aircraft for the mission.
And the ability to recover quickly from operational disruption and continued to deliver value to our guests.
Internationally, we had another great quarter with third quarter, PRASM up 5% year over year.
Demand for the Hawaii vacation was robust and pricing generally remained strong as we move through the quarter.
The premium cabin continuing to perform well on international routes with PRASM up 9% year over year.
Overall this was the 14th consecutive quarter of year over year PRASM improvements for the entity validating the investments we've made in our team and our product.
Japan performance remained strong during the during the quarter and we're excited to continue growing the franchise with the launch of Fukuoka service in November .
Well the DRG tentative ruling regarding our anti application with Joe was disappointing we're focused on preparing our response the duty and continuing to work on building our partnership with Jeff.
Our value added revenue streams also continued to strengthen with value added revenue per passenger up 10% year over year.
Extra comfort and preferred seat revenue performance continues to set records and we remain on track to comfortably surpass our 100 million dollar target for 2019.
Revenue from the sale of Hawaiianmiles also set a new quarterly record and continues to contribute meaningfully to our value added revenue per passenger.
Cargo revenue for the quarter was down 9% year over year due to lower volumes out of Asia.
Although we saw sequential improvement versus last quarter as the team has been working hard to adapt to the current macroeconomic conditions.
Now looking ahead to the fourth quarter, we expect our capacity to increase between 3% to 4.5% year over year.
The largest increasing capacity during a quarter for 2019.
Our fourth quarter year over year capacity increases driven by the launch of our new route from Maui to Las Vegas.
The reintroduction of our Fukuoka route.
The introduction of a second daily service from San Francisco to Honolulu.
And our new service to Boston, which started in April of this year.
We expect continued strengthen our international geography, as well as robust demand in our domestic markets offset by average fare pressure in that entity.
The net of this as we expect our fourth quarter RASM to be down between 0.5% to 3.5% year over year.
The nominal sequential slowing of RASM in the fourth quarter is driven by a number of factors.
The sequential increase in industry capacity growth.
The launch of two new routes later in the quarter.
And the impact of our increase stage lengths.
While we anticipate some benefits from Maine, Kevin basic in the fourth quarter, we will come much closer to our annual run rate level in the first quarter of 2020 due to our longer booking curve.
As we look beyond the fourth quarter and out into 2020, we expect our capacity growth in the mid to high single digits, which is higher than our targeted.
Long term growth rate, a low to mid single digits.
Our growth in 2020 is driven by the timing of aircraft deliveries and relatively low growth in 2019.
This growth is largely fueled by the Annualization of New services started and 29 team and the launch of our new Haneda frequency in the March of 2020.
Overall, we are optimistic about the future and our ability to compete to win in the markets. We serve we excited about our growth prospects as we come to the final phase of our Athree 21 Neal expansion.
Bookings for the Athree hundred Twentyneo roots are on track and our expectation with our expectations and we look forward to continuing to grow our North America to away network with an aircraft as ideally suited to the mission.
We are growing and strengthening our north American network as as freeing up wide body aircraft to support growth in our long haul markets.
We anticipate meaningful revenue improvement through multiple initiatives.
Main Kevin basic.
The gel partnership.
The continued monetization of our premium cabin investments.
And other value added revenue, which will drive revenue performance going forward irrespective of the competitive environment.
We are executing well against our plan for 2019, our results demonstrate that we've built a strong competitive position through our diversified network in our unmatched guest experience with authentic Hawaiian hospitality.
I am confident that this winning combination that will allow us to withstand short term competitive pressure and succeed in the long term.
And with that I'll now turn the call over to Shannon.
Thanks Brent.
Hello, everyone and thank you for joining us today.
I'll start with a brief recap of our third quarter results today, we reported third quarter, adjusted net income of $81.5 million or $1.72 cents per share.
And adjusted pre tax margin of 14.6%.
Our ability to continue to deliver strong financial results demonstrate the strength of our business model.
The benefits of a diversified network.
And our resilience to competitive pressures.
In the third quarter, CASM ex fuel and items increased 4.9% year over year inline with expectations at the beginning of the quarter.
As a reminder to sequentially higher year over year cost, we experienced in the third quarter or an anomaly duty unique factors related to our fleet transition and the timing of maintenance events and then not evidence of a trend.
Our economic field costs per gallon for the third quarter was $2.04, which is better than our expectations at the beginning of the quarter. Despite the short term flip in paces in September .
On the financing fan, we closed aircraft that Japanese yen denominated financing transactions totaling $220 million during the third quarter.
The yen denominated loans provide a natural cash flow hedged to our yen revenue exposure at a very attractive coupon rate of less than 100 basis points.
We also extended the leases on three Athree 30 aircraft, resulting in meaningful cost savings.
We structured the Athree 30 lease extensions in a manner that maintain flexibility in our fleet plan.
Such that we can adjust the growth of our network to our desired pace.
Based on market conditions, when we start receiving our 77 deliveries.
Additionally, in the third quarter, we returned $26 million to shareholders through dividends and share buybacks.
We bought that $20 million of outstanding shares.
Leaving approximately 47 million remaining of our current 100 million dollar authorization.
Year to date to the end of the third quarter, we've bought back 3.9% of our shares outstanding.
During the third quarter, we continued to make good progress on changing the way, we did business to generate structural cost savings.
Primarily through vendor management and aircraft ownership initiatives, we're now on track to execute on over $40 million of annualized savings by the end of 2019.
And continue to see more opportunities in these categories and others, such as labor productivity and overhead.
Altogether, we have identified initiatives with a cumulative potential for annual savings of over $150 million and we're in the process now evaluating their feasibility as well as prioritizing them against our strategic imperative to ensure alignment I.
Im confident that will reach our 100 million dollar target in 2021 and deliver on this important priority.
Looking forward to the fourth quarter, we expect CASM ex fuel and items to be up between 0.5, and 3.5% compared to last year, reflecting more normalized year over year changes.
Our fourth quarter CASM ex forecast includes headwinds.
From contractual labor rate increases and the associated benefits.
Sterling about one point.
An increase in ITC spend as we invest in our technology capability totaling about half a point.
An increase in variable compensation due to improved financial performance totaling about half a point.
The impact of maintenance credits received in the fourth quarter of 2018, not expected to reoccur in 2019 as well as an increase in aircraft maintenance events totaling about half a point.
And offsetting these pressures our savings from our 82 30 lease renegotiations totaling a little more than half a point.
We're increasing our full year CASM ex guidance slightly primarily due to an increase in variable compensation due to improved financial performance as well as higher than expected fleet transition costs.
Not included in our CASM ex fuel ranges are any assumptions relating to the amendable contract with our flight attendants Union.
We continue our negotiations with our flight attendants under the oversight of the National Mediation Board.
We're eager to bring these negotiations to upload and reach an agreement with recognize the contributions on our flight attendants to our company success, while maintaining our cost competitiveness for the long term.
Based on the fuel curve as I've as of October 10.
Our economic fuel cost is estimated to be $2.02 for the fourth quarter, and we're lowering our full year forecast to be $2.05.
As of September 32019, we've hedged approximately 50% of our projected fuel requirements for the fourth quarter.
Our capex for the full year 2019 is now expected to be between 410 at $430 million, which is within our initial guidance range.
As we look ahead into 2020, we're expecting much lower capex than 2019 with only one planned aircraft delivery.
This will give us an opportunity to focus on generating greater value from our current investments and prepare for our next widebody growth base, while driving long term structural cost reduction initiatives.
Overall, I'm pleased with our financial performance, particularly given the evolving competitive environment.
And I'm optimistic about our future.
We're committed to cost discipline, which combined with our multiple revenue initiatives will position us for continued success in the long term as we generate value for our guests and our shareholders.
Over the years, we've built a world class airline with a strong brand and healthy balance sheet.
We have the right aircraft with superior revenue generating capability for each distinct mission in our network.
And we deliver award winning authentic line hospitality to our guests each and every day.
This concludes our prepared remarks, I'll now turn the call back over to a lot of.
Thank you Peter Shannon and Brent.
We'd 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 analyst.
As a reminder, please limit yourself to one question and if needed one follow up question Diego. Please open the line for questions.
Thank you.
At this time, we will conduct a question and answer session.
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Okay.
My first question comes from Joseph Denardi with Stifel. Please state your question.
Yes, thanks, good evening.
Brent I think I think you said in third quarter, North American PRASM was down 2%.
On a 7% increase in industry capacity, which is a really really good result can you just theorize on what's driving that is it kind of demand stimulation from some of the new capacity in the market as it demand shifting from other markets.
Sure some of its your own good execution, but maybe just a little bit more color on what's what's driving that.
Sure Joe I think it's a combination of several things I think it is one.
Starting with kind of matching the right airplanes for the right markets for us in terms of our 321 rollout plan and we continue to execute really well on those and generates a benefit of of that fleet.
Some of it as well in our cases benefits of continued investments in extra comfort and premium cabin, which are driving.
Performance in the front part of our airplane.
That is certainly helping the bottom line and beyond that I think we had really good execution.
In a quarter.
That was a bit choppier last year in terms of some weather events and so our execution as we got through the latter part of a quarter was quite good and and we just saw solid performance there.
Okay, and then can answer if you. If you mentioned this but I guess relative to Brent kind of capacity commentary for next year, what should we think about CASM ex trends into next year, and then maybe beyond that as some of the cost savings initiatives take hold.
Yes, Thanks, Joe So we're still in our planning process for 2020.
I'm not quite ready to give guidance, but we can talk about some of the puts and takes and.
Friends Azim comments about 2020 is important much higher than what we saw this year I'm also were fully baking in.
The $40 million of cost savings that we've already executed on this year plus more we havent.
Like I said I can't give guidance quite yet as we're still going to the planning process.
But I'm very excited about that.
As well as.
You know we've got.
Lower.
Capex not really related to how them but.
We've also got I'm trying to think none of the guidance of course includes any of the if they assumptions that obviously would probably be an offset whenever that is resolved hopefully soon.
But I I eat well I can give guidance I can say that I'm really happy with where we are as we look forward with costs I'm really excited about our cost savings initiatives.
So.
Without giving guidance, that's probably the best that could give you.
Okay. Thank you.
Our next question comes from Steve O'hara, with Sidoti and company. Please state your question.
Hi, good afternoon.
Well in terms of the.
The.
Actually the growth and.
Issues there with.
Capacity coming to the mainland.
I'm just curious what the impact.
So far as bad from the.
The change in the regulations around air being fees.
I guess, they're short term rentals and things like that I guess some of the.
Government agency seem to think or I think it was your hero that was kind of negative in terms of the impact just curious you've seen anything there that you expect longer term.
Yes, Thanks, Steve.
As of right now, we havent really be able being able to see any impact on.
Demand that we can attribute to.
The changes in regulations around vacation rentals. It is something that we continue to monitor and we'll we'll look to see if theres anything we can identify going forward, but.
Right now based on how we closed out the third quarter and our bookings in the fourth quarter and going into next year, we continue to see.
Robust demand for traveled to Hawaii from North America and from our international destinations.
Okay.
And then I guess.
I think about Hawaiian.
Versus other airlines maybe.
Usdeight their lives.
I'm just wondering.
It seems like you guys have kind of short haul in long haul not a lot of in between.
But in terms of the opportunities that are out there.
Where do you see that better opportunity set it longer longer haul.
Steve or is it shorter haul opportunities within maybe North America I guess.
<unk> versus international and then.
Are you able to source aircraft.
In a timely manner to kind of meet those opportunities or do you think you have the right kind of fleet going forward.
Target those thank you.
Yes, let me start and then maybe see if Brent has any additional comments.
You know I would say we see.
Opportunities in the future in a variety of places I think in.
You know our market share of any of the geographies we.
We serve with the exception of neighbor Island is not so high that that we don't have opportunity for gains and there's there's.
Consistently been growing demand for travel to Hawaii I think.
Nearer term you obviously, we've got the Japan.
Flights were we're starting in November and March of next year. So that's a lot of the focus for.
The next year or so I think we see continued opportunities in in North America to to build our franchise.
And and certainly in Japan going forward and elsewhere internationally. So.
We have we've built a network that is really focused on the important sources of Hawaii visitors and I think that gives us the opportunity to be opportunistic about looking at.
Add.
Things that are available when they become available and so you know currency in fuel in different macro factors will have an effect from time to time, but I think we're in a position with our diversified network to Hawaii of being able to.
To take advantage of opportunities and also to it.
Just two circumstances.
As far as your fleet question goes I think for we do have.
Aircraft on the order Shannon mentioned.
Okay.
Primarily once we got through these 83 21 neos between now and March.
The aircraft we have on order right now are off.
Our.
Seven eight sevens.
Seven eight sevens will allow us to.
To in some cases free up some narrow bodies for other opportunities or to grow long term and will also be able to replace athree hundred thirtys.
Beyond what's currently on order I would say for the aircraft that we are likely to grow with which is the ones that are.
Our generally in our fleet right now there is considerable order book. So so there's a bit of a lag to get to them, but we've anticipated that we've got aircraft on order and we've got flexibility to manage our growth with retirements overtime if circumstances warrant.
Yeah, I think Peter laid it out very well we've got.
Yes, a real ability kind of grow opportunistically wherever we see the opportunity in the network, whether it be on west coast, whether it'd be deeper in the North America, whether beauty international side.
And the timing of 77 deliveries and what that does from a fleet flexibility really will enable us to be opportunistic as we look into 22 and 23 and beyond.
Okay. Thank you very much.
Thanks, Steve.
Thank you. Our next question comes from Helane Becker with Cowen and company. Please state your question.
Hey, Thanks, very much operator for a time and hi team. Thank you very much for taking the question.
Can you just talk about the acceptance or are they increase it you're seeing in your corporate card.
I don't know, what's the right were take rates.
And given the increased competition or capacity in the local market.
Yes sure.
Helane use the term corporate card I think you're referring to our co brand credit card, which would yes halfway through.
We went but.
Most of my.
First of all focus.
We've actually had.
No no problem, it's a it's a great question and we've actually seen.
Really strong demand we are on track for a a record in new card applications.
For this year and strong growth over 2018, so we're seeing great demand for the card. It is we've got terrific penetration here in Hawaii. It is also very popular with people on the U.S. mainland, particularly on on the West coast them, We're happy with the continued growth of the.
The credit card portfolio.
Is there anyway, you can like say numbers [laughter] like can you say, we saw you know X percent crews and in the quarter in a year or some numbers that just give us a sense of what you know great penetration and and excellent acceptance means.
Yes.
Let me, let me think about that one and we'll we'll think about how we can give some more information going forward I don't have it on my fingertips right now and I don't just want to sort of chewed off.
A number haphazardly, so so let us take that went away.
Okay Fair enough and then my other question is just with respect to aircraft deliveries I think.
Your last aircraft on this order comes you mentioned in the first quarter and then you don't get anything until 2021. So when we think about returning capital to shareholders. Next year are you thinking about you know increasing the share repurchase program or are you thinking about.
During what is the right word warehousing the cost the cash for for like the Knicks. The next round of aircraft purchases or how should we think about you know 2020 as.
I don't know capital return year or cash generation year Freak, what you do it for free cash flow anyone of those.
Like pick one [laughter].
Sure.
Thanks, Let me, let me start Noblet Shannon chime in if if she wants to add onto this I would say.
First of all shaming gave the numbers we've been executing on the.
The outstanding share repurchase more more than than halfway through.
The 100 million dollar program, we announced in the latter part of of last year. So we are we're continuing to think about capital returns. All so we've got the dividend that adds to the capital returns profile.
I'm not wanting to speculate on what will happen. After the current program goes but I will say.
That as we build our plans for next year one of the features an Chen mentioned this was that our Capex is lower next year.
That.
Combined with our expectations of our performance means we would expect to have greater free cash flow generation.
Next year and.
We will obviously be thinking about.
The priorities for that free cash flow generation, one of them or it is reinvesting in the business.
Seeking.
Increases in capital returns I think we've got a variety of options and we'll continue to be balanced in our approach to how we.
How we execute against that.
Yeah, I'm, usually lead when we talk about sources and uses monthly uses of cash Oh, we usually have a third bucket as well in addition to in a shareholder return.
And investment in the business, which is strengthening our balance sheet I think our balance sheet is that of at a really good.
Point.
Right now so and that's why I think Peter mentioned only at the other two and I think that is where our focus is we've got a lot of facilities.
Then technology and that's how we're continuing to make but we're always balancing that and looking at the shareholder returns as well.
Great. Thanks team I really appreciate that helped their seven they stack or.
Thanks Glenn.
Our next question comes from Rajiv No Ahwahnee with Morgan Stanley . Please state your question.
Hi, Thanks for the time.
In France, actually and international question or two for you at a high level can you just talk about.
Supplies have been looking there I know there was.
So, let's talk about Athree eightys coming through.
Just wondering if that's already in the past now and into more of a a benign set up going forward on relating to that'd be great ticket an update.
FX and surcharge impacts and if we're at sort of steady state on that.
Yes, so I'll cover years. Your second question first I mean, we didnt have any comments around.
Forex and fuel surcharge in the quarter here because it was frankly it was pretty benign.
And so weve in Threeq, you, we had relatively equilibrium in terms of that from a year over year perspective.
As we look out into Fourq queue at this point.
We don't anticipate a material change to that this right now.
In terms of a of capacity on the international side.
Specifically around the 380 some of that capacity has come in at some of it has been offset by reductions in capacity in other parts of Japan, there's been some reductions and capacity in Osaka and some other carriers have trimmed a little bit of took the Tokyo capacity.
So theres a bit more to go I think in terms of what M&A has committed to doing obviously, we've got our own capacity growth in Tokyo.
At the end of the first quarter in 2020.
On the rest of the international franchise.
There's been a little bit of capacity continues to come out of out of Australia New Zealand.
More specifically in New Zealand, where capacity has ramped up.
A bit more in previous years, and so we see some of that coming out of the marketplace.
That's great and Shannon if I may have a quick one for you I appreciate you're not giving Calvin guidance for next year, but is there anything wrong with us assuming that with the big growth.
The next year, that's above trend that that shouldn't lead to a tailwind on.
The unit cost side or is there some investments that that would have to be made with with all that capacity, whether it's on a flavor side.
Or elsewhere in the system.
Yeah. Thanks Angie.
There really big differences in the business.
Other than the fans love the SM Sad that Brent mentioned, then and our cost transformation. So.
Yeah and did you just follow on that I I think Shannons got it absolutely right. We have the unknown we have right now is.
Where the the ethane negotiation is resolved I share.
The Shannon's comments from the called up that we hope that gets resolved sooner rather than.
Then later, but aside from that we have normal inflationary increases there some step increases in existing labor contracts, but but those are the normal.
Sort of year on year increases that we have to deal with as a business that capacity growth does provide us.
A.
Good opportunity on the cost side.
Next year and as we go through the Biogen, we expect to make sure that were.
We're realizing all the benefits of that the weekend.
Thank you guys.
Our next question comes from Mike Linenberg with Deutsche Bank. Please state your question.
Yeah, Hey, two quick ones here I guess just to Brent you talked about a lot of introductory fares in the entire island market. How would you characterize the extent of maybe to the stimulation that you're seeing if any you know what he is it really truly immature market and we're just seeing share shifting around are we seeing.
Things, some meaning meaningful sort of pick up in number of people flying between the islands.
So Michael I, just look at hey, our own trap.
If I looked at our own traffic that we generate a neighbor islands over the course of the quarter, our our passengers boarded the around roughly flat year over year.
And so any any change to that you know there in terms of.
The competitor, having a having some some traffic on that would've been would have been stimulative and overall the market size I think in Threeq you would have grown.
Again, some of that is off of a base of a little more challenging quarter last last year with some weather events. We had here in the state and Mike. This is Peter just set to add on to that you know I've been around Hawaii, the Hawaii market now for.
Almost a decade and a half and I think the way we have characterized it in the past than I think this is reflected now is that.
That is mature market the price elasticity is less than one but the price elasticity is not you're off so we do see.
Some stimulation, but but with an elasticity of less than one.
Okay. That's okay. That's.
Great color and then Peter I, you know I want to ask you about you know the decision to start service to Honolulu, Fukuoka I realize it was a market that you're in some time ago, you backed away obviously the world is changed a little bit, but I suspect that the decision to go into that market.
Was probably you know with the view that you would probably see.
Antitrust immunized deal in place high at the time to either started or soon thereafter and I'm. Just curious with you know the the absence of 18 <unk> in your Chow agreement, how does that change the calculus on maybe your appetite to do additional secondary.
Three markets down the road it would seem like that 80, I would almost be an essential.
You know whether it would be you know I don't know I think I think you had at one point you either in send a you know that go into some of these other markets like just your thoughts on that because I feel like it is maybe a bit of a game changer herrick.
Any elaboration, we great. Thanks.
Sure Let me, let me talk about it in general and then and then talk about Fukuoka.
In specific.
In General I think one of the.
The great public benefit opportunities, we see from from the T.I. application is greater opportunities for growth in the long term and I think there are you know on the margin.
There are going to be opportunities that.
That would make sense only with an ATM immunized.
Partnership with Jal, but may not be possible. If if we don't end up getting the a guy immunized partnership. So I think the premise of your question is accurate.
Let me sort of step back and talking about food go okay and in particular, because this is one we obviously announced.
Without certainty about about 80, I and so obviously, we had a level of confidence that that either way, but it would be a good opportunity for us and I think you're right that it is it's very different circumstances and when we were operating before when we were operating before we had our seventh.
Seven aircraft on the route we know.
From putting that the threethirty into Sapporo, a while ago that the performance of that one was positive even with a slightly larger airplane and so I think that's that's a tailwind to the fukowoka opportunity when we were operating Fukuoka.
Before there were 14.
Frequencies a week in the market and we are launching this in November with initially for frequencies per week. So that's that's a different.
Circumstance on a different hurdle in terms of demand, we need to realize to to make a successful.
<unk>.
And we do have even without a T.I., we do have the benefits of some of the job cooperation that is available today, which is a different circumstance. So I think all of that is accrues to too.
Gives us confidence about that opportunity with or without a T.I. I would add in that our commercial execution over the last few years and how we performed in Japan is has.
We've moved the bar higher on that so I think fukowoka is going to be a good opportunity but that doesn't.
That doesn't detract from some of the merits of a of the logic of your question that that on the margin.
What we can do.
With a tie in terms of growth is different than what we can do without a tie in terms the markets for.
Obvious Hawaii selected those particular ones, but just how are we think about that going forward.
So.
You know we launched it with.
Three specific nonstop roots in late September that was that was really part of a plan to have a phased rollout. So that we could do testing and make sure we weren't rolling it out to comprehensively before we had made sure.
But everything was working in terms of our technology and our process.
When I referred in the prepared remarks to the subsequent rollout over over the following weeks was actually.
Never have already been a number of phases and at this point, we're pretty comprehensively rolled out across our north American network, including in connecting markets and so.
So so that is that is something that is in place today.
When we announced we were going to do main cabin basic what we what we said was that we were focusing on North America and that remains our priority right now and I think we're going to we're going to see how everything works. Aaron then think about whether there are opportunities down the road to consider.
Some of the either main cabin basic or using some of that technology in other geographies to.
Give us a little more product variety.
Got it Okay, and then would you ever consider that in I know so many Asian market I know some of the Lccs head to head try to.
That make us flash, but I did notice on retrenching on that would that make sense to to do it like and some of the Japanese market. So it to further you know have more product offering there does that not makes sense because I did notice like airasia acts like some of them looks like there you know retrenched.
So what I would say is we're going to continue to be open minded and one of the things that is a truism in this business is that.
But the markets, we operate and continue to evolve over time with different products and services and airline business models.
I would agree with your premise that some of the international markets are a little bit more traditional and it may not make sense in the near term, but I would also say if you look at.
Some of the the products that are available from our competitors in places like Australia, New Zealand already incorporate many of these concepts. So I think it'll be a sort of market by market country by country geography by geography look that we take about where we see opportunities.
Got it Okay, and then just a follow up to an earlier question and that was you know growth opportunities when we think about international in Japan.
Clearly a growth area, we think of the other countries I know that China had been tried and I'm, obviously not the time to go back now but.
In terms of the when we think about your international would it be new markets or do you think you can you know Additionally add to it still yeah, you're doing in New Zealand et cetera, how would we think about that in terms of the growth.
Sure. It's a terrific question it it is.
Something we spent a lot of time talking about and I think it is.
It is another thing that we expect to evolve over time, you know I year ago.
We went through our Threed time, a week service to China coming to the conclusion that this was not the right time.
For service from from China to Hawaii, and and that is something that.
As you suggested in the near term, we're probably not going back to but I still believe that China is a.
A market with massive potential and there will there will come a time again, where it.
China will become an important source of visitors for Hawaii, and we may return to that market I think in terms of of.
The the international places, we serve domestically or Kurt sort of currently including Australia, New Zealand and Korea, we see additional opportunities.
I would say again, if you have to keep in mind.
The evolution of the macro environment and right now, we're an environment, where the U.S. dollar is very strong and has been strong for awhile.
The point of sale for flights to Hawaii is always going to be.
Hilton towards the international and of the flight and so that May suggest that this is not the moments in time to really be doubling down on on international expansion, but.
But I will remind people that currency markets change over time and that will present opportunities overtime and we are we're well positioned because of the network that we have built and the selling structure on the improved market infrastructure and the evolution of our commercial execution.
To take advantage of those opportunities when they present themselves.
Great. Thank you.
Thank you just a reminder to parts.
Just to remind us all participants. Please one question and one follow up question when the queue up thank you.
Our next question comes from Catherine O'brien with Goldman Sachs. Please state your question.
Hi, everyone. Thanks, so much for the time.
Oh so.
As we go into next year, how should we think about the ranking the size of the contribution of some of your 2025 initiatives you know between mid cabin basic Jal partnerships and the other ancillary as you mentioned and then improved merchandising on the premium cabin and I guess kind of like a follow up to that one and how would that look.
If the deal key decides to reverse the initial ruling.
They don't decide to cover that thanks.
So will you know we've shared some details.
Around kind of main Kevin basic and and our estimates evaluation.
In terms of 15 to 25 million annually and I think thats, probably a pretty solid number.
For 2020, as we look out into that we've got well have a little bit of a booking curve impact flight from when we started and so first quarter, we'll take a little bit of time to ramp up but I'm pretty confident with where we're at.
On that as we think of gel.
We continue to work with them, we continue to get benefits from the partnership today.
Clearly the importance of 18 maintaining that.
Value of those benefits.
Grow materially.
For granted 80, I and we can make the network choices and and create the consumer benefit that.
That we envision and that we that we see exists I'm frankly in terms of our proposals.
We haven't put a number on that and that's something that I think as we look forward and into 2020 will will firm up.
But we think there's there's benefits there as well as we look out into 2020, I think when I look at kind of credit card when I look at extra comfort.
There's continued run rate and those products as well.
And just one thing I would add to that specific to to the general partnership I think one difference that we have relative to three months ago with the.
The show cause order, having now being delivered is that.
Even if we are successful or if we're successful in convincing the the diodati to reconsider Ritz.
It's tentative corridor.
Timing of when we start because of the elongated regulatory process is probably going to be a little later into 2020 than what we would've been thinking a few months ago.
Understood and then maybe just two quick ones for Brent I know you gave the breakout on PRASM between.
Domestic international but could you give us any what North America and dryland is below that and then maybe just a follow up Turkey. The question earlier. He gives us a feel for what international industry capacity has looked like and what that looks like into year end, maybe one to 20 point. Thanks a lot.
So in terms of Threeq, you performance North American neighbor Island, where we're quite similar in terms of RASM performance and so.
They were they were quite close if we looked at the two entities that the two sub entities that make up the entity. So I.
I think pretty consistent between those.
If we look at the international side of the business we've got a.
International capacity down about 5% year over year in Fourq, you and down about force 4%.
And one Q and that's just based on currently published.
Schedules.
Okay. Thanks, so much.
Thank you. Our next question comes from Hunter Keay with Wolfe Research. Please state your question.
Hi, everybody. Thank you.
So the main Kevin basic I understand this was probably created defensively again save affairs in southwest product, but they both have Wi Fi and you're going have to do that at some point. So I would imagine that product gap is going to get worse as main cabin rolls out and people understand that so so when do you have to make a decision on that and.
How much is going to cost and is it going to run to the TNL or is it all going to be capitalized.
So I wonder.
First of all I wouldn't concede that we have an overall product deficit. When you consider all of the the other attributes that go into our onboard experience I think we've got.
We are the only ones with authentic way in hospitality on our flights and we've got some other attributes like complimentary meals and the main cabin that others don't have.
But.
Having said that I would.
Except the premise the Wi Fi is becoming more common.
For for Airlines in General I think.
We are obviously a bit of a late adopter to Wi Fi as we having not adopted it yet and and the reason for that candidly is.
We are one it was initially more of a business oriented product I think that has definitely changed.
Number two the technology the satellite technology for over water service, particularly over the Pacific is is even today I'm quite spotty and I think there were some providers that have better coverage over the Pacific men others, we're continuing to evaluate what the options are.
I have been on some some airplanes with with really very poor a very poor experience in terms of the lifeline wife high flying over the Pacific and that is something that but we want to make sure that the by the time, we think about doing that we are in a position to to deliver a approach.
That is up to the standards of.
Of our overall experience.
So you know, it's premature for us to say that but up but I do think overtime the technology is going to.
To get there and it is going to become sort of more of a table stakes expectation for the overall in flight experience. So.
I think that is that is something we will likely do in terms of how it's going to run through.
The income statement of the balance sheet, we're not even to the point of making.
A decision yet so so I'm not going to to sort of get into answering that part of it but but I do think that.
Eventually it is something that we are likely going to to invest in I think it'll give us an enhanced overall experience I think we'll make sure we have a great product.
Over the Pacific Ocean, and and that will be a be something that.
I would look to have an opportunity to use to improve demand for travel to Hawaii overtime.
Okay.
And then another CASM ex question Shanda I'm I'm, a little bit surprised that you guys aren't are giving us more guidance on 2020 CASM given back in July 2018, you said it would be flat to down in the years ahead. So you arguably talked about it and capacity growth is going to be substantially higher. So the question is.
Is the reason why you're hesitant to talk about it entirely because of the flight attendant negotiation or is there other inflationary costs in the business. Peter would you kind of alluded to earlier as well, but really the main question is what has changed since you gave us that flat to down in the years ahead middle last year.
So I wonder I think the I think the real reason, we're hesitant to give you more specifics on our CASM ex for next year is that we're not prepared to give 2020 guidance. Yet today. This is this is earlier than we normally give guidance for the upcoming year and so we're still a Shannon said in the middle of.
Planning process, it's going to inform what that is and when we have some guidance to give you.
We will give it I think we've talked about.
The puts and takes and there are certainly opportunities there, including very importantly, the capacity growth that we have planned for next year.
Okay. Thanks.
Thanks I wonder.
Ladies and gentlemen, we have reached the end of the question and answer session. So I will now turn the call over to Peter in group for closing remarks. Thank you.
Hello, again to everyone for joining us today.
We appreciate your interest and are excited about our future prospects and I look forward to talk new again in a few months.
Aloha.
Thank you. This concludes today's conference all parties may disconnect have a great day.