Q4 2019 Earnings Call
[music].
Greetings welcome to Hawaiian Holdings' fourth quarter and full year 2019 earnings call. At this time, all participants are not [laughter] Denali mode. A question and answer session will follow the formal presentation. If any much require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I would now like to turn the conference over to a lot of James managing director of IR. Thank you may begin.
Thank you Sherri Hello, everyone and welcome to Hawaiian Holdings' fourth quarter and full year 2019 earnings call here with me in Honolulu, Our Peter Ingram, President and Chief Executive Officer, Shannon, Okinaka, Chief Financial Officer, and Brent over Big Senior Vice President of revenue management and network planning.
We also have several other members of our management team in the room for acuity.
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 question 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 a release it is available on the Investor Relations page of our web site Hawaiian Airlines dotcom.
During our call today, we will refer at times to adjusted or non-GAAP numbers and metrics a.
A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found at the end of today's press release posted on the Investor Relations page of our website.
As a reminder, following prepared remarks contain forward looking statements, including statements about our future plans and potential future financial and operating performance.
Management May also make additional forward looking statements in response to your question.
These statements are subject to risks and uncertainties and do not guarantee future performance and therefore undue reliance should not be placed upon them.
We refer you to Hawaiian holdings recent filings with the FCC for 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 at 8-K.
I'll now turn the call over to Peter.
Hello, Hello, everyone happy new year, and thank you for joining us today.
As you have seen in our press release today are fantastic team continued to execute well this quarter.
We posted adjusted net income of 45.9 million, an adjusted EPS of 99 cents per share for the fourth quarter.
For the full year or 2019.
We posted adjusted net income of 218.9 million adjusted EPS of $4.60 per share and as adjusted pre tax margin of 10.5%.
This is a very good performance overall in light of the heightened competitive capacity admirer ma'am, we experienced throughout 2019.
We delivered double digit adjusted pre tax margin in the year, where we faced elevated competition within the Hawaiian Islands between North America in Hawaii and from Japan.
Delivering this financial performance is a testament to the competitive advantages that we have built in each of these geographies, giving us great confidence about our ability to continue to execute well in the years ahead.
Our focus has been and we'll continue to be on what we can do to make our airline better at serving our gas.
My Thanks, as always goes out to the 7400 outstanding professionals throughout the operation and in the back office for keeping us competition fit running the best operation in the business and delivering a low hard to our guests day in day out.
I look forward to sharing the financial rewards for their accomplishments later this quarter, when we deliver profit sharing and balanced scorecard payments to our team.
At our last Investor Day in December 2018, we outlined several priorities that wouldn't be the focus for the next several years.
And as I reflect back on 2019, I'm proud of whatever our team has accomplished.
We delivered product like star gas value with the introduction of main Kevin basic the launch of new Nonstop service to Boston and Fukuoka.
And the expansion of our North American network with the Athree hundred 21, Neil the most fuel efficient airplane operating between the West coast in Hawaii.
Thanks to the Athree hundred 21, Neo which now number 17 in our fleet, we've expanded our Maui hub to serve nine western U.S. destinations.
We advanced our aspiration to make travel effortless by improving our guests day of travel experience.
We launched our new mobile App and renovated the lobbies of our neighbor island airports, replacing.
Outdated kiosk and then just recently in the fourth quarter, we completed the first phase of our Honolulu terminal one make over.
New kiosks in the initial phase of a transformative lobby redesign.
These investments are already starting to pay off through improved net promoter scores and a more relaxed check and experience for our guests.
We made significant progress towards improving our cost competitiveness.
And we are solidly on a path to achieving $100 million in structural cost reductions by 2021.
And we've been building the foundation for our future with investments in fleet technology and process redesign.
We took delivery of six Athree 21, Neos in 2019 executed lease extensions on three Athree hundred 30 aircraft during the year and in the fourth quarter, we executed lease extensions on five Boeing 717 aircraft.
Let me pause here for a moment on elaborate on the 717 lease extensions, which were executed at the end of the year.
We operate 27, one sevens in our fleet 15 of which are ha owned and financially unencumbered and five of which are leased.
We're often asked about our plans for 707 replacement.
We usually answer that Theres no plane flying today that is better suited for the unique missions. We fly in the neighbor Island Network then the 717 based on its size economics and durability.
By extending our 717 leases to the middle of the decade, we are indicating that we're not planning to replace this fleet in the next five years.
Concurrently we've agreed to extend the power by the hour agreement related to this fleets engines and are planning to have a 717 flight simulator moved to Honolulu to allow us to do all of our simulator training at our home base.
We will continue to monitor options for the latter part of the decade, but for now we see no need to deploy our capital to replace these aircraft.
As we accomplished all of this in 2019, we continued to focus relentlessly on delivering authentic Hawaiian hospitality to our gas and executing our network missions better than our competitors.
Looking forward into 2020 as you have seen in our guidance today.
We are forecasting a challenging quarter from a revenue perspective.
Brent and Shannon will elaborate on the guidance in a bit but I wanted to take a moment to provide some important context.
Based on current scheduled projections the furthest first quarter features our highest year over year increases and competitive capacity during 2020.
The North America to Hawaii market has already absorbed a significant amount of industry capacity over the last two years with more to come in 2020.
And then the neighbor islands.
We have the recent entry of new competitive service in Hilo and the highway while we have not yet lapped last year's entry new entry in Maui and Kona.
Compounding this the first quarter is typically the seasonally most challenging for our roots. So it's a tough environment to stimulate demand for the additional capacity.
As we progress through 2020, the year over year competitive capacity changes are projected to moderate.
Based on current schedules and seasonality becomes more favorable.
So we will have a different backdrop as the year progresses.
A challenging quarter does not DMR view that we have a winning formula and we will succeed in the long term.
Providing evidenced of support this confidence the recently released DLP revenue numbers for the third quarter of 2019 show that our North America PRASM premium versus our competitors increased yet again, despite two years of above trend industry capacity growth and the fact that our results.
For this period deny yet reflect the addition of main cabin basic to our product lineup.
Our focus is on what we can control and the execution of our strategy with even greater proficiency.
We will maintain our focus on the needs of travelers to from an within Hawaii.
We have the right aircraft for each mission in our network.
We will continue to strengthen our already competitive cost structure.
And we will continue to deliver authentic Hawaiian hospitality that our guests value everyday.
On top of this the financial resilience. So we have built in recent years allows us to invest for the long term and withstand short term macro pressures.
2020 will bring to a close our current Athree hundred 21 Neo expansion as we take delivery of our 18th Athree 21 Neo in March.
And we will ramp up our preparations for our next phase of growth with the 787.
We'll also continue our investment in improving our guests day of travel experience and we will deliver structural cost savings through our cost transformation initiative.
2020 also brings more growth in our successful Japan franchise.
With the addition of our third daily frequency from hand that airport in Tokyo.
Let me provide you an update on where we are with our application for antitrust immunity with Japan Airlines.
We submitted our response to the deal you show cause order on November 12, and our submission focused on a few main themes.
We outlined the specific information technology investments that we are making to ensure that we can rapidly to achieve the public benefits of the partnership.
We expanded the geographic scope of the joint venture to the extent feasible given the nature of our network.
We committed to using our partnership to grow service between Japan and Hawaii.
And we clarified the importance of achieving antitrust immunity in realizing the full public benefits of our growth strategy.
Our submission is currently being evaluated by the DLP and while there is no set timetable we expect a response within the next several weeks.
If we are granted antitrust immunity, we expect to implement the JV towards the end of 2020.
Japan continues to be an integral part of our growth strategy and we look forward to deepening our partnership Jal, if we are grand today.
I feel great about what the future holds for Hawaiian Airlines.
We just celebrated our ninetyth anniversary in November .
And had a chance to honor the legacy of generations of employees, who built are terrific airline.
As we enter our 10th decade.
Im excited that our team has never been stronger.
And that our business is built for us to compete and win over the long term irrespective of the competitive challenges we may face from time to time.
We look shortfall, we look forward to sharing more with you about our future plans at our upcoming Investor day in March.
And with that let me turn the call over to Brent to talk about our revenue performance.
Thank you Peter and Aloha, everyone.
I'd like to Echo Peter sentiments and want to thank my colleagues for other great work in 2019 and doing such a wonderful job of taking care of our guests over the past year.
We wrapped up another strong quarter fueled by robust demand across our network.
Our topline revenue was up 1.5% year over year in the fourth quarter, while RASM was down 2.1%, which was inline with our expectations at the beginning in the quarter.
Once again, our fourth quarter results reflect the strength of our diversified network as yield pressure from competitive capacity increases in our domestic network were partially offset by strong performance in our international business.
For the fourth quarter industry capacity was up 9% in North America, and it was 12% and neighbor island, which contributed to yield pressure during the quarter and resulted in the year over year decline in domestic PRASM of roughly 6%.
Part of the industry capacity growth in North America was from our own increase and Athree 21, Neo service as we launch New service from Valley to Las Vegas during the quarter and expanded our breadth of service in key West Coast markets.
With service at different time channels.
We are encouraged by the performance of these new services, so far and expect them to continue to develop into 2020.
We're also really happy with the performance of our main Kevin basic product, which we rolled out across our North American network early in the fourth quarter.
Given where we were in the booking curve when we launch the product revenue impact for the quarter wasn't that significant however, it did exceed our expectations.
Well, we're working on optimizing the product offerings, we're confident that will be at least at the high end of our $15 million to $25 million range from Maine, Kevin basic once we reach steady state.
And we'll be happy to share more details about our expectations for the product at our Investor day in March.
As Peter mentioned, we recently received DSP data to calculate our relative revenue performance for the year ending September 2019, and our revenue premium and West Coast markets continued to expand this once again demonstrates the strength of our North American network focus on the Hawaii traveler and are optimistic configured aircraft.
While the commercial team accomplished a great deal in 2019, we know we have much work ahead of us in 2020.
Industry capacity between North American Hawaii is expected to increase sequentially and will be up 11% year over year in the first quarter of 2020.
However, based on currently published schedules that appears at the first quarter should be the high water Mark in terms of industry capacity growth.
Our neighbor Island network saw continued yield pressure during the fourth quarter consistent with increased competitive capacity and persistent promotional pricing in the market.
The outlook for industry capacity accelerates as we move into the first quarter with a 26% increase in year over year capacity, which will continue to put downward pressure on RASM.
Overall demand for neighbor Island travel remains solid and we're competing from position of strength in this geography with our scheduled breadth local loyalty program and superior ability to recover quickly from operational disruption.
Once again strengthen our international geography in the fourth quarter helped offset pressures and domestic.
We had another great quarter and international with PRASM up 9% year over year in the fourth quarter, our 15th consecutive quarter of year over year PRASM improvement.
Again, our premium cabin continued to perform well on international routes during the quarter with PRASM up 11% year over year.
We continue to grow our successful Japan franchise during the quarter with the launch of New service to Fukuoka, Japan in November we're off to a great start and Fukuoka and are encouraged by the performance of the route.
Given our familiarity with Japan, the strength of our brand there we expect this new service to mature quickly.
We also launched sales of our third Tokyo Haneda to Honolulu service, which begins operating at the end of March were excited to continue to grow our Japan franchise through our partnership with Japan Airlines and look forward to a positive response from the DFT regarding our application for antitrust immunity.
Our value added revenue streams had another strong quarter with value added revenue per passenger up 10% year over year.
Im pleased to confirm that we surpassed our 100 million dollar target and generated $107 million, an extra comfort and preferred seat revenue in 2019.
Revenue from the sale Hawaiianmiles also had strong performance in the quarter contributing meaningfully to our value added revenue per passenger.
And we look forward to sharing more details on our growth expectations for loyalty revenue at our upcoming Investor day.
Cargo revenue for the quarter was down 9% year over year due to continued macroeconomic contagion conditions in Asia impacting exports from the region.
Now looking ahead to 2020.
We expect our year over year capacity to increase between 5.5 and 8.5% for the full year 2020.
With the largest increase taking place in the first quarter, where we expect year over year capacity to increase between 7.5 and 10.5%.
Our capacity increases in 2020 are largely driven by the Annualization of new services launched in 2019.
As well as our third Haneda, Hulu frequency, which starts in March.
Our first quarter capacity is also a little higher than we had initially planned. This is some short term up gauges for operational reasons.
For the first quarter, we expect RASM to be down between 4.5 and 7.5%.
The sequential slowing of our RASM in the first quarter is driven by the elevated industry capacity environment. The increase in our networks weighted average stage length.
Short term headwinds and fuel sard fuel surcharge comparisons and the close enough gauges that I mentioned.
The first quarter is historically, the lowest demand quarter the year and there are a lot of seats coming into the market during low demand months as we look out further ended 2020, the increase in industry capacity tapers off as we lap some of the ads in 2019, and we expect that seasonally stronger demand will help absorb some of the additional capacity.
Our focus in 2020 will be to ensure we mature developing routes continue to monetize our premium seed investments.
Grow the benefits from our main Kevin basic product and expand our partnership with Japan Airlines.
We're excited about the future point here at Hawaiian Airlines, and we're planning for our next phase of growth with our seven eight sevens, while strengthening our revenue generating capability with meaningful revenue improvement initiatives.
I'm confident in our ability to continue to withstand competitive pressures through our diversified network.
Focused on the Hawaii traveler and unmatched guest experience delivered with authentic Hawaiian hospitality.
We look forward to providing more details on our future plans and revenue initiatives at our upcoming Investor day in March and with that ill now turn the call over the Shannon.
Thanks, Brent Hello, everyone, how only mckinsey keyhole happy new year.
I'll start with a brief recap of our fourth quarter and full year 2019 results.
Today, we reported fourth quarter adjusted net income of $45.9 million.
Our 99 cents per share.
And adjusted pre tax margin of 8.9%.
For the full year 2019, we reported adjusted net income of $218.9 million.
Adjusted EPS of $4.60.
And adjusted pre tax margin of 10.5%.
As Peter mentioned, it's a strong results given our competitive landscape.
In the fourth quarter, CASM ex fuel and items increased 0.8% year over year, which was at the favorable end of our guidance range as several anticipated expenses for the quarter came in lower than forecasted.
Our economic fuel costs per gallon for the fourth quarter was $2.05 and our fuel consumption came in at favorable end of our guidance range, which helped to offset some of the increase in fuel price.
As in prior quarters, we continue to see benefits from our Athree 21, Neal speech position.
Fuel consumption grew only 1% year over year on a 3.7% increase in capacity highlighting the fuel efficiency of this aircraft.
Additionally, in the fourth quarter, we returned more than $23 million to shareholders through dividends and share buybacks.
We bought back $18 million of outstanding shares, leaving approximately $29 million remaining of our current 100 million dollar authorization.
For the full year 2019, we bought that 5.2% of our shares outstanding and when coupled with our quarterly dividends returned to more than $91 million to shareholders.
On the financing front as Peter highlighted earlier, we executed lease extensions on five Boeing 717 aircraft, which will provide significant cost savings, while securing our neighbor island fleet into the middle of this decade.
As part of the transaction. We're also bringing is 717 full flight training simulator to Hawaii, which will allow us to centralize all pilot training in Honolulu, and further reduce our cost.
During the fourth quarter, we continued to make good progress on our cost transformation initiative.
For the full year 2019, we achieved $26 million and benefits from our structural cost savings and have included a little over $60 million in our cost guidance for 2020.
We're on track to achieve our 100 million dollar structural cost reduction target in 2021, and our teams are actively engaged in evaluating additional opportunities for further savings in the future.
We plan to lay out the details of our cost transformation program at our invested in March.
Looking ahead to 2020.
We expect CASM ex fuel and items to be down between 1.5, and 4.5% for the first quarter of 2020.
Our year over year CASM ex performance will vary throughout the year, largely driven by the timing of maintenance events.
For the full year 2020, we expect CASM ex fuel on items to be between down 2.5 and up 0.5%.
This includes headwinds from the initiation of Athree 30 landing gear overhauls and 77 fleet transition costs.
Offset by the maintenance cost benefit associated with a higher mix of Athree 21, Neal flying as well as lower Athree 30, 717 aircraft ownership Todd.
Our CASM ex guidance for 2020 includes the expected benefit from our cost transformation initiatives, but as in the past does not include any assumptions relating to the amendable contract with our flight attendants Union.
We're eager to bring these negotiations to close and reached an agreement, which recognizes the contributions of our flight attendants to our company's success, while maintaining our cost competitiveness for the long term.
We're also entering into negotiations with the I am which represents our airport employees and mechanics among other employee.
Although the I am contracts are not amendable until January of 2021, we have agreed with the I am to work toward reaching a new contracts prior to the amendable date.
It's also important to note at the CASM ex fuel metric does not reflect the benefit of increased fuel efficiency from our Athree 21, Neo transition, but includes the increased ownership cost of the new airplanes.
Keeping fill pies constant the fuel efficiency benefits is expected to bring another half point of overall CASM improvement year over year at the midpoint of our guidance.
Based on the fuel curve as of January 28, our economic fuel cost is estimated to be $1.97 cents for the first quarter.
And $1.85 cents for the full year 2020.
As of December 31, 2019, consistent with our policy, we've hedged approximately 50% of our projected feel requirements for the first quarter of 2020.
Our capex for the full year 2020 is expected to be between 220 million and $260 million, which includes our 18th and final Athree 21 Neal delivery.
Pre delivery payments for 77.
And facilities and information technology investments.
Overall, I'm pleased with our financial performance in 2019, and I'm optimistic about our future.
We have a resilient business capable of producing solid returns in the face of increased competition.
We have a strong balance sheet and we're well positioned for long term success.
I look forward to senior person and giving you more details on our future plans at our invested in March.
This concludes our prepared remarks, and I'll now turn the call back over to Atlanta.
Thank you, Peter Shannon and Brent and 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 analysts.
As a reminder, please limit yourself to one question and if needed one follow up question Sherri. Please open the lines for questions.
Thank you.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tomo indicate your line is in the question Q ebay press star to if he would like to remove your question from the Q.
Participants using speaker equipment and may be necessary to pick up again said before pressing the star Hughes.
Our first question is from.
Steve O'hara with Sidoti. Please proceed with your question.
Yes, hi, good afternoon.
Hi, Steve.
Hi.
Yes I.
I guess in terms of.
The.
Expected that decline in that year revenue in the first quarter.
Our way to kind of talk about how much of that you think is.
Self inflicted in that you have a lot more capacity growth.
Something like that where you know.
You are adding capacity the market versus.
What's being added to the market.
Let me start on that Steven then I'll hand, it over to Brent to provide a little bit of detail I think the the situation and you're seeing is a function of.
Primarily of industry.
Capacity growth we've got.
Something on the order a mid twentys percent.
Capacity growth from the industry in the neighbor Island part of the network, which is.
Still not having lapped the entry of service of a competitor into Maui and Kona last year, and then new services, who we and Hilo. This year. Our neighbor Island capacity is is basically flat. So you know in the context of your question. There is theres really no impact there.
They are from.
From our capacity actions, but it is a substantial industry capacity increase.
I think North America.
Which is north of 50% of our overall revenue we do have some capacity growth our investments have been performing well and but we have seen industry growth as well. So maybe Brent view on at any more color to that yes, I think we will grow more in North America and one Q then we will the rest of the.
The year, and that's largely a function of timing of aircraft deliveries and so.
Our north of our North American growth rate will just taper off now.
As we get into in Twoq.
As Steve that's really just a function of timing as lend aircraft entered the fleet this year and last year.
Okay.
Thanks, and then maybe just on the.
I guess it was kind of on the tech side with the Zhao.
The issues there.
Can you just talked about are these substantial investments that need to be made and will they be made anyway, regardless of whether the JV is approved thank you.
Yes, let me let me talk about there were when we go back to the show cause order or that the the Deo T. issued in.
In the third quarter of of last year.
There was we're a number of things that they highlighted as.
As.
Wanting to see additional evidence from ourselves and Jal before they were prepared to grant that antitrust immunity and specifically those related to.
There were a number of them the related to technology and it its technology in the context of of things like seamlessly.
Transferring.
Connecting passengers between two airlines or having last seat availability on our website for connecting trips on Zhao.
These are these are the sort of of ITC capabilities that carriers that are part of global alliances of typically made investments over time and have in place and in our case entering into our partnership with Zhao. We have we have not had a sufficient business case to justify those.
As investments over time.
The the opportunity to deep within our partnership with Jal gives us the ability to have that business case, and certainly that is further bolstered by the potential for antitrust immunity.
We've made some of those.
Investments over the course of 2019 were continuing to invest now so we're building the capabilities I I think some of this is if anything it's an acceleration of investments that would have been sensible for us in the long term and if it just makes sense in the context of where we are with.
The partnership with gel to accelerate those investment into the near term and prioritize them over other.
I'd investments, we might have been making this year.
Our next question is from a hunter, Okay with Wolfe Research. Please proceed.
Hi, everybody.
Hi under.
Peter I notice if I'm not mistaken I think you bought those 10 70 sevens like three weeks before you announced the Jal JV. So.
I'm kind of <unk> I know the JV is really more about gross and not pricing. So.
The question is really how does a lack of a JV impact decision potentially keep those planes and really do you need all 10 in the event that you can't get Apiay and go forward with it.
Yeah, I I'd say, the timing of the order and I don't remember.
Exactly when the time in the order was vis-a-vis the joint venture announcement.
But really the 787 investment and the Jal JV are are really independent when we ordered the seven eight sevens.
That was on investment in an aircraft that we expect to be flying for the next couple of decades.
I suspect will over time end up with more than 10, not just 10 aircraft. It is.
And aircraft that works well throughout our network today.
One on roots alike.
Like Honolulu to New York Honolulu to Sydney.
Variety of our roads into Japan that would be the ideal aircraft with or without a jal JV. So I don't think theres any question that we feel very good.
If we had if we had to go in a time machine and see if we'd make the same decision again I think we would make exactly the same decision again on the seven eight sevens as far as the right number one of the things we've highlighted over time is we have structured.
Overtime, our lease explorations and and other opportunities to to alter the size of the fleet with regards to the seven eight sevens coming in and the potential for Athree hundred 32, hundreds to go out in a way that allows us to within a range.
Dial our capacity growth up or dial our capacity growth down in a way that.
That allows us to match.
Supply of our product in the marketplace with the demand that exists out there. So we feel really good about where we are in that context.
Okay. Thanks, and then Brent.
No not mistaken correct me, if im wrong, but it looks like you lowered its amazed 320 ones on the inter island.
Can you talk about that decision is this something that we should expect to continue or is this sort of that.
Get back to that operational comment you made.
Before early in your prepared remarks.
No that is thanks it is.
It's actually attracted a unique amount of curiosity, it's not anything strategic that where we're looking at changing.
Frankly, as we were adding or Las Vegas, Mally service nagging, some frequency into Honolulu, Seattle, we needed a bit of a bridge.
To get that airplane back and forth.
As it serving those two markets and so.
Yes.
Yeah.
Each direction.
One direction each day, a week gets going back and forth and we've we elected to do it is scheduled service and sits.
Conveniently you automatically in the heart of our bank there so to provide some more connecting opportunity into here.
But it's not any his strategic shifted just a function of how we're.
However, routing airplanes and how we deployed our 17th Athree 21.
Got it thank you so much.
Thank you Sir.
Our next question is from Dan Mckenzie with Buckingham Research. Please proceed.
Hey, thanks.
A couple of questions here.
So I know you just continued service to China in the first quarter last year and you don't serve Hong Kong, but I Wonder if you can size the revenue.
From that inbound demand that either comes to Japan, either directly or on your flights or via your relationship with gel.
Yes. So it was actually I believe what was the fall of 18 that we we suspended our service to to Beijing. So we've been out of that for about a year and a half.
And part of that.
That's the reason for that was that.
The business case for.
Direct service to try and always relied on the market.
Growing and while we had seen growth that hadn't grown at a pace sufficient with delivering.
Returns on our investment and and so we left the market at that time.
Today, we have very limited.
Service from from China.
And candidly, there's very limited service overall very limited amount of the.
The overall tourism in Hawaii is from China, I think I heard.
Someone last night from Hawaii, Tourism authority, quoting a number of of 1% or less than 1% of the overall visitors in Hawaii our from.
China. So it's a small part of the market today I think in the long term there was still on argument to be made that China is going to be a more important source of demand, but as we sit here in 2020. It is really not not a significant piece of Hawaii tourism overall, and certainly not a significant piece of.
Our business, yes understood. Okay. Good no question here.
Just given the status of the buyback program in the dividend.
I Wonder if you can provide maybe a finer.
Point on capital returns this year in what you might be targeting exactly and I guess, you know what that might depend on it. So I guess, what I'm getting that is just given where the market cap is are you inclined to are you considering.
Potentially accelerating the stock buyback program or potentially that augmenting it.
Let me.
Let me start with that Dan and then I'll see if Shannon wants that any comments on top of mind.
Eight.
I think will broadly when we think about.
Deployment of.
Free cash and we do expect to generate.
Free cash flow this year and have some to deploy we think about it in the context of what opportunities do we have to invest in our business that we believe can.
Deliver returns in excess of our cost of capital and that is that is typically our first priority.
And then beyond that we look at opportunities too.
Reduce debt and the broad category of debt I would also add to that things like paying down pension liabilities.
And then we look at opportunities to return capital to investors in the form of buybacks and dividends and I think we try and keep those balanced.
It has not been our practice to.
Accelerate rapidly and to try the time in the market on that we are we are out a little bit more.
Systemic about that and how we have treated over time.
But.
That's sort of a high level philosophy around how we think about that I think one of the other things we're mindful of sometimes is.
Sometimes it makes sense to just hold below cash because we're looking forward into.
Capital needs in the coming years, and and rather than deploying it all and having to go in fund raised to get that money back in the future. We want to make sure. We're thinking about the next couple of years ahead, and just not 2020, Shannon anything you'd add to that.
No I mean, I would just add that you know in 2019, we bought back a little over 5% of our total outstanding shares since 2015, we've bought back almost 18% of our total outstanding shares. So I think we've done.
Quite a bit and assuming and we'll continue to look at it as Peter mentioned in violently.
Very good.
Squeeze one last one in here on the 100 million and cost savings initiatives.
It looks like the better into the full year guide for CASM ex fuel in 2020 implies that it could fall 2.5%.
Just wondering if that.
Down 2.5% that better into the guide factors into full cost savings or if there is.
Or what that what that might sort of include exactly.
Yes, Thanks, Dan.
Includes about $60 million of cost savings. So he and part of that is dependent on the timing of when we execute certain initiatives. So it can be more if we can get it done quicker or you know, but we've built in about $60 million into the guide.
And so.
Then the 60 million corresponds roughly two to the midpoint of the guide and I think the range around that is really just capturing the fact that.
We're only a month into the year and there's there's some variability that.
Can exist Bose favorably and unfavorably and some of these numbers.
Understood. Okay. Thanks for the time you guys.
Okay.
Our next question is from Catherine O'brien with Goldman Sachs. Please proceed.
Hi, everyone. Thanks, a lot from the time.
Right so the.
One for you I'm just wondering what the premium seat growth in 2019, and then where that look like for this year and then part to that is what should we think of it the biggest driver of revenue goals for 2020 outside of capacity would that be the full basic economy or is there maybe some further fine tuning on some of the pricing premium seats. Thanks.
Yes, I don't have the premium seat numbers in front of us in front of me, we'll we'll follow up with you on that.
As I look out into 2020, I really see kind of multiple areas of growth that you alluded to the growth in Maine cabin basic products. After really good start were well spend some more time talking about that at Investor day.
We're encouraged with the initial results were going to continue to fine tune.
That product as we look at its applicability across across our network.
I would say that is one I think we've got.
Some continued improvement in optimization in the front cabin and we've had multiple years of.
Successful growth there I think we still have some room in front of us.
To continue improve performance for that product.
And then I would say, we've got some opportunities as well.
Around ancillary product optimization, and we'll talk a little bit more about that at investor day as well.
Okay got it and then actually two morphine Brian .
So do you shared what total domestic RASM was so can you just talk about the breakout between North America and Dryland and then also maybe a bit of a follow ups Dan Mckenzie. Your question, but have you seen any discernible fall off in bookings from international markets, given what's going on with the current affairs. Thanks.
In terms of a breakdown of domestic North America was down mid threes neighbor Island was down six.
Kind of consistent with what the overall number was and then obviously the impact of stage length in their drags that to that number down to six overall.
It may maybe I'll just.
Start on the the Corona virus question and.
You know it is certainly something I know.
All of you in the investment community are.
Trying to calibrate the impact in and it really is a difficult challenge at this point because I think there is we all have so much uncertainty about what is going up.
Going on here and how it's going to develop in the coming days.
I think as we've looked at it and we've had some.
Im discussions internally over the last several days.
As we sit here today.
There is obviously.
An enormous.
You know medical.
Challenge in in China, and a rapidly growing epidemic in China and from from the perspective of airline industry that is.
Manifesting itself in significant reductions in near term demand and I think you have seen in the last 48 hours.
The response of global airline, serving China to that too to rapidly reducing in a number of cases eliminate capacity to China.
So clearly that's an acute impact in the in the here and now.
In terms of and again from our perspective at Hawaiian not serving China, there, we're not participating in that because.
We don't have a dog in that hunt.
In terms of looking at our network. The next question then becomes what what happens from here with the Corona virus in particularly in countries outside China, whether it's in.
The Asia region, or North America, or Australasia, as it pertains to our network and there we've got.
Again, a lot of uncertainty in any of the countries that we serve to date there are.
Single digit typically reported cases of.
Corona virus.
Most of those are.
Cases, the vast majority of those are cases that have a nexus back too.
Back to China, and so I think it's really difficult to extrapolate where it goes from here and whether.
The severe.
Medical issues that are existing in China and up.
Being exported at scale to other geographies.
Whether that happens or not then there is another follow up question of of weather.
Concerns about this as as it gains more media attention starts to affect travel demand.
Right now we have seen very little evidence, but it is early days of that and I think it is likely in our sense if that were to happen that it would manifest itself in the places that are closest to.
To China like Korea in the example of our network and then you know spread out from there in the event that the crisis continues to worsen, but it is purely speculative for us to say anything on that today and maybe just Brent I know your team has been looking too.
To see if there are any signs of.
Of demand changes yeah. So I mean, it's it's a little bit.
A little bit challenging the measures were sitting in the midst of kind of lunar new year and that impacts booking velocity and that moving around over the last over the last several years.
As we've looked at close.
No real discernible impact, particularly out of our major geographies, Japan demands holding up well.
A show in New Zealand things are strong in North America bookings continue these strong.
We have probably more lunar new year impact in Korea. So, we'll keep a close eye on that and how about things transpire, there, but as Peter mentioned from a macro impact we haven't seen.
We haven't seen any real impact, yes, as obviously, something we're going to be paying attention to in the days and weeks ahead, because it it would appear that but we're still in the early days of of the developing health crisis.
Yes, so thank you file that color.
Yes, Thanks Catherine.
Our next question is from Michael Linenberg with Deutsche Bank. Please proceed.
Hey, this is coming on for Mike.
Just one on Japan with all the new Haneda slots for both the U.S.
We've seen some of the carriers moving their services over from Narita hub.
The overall market for Honolulu to Tokyo, as it pertains to aggregate capacity and Hawaiians positioning with that is within that as we head into the summer.
Yes, so so in terms of changes related to an AD and those are going in at the end of March.
Our service from had net a two to Honolulu, which will be our third daily hand at a flight is.
Is the incremental frequency associated with the the opening up a fair net access this year.
Jal has to have will be flying to services from and that.
Those are replacing two services.
In the Rita.
And it's got to service that was already there that's been therefore.
For several years and then yes are there is one other incremental one where there's another one and that and that is delta and that is again.
Sort of a swap of capacity that was in.
No Rita so really it's our flight is the only incremental one there and then adding to read out we see a little bit of incremental.
Capacity from.
At a continuing to.
To expand their no no Rita flying.
And you know some other some other changes moving around in the marketplace, but.
Not not as.
As much incremental from head to head that a movement as we might have thought directly tied to that event.
Got you. Okay. Thanks, Yeah, I think obviously it is we've talked about and our gel filing on other calls it's a big deep market, we're going to add frequency into it.
We're excited about the trip we're adding.
Beyond just getting another a trip in the Henrietta and offering some greater time of day convenience.
Getting in at the time that we're going to be able to get in will be able to open up a lot more connectivity with jal into domestic Japan, and we think that theres. Some theres untapped market there that will be able to continue to grow with the additional capacity as well.
Great. Thanks, guys.
Sure. Thank you.
Our next question is from Joseph Denardi with Stifel. Please proceed with your question.
Yes. Thanks.
Peter just in terms of the international PRASM strength that you guys saw was there any FX their surcharge tailwinds in fourth quarter, and then the expectations for those factors affecting first quarter.
Yeah, Let me, let me turn I want to Brent.
Yes so.
When we look in Fourq you, we had an act we actually had a little bit of a headwind from.
Fuel surcharge and FX that grows.
A bit as we get into Q1.
We had last year was a little bit anomalous in terms of Japan fuel surcharge based on the timing mechanism fuel surcharges were.
We're a fair amount higher Q1 in Japan last year.
So we'll see a greater impact of that Q1 and then well it's little early to forecast into two into Twoq, we do see some of that.
Headwind will will likely start to moderate a bit as we get into twoq.
Helpful.
Peter you've spoken over the years about how capacity in your markets finds a level over time I'm wondering if you have a sense as to maybe there's a rule of thumb. If your margins are acts all this capacity growth is.
Pressured your margins than industry margins, excluding yours must be X minus something cerny 30 way to think about that just in terms of when capacity may start to rationalize a little bit. Thank you.
Yes, it's an interesting question and it's difficult to predict the timing obviously.
Our competitors.
Don't consult with us on their capacity plans for for serving Hawaii.
The.
I think some of it depends on on what's going on in the macro environment as well.
You know, how how carrier see opportunities in different parts of their system, what the fuel price environment looks like since this tends to be long haul flying with a higher.
Fuel price component.
But.
I do think.
That in a.
World with with rational players people should be making investment decisions on where they fly based on where they see the biggest opportunities and I would say clearly you know a couple of years ago when.
When our margins were in the high teens it was easy to see.
And easy to see opportunities in Hawaii, I think as.
Our margins haven't fallen off a cliff, but they are in a more moderate range and the tenant a half percent range over the last year and I I think the.
We would certainly expect over the next couple of years I think to see a little bit of a moderation of growth and perhaps overtime.
Some some retrenchment bye.
The the marginal routes where people are generating.
Lower RASM, then and particularly if if costs go up for a variety of reasons for other carriers, but.
For US right now, we're we're really just focusing on making sure we're executing.
Day to day, making sure that that our capacity is not the marginal capacity in the market and we don't think it is right now.
That's helpful. Shannon just quickly on the fuel cost guide for the years 185 seems a little low is that just kind of timing of when you guys did it or is there any hedge gain in there. Thank you.
Yeah, there is no hedge gains in there.
Low I'm guessing you're comparing to energy if you recall a lot of our.
Feel its purchase based on the thing Carol and that so it does differ.
Llandovery T.I.s, sometimes that explains that difference between us and the industry, but I think there has been some decline in the last few days in the fuel price I believe there's a there's a footnote on the the the fuel cost guidance number that that will tie it right to the direct or indirect day that we do.
Yeah. Its January 28, so that when you look at the fuel curve on the 28 and Thats, where we pulled it yes. Thank you very much.
Sure.
Our next question is from Helane Becker with Cowen and company. Please proceed.
Thanks, Operator, hi, everybody and thank you.
For the time.
So.
I guess Peter.
I have a different question on the China. Thanks.
That capacity comes out from the U.S. carriers and others do you are you concerned that they put it on a temporary basis into Hawaii.
From sort of new markets.
Or additional capacity from existing markets.
Yes.
You don't really in that the a little get part of that answer as its obviously up to them not up to US again I think if you look at it and I've just monitored a couple of the announcements in the media and the last couple of days most of what have I have seen has been.
Published capacity adjustments that go out from a week or two to maybe through the end of the first quarter and so I think in cases like that if I was thinking about in the context of of our business.
We would not be thinking about.
Redeploying that capacity necessarily anywhere in the short term because if you're planning to go back into.
Those those other roots fairly quickly youre going to need those airplanes and it is difficult to just be toggling capacity in in our markets on a short term basis. So I put a relatively low probability on that but.
Again, you'd have to go as some of those other carriers.
Got no I think thats very helpful. Thank you very much and then Shannon for you I just have one question you talked about a five lease extensions.
And then I think you said something about how it would save you money right I kind of missed that part, but you know you are rent expenses down.
For the quarter quite a lot and for the year.
So is that like that the fourth quarter that new run rate, we should be thinking about.
So I, let me, let me start where that Helane I think some of the some of what you're seeing in the the rent expense in the fourth quarter doesn't reflect the the 717 lease extensions at all of those were done at the at the very end of the the period, what we did do as I mentioned in.
In my comments in the call during the year last year was.
We had some lease extensions related to a couple of our Athree hundred Thirtys those were Athree hundred Thirtys that were right near the beginning of our original acquisition of that fleet back in.
In 2010 and they were.
They were among some of the higher cost leases, we had and.
As.
I think most people are probably where the the 330 200 market as has moved considerably since that time and so.
I think thats.
That's what youre seeing reflected in there in terms of the run rate I think what's in the fourth quarter made may did does certainly doesn't reflect the seven one sevens.
But it but otherwise.
Reflects our fleet from from the perspective of the Athree hundred Thirtys and the Athree 21 Neos.
Okay that's perfect.
Thank you very much.
Sure. Thanks Helane.
I never question answer session I would like to turn the conference back over to Peter for closing comments.
Hello, again to everyone for joining us today, we appreciate your interest as always and.
And we're very excited about our future prospects and look forward to a talking to you more about them again at our Investor day in March.
Aloha.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
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