Q3 2020 Hawaiian Holdings Inc Earnings Call
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Greetings and welcome to the Hawaiian Holdings Inc. third quarter 2020 earnings call. At this time all participants are in a listen only mode a brief.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Miss a lot of James Managing director Investor Relations. Thank you you may begin.
Thank you Michelle Hello, everyone and welcome to Hawaiian Holdings third quarter 2020 results Conference call here with me in Honolulu are Peter Ingram, Our President and Chief Executive Officer, Brent Overby, Hirst Senior Vice President of revenue management and network planning and Shannon Okinaka, our Chief Financial Officer.
We also have several other members of our management team in the room for the Q and a.
Peter will provide an overview of the continued impact of COVID-19 on our business and our vision for the future Brent will provide an update on our commercial performance and trends and Shannon will provide an update on our cash and liquidity.
At the end of the prepared remarks, we will open up the call for questions.
Now everyone should have access to the press release that went out at about four o'clock Eastern time today. If you have 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.
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, the following prepared remarks contain forward looking statements, including statements about our future plans and potential future financial and operating performance matters.
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 and 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 and 8-K.
I will now turn the call over to Peter.
Hello, Hello, everyone and thank you all for joining us today.
As you have seen in our press release today. The COVID-19 pandemic continue to have a severe impact on our business and third quarter.
The second and third quarters of 2020, you will likely go down as the most difficult period of Hawaiian Airlines proud almost 91 year history.
In spite of that it is touched my heart each day to see the dedication and care that our team has showed to our guests and each other.
I'm very encouraged that the Hawaii pre travel testing program, which went into effect on October 15th will Mark an important inflection in the trajectory of our business.
Program allows the traveler to bypass the mandatory 14 day quarantine by presenting evidence of a qualifying negative COVID-19 test from his state approved provider.
Since the beginning of April we have operated a minimal schedule to serve the minimal demand for travel to and from Hawaii.
Our experience in Hawaii corresponds to that in Europe, Asia and elsewhere in the world that are viewed life's quarantines to mitigate the spread of the virus.
Simply put quarantine requirements went strictly enforced.
Virtually eliminate all demand for travel.
With the opportunity available once again to travel to Hawaii without injuring a 14 day quarantine, we expect demand will continue to improve in the months ahead.
We are expanding and we'll continue to expand our schedule to meet that demand.
The early returns are encouraging.
The logistics of the process are going relatively well.
There have been some teething pains to be sure that are being worked through by the state and that are improving every day.
We have indeed seen an increase in our loads since the 15th and have seen positive trends in our bookings, which Brent will elaborate on later in the call.
Well there is a very long road yet to be traveled it is encouraging to have begun the journey.
As for the neighbor Island quarantine the time of our last call. The quarantine had been lifted but due to a spike in cases on the island of a wahoo. The quarantine was reinstated on August 11th for all travel to any island other than a wahoo.
And to stay at home order was put in place for a wahoo for about four weeks starting in the last week of August.
As things stand today traveled from a wahoo to the neighbor islands without Florentine as possible only with a negative COVID-19 test.
We do not believe that test exemptions are the right solution for neighbor Island travel.
As neighbor island visits are generally shorter in duration and lower cost overall for the traveler. So the 100 to 200 dollar incremental expense and inconvenience of taking a covert test is going to stifle much of the entire island demand for as long as this requirement is in place.
Our hope is that the prevalence of the disease on Wahoo, which has been declining appreciably over the past several weeks reaches a level, where the intrastate quarantine requirements will be lifted entirely.
The biggest risk to the upward trajectory of our business is a scenario in which there is a significant increase in cases of the disease in Hawaii, leading to a retreat from the pre travel testing program.
Well this is not in our control we will do our part to make sure the travelers understand the testing requirements that they arrive with state approved tests.
And that they are informed about their personal responsibility to keep our community safe.
Importantly, more travel does not have to mean, an unmanageable spiking cobot cases.
We've gone from a small number of untested travelers to a larger number of travelers, but with most being recently tested negative for the disease.
Combined with ongoing efforts to reduce the community spread of COVID-19.
Our hope is that these actions keep the disease in check here in Hawaii.
To help ensure that our guests get tested we have worked to bring testing partners to the table. In addition to the provider source by the state of Hawaii.
We are continuing to pursue additional testing opportunities in order to make the testing process as seamless and easy as possible for our guests.
We expect the market competition will make testing less expensive and more accessible overtime.
As this happens we expect demand for travel will continue to improve.
While the delay of the testing pre travel testing program reinstatement of the neighbor Island quarantine and Reimposition of stay at home orders comprehensively stable demand in the third quarter, we focused on what we could control.
We were successful in accessing the financing we needed to endure the immediate crisis and feel we are in a good place from a liquidity perspective.
We completed negotiations with our labor unions on voluntary leave programs.
And executed on the labor Rightsizing efforts that were painful but necessary to ensure we remain competitive as we fight through this challenging period.
And position our company to emerge successfully from the crisis.
We reduced our active workforce by about one third through a combination of voluntary leaves voluntary separations and furloughs.
About 87% of the reductions were voluntary separations or voluntary leaves.
We also successfully completed negotiations with Boeing to push back the introduction of seven eight sevens to our fleet from early next year to the latter part of 2022.
Shannon will provide more details on the adjustments to our fleet plan.
But I'd be remiss, if I didnt note that Boeing has being a supportive partner throughout this process.
The 787 is a terrific airplane.
And we will be a vital part of our fleet in the future.
But we don't needed in 2021.
Im pleased that we were able to make this agreement to pushback deliveries to a more appropriate time.
As we look ahead to 2021, we continue to plan for our operations to be 15% to 25% lower in the summer of 21 than they were in 2019.
However, less than two weeks, having passed since travelers have had the ability to avoid quarantine.
Our assessment of the demand environment is sure to evolve in the days ahead.
With this in mind.
We are positioning ourselves to respond to circumstances as they unfold.
In the near term, we continue to focus on managing down our cash burn.
We have done an admirable job of minimizing our expenses as we have run a much smaller operation and we we remain laser focused on controlling our spending.
But there is only so much we can do to reduce costs, while maintaining our ability to rebound.
Step function change in our cash burn requires us to generate more revenue.
Thats why the pre travel testing program is so important it allows us to get begin to access the pent up demand for travel to the world's premier leisure destination.
Getting there won't happen immediately.
While bookings have improved over the past few weeks. This is against a backdrop of advanced bookings well below historical levels for the coming months.
As we compete for this demand to begin to ramp up our operations, we will necessarily increase our cash cash expenses even.
Even as we do so.
We will be extremely judicious in the spending decisions.
And we're going to continue to look at every aspect of what we do to make sure that it meets a new expectations of our guests whether these expectations are permanent or transitory.
At the core of this is our focus on the needs of travelers to from and within Hawaii.
This has always been a source of competitive advantage for us and it is likely to be amplified in an environment, where the travel processing guest expectations have been upended by the pandemic.
One of the important first milestones in our journey back is to reach cash breakeven.
Im not going to attempt to forecast the timing for us to do so as we don't yet have enough experience with demand in the pre travel testing environment to provide a specific target.
But we are on a positive path and our ability to again access demand gives us more confidence and we've had that we're moving in a better direction.
Looking further ahead, we need to restore balance sheet strength.
Reaching cash breakeven will be an important milestone, but it is only a single marker on the road back to success.
I joined Hawaiian as its chief financial Officer in 2005, shortly after the company emerged from a two year restructuring.
It was a company with many incredible and unique strengths, but.
But the balance sheet was not one of them.
Our team leverage the strengths of our business to generate cash flow to build a strong balance sheet.
It Didnt happen overnight, then and it won't happen overnight now, but I'm certain we will do so again.
There is much that gives me confidence as I look forward, Hawaii is again open for business.
Leisure travel throughout the world is rebounding faster than business travel.
And with the ability for guests to travel to Hawaii without quarantine, we will be able to take advantage of this more so than we have been able to over the past seven months.
So I look forward to 2021, I know that we are not yet out of the woods, but I know that we have the right team in place to get through this.
I am continually amazed by the outstanding efforts made by my colleagues both on the front lines and in the back office to deliver the guest experience and operational excellence that our guests expect from us.
I would like to express my gratitude once again for the exceptional job they do everyday despite the unprecedented circumstances, we have faced together over the past many months.
In particular I want to acknowledge the contributions of our colleagues who accepted early out or retirement packages in September in many cases after decades of loyal service.
I wish our retiring pilots and flight attendants could have enjoyed their traditional final flight.
To allow us to honor their years of service to our guests.
And I wish our departing ground employees could have had a final in person celebration with coworkers.
While the pandemic Rob them of that the legacy that has been left by all of these dedicated professionals will inspire our recovery.
And we look forward to welcoming those on furlough involuntary leave back to productive employment as soon as possible.
I will now turn the call over to Brent to give you more details on our commercial outlook.
Thank you Peter and Aloha, everyone.
I'd also like to express my gratitude and appreciation to our team for all the work that has gone into building and executing our evolving plans as we respond to this unprecedented situation.
This touches so many parts of the organization and we as a leadership team are proud of this collective effort.
During the third quarter total revenue was down 90% year over year on an 87% decline in capacity.
Passenger revenue was down 94% year over year.
And other revenue was down 41%.
A highlight in our third quarter results was the outstanding performance of both our cargo and charter businesses.
As we adapt to the current environment. Our team has been nimble and opportunistic as found ways to secure incremental business.
Despite an 87% decline in capacity year over year cargo revenue was down only 28% driven.
Driven by higher yields and extra cargo only flying.
We operated more than a 140 cargo only long haul flights in the quarter and.
And we ramped up charter flying as well.
We will continue to look for alternatives to utilize our aircraft and resources to generate cash for the company, while our passenger business recovers.
In North America, we operated just 18% of our schedule compared to last year.
We added service to Portland, Sacramento, and San Diego back in the beginning of the quarter.
But then trim some frequency due to the delay in the launch of the pre travel testing program beyond September Onest.
Now looking ahead to the fourth quarter, we expect to operate about 37% of our North America schedule overall compared to last year as we bring back more capacity each month.
In October we welcome Las Vegas back to our network and will fly approximately 20% of last year's schedule.
In November we are bringing back Phoenix, San Jose and Oakland back to the network as well as several North America, the Maui routes falling approximately 36% of our schedule compared to last year.
And in December we plan to bring back New York, Boston and long Beach.
As well as more North America, the Maui, and quiet service and expect to fly about 54% of last year's levels with.
With that figure bumping up to the mid Sixtys during the holiday peak.
With these additions we will restored service to all 13 of our pre pandemic origin points in the us on the us mainland.
Now moving over to neighbor Island, our performance was negatively impacted by the reinstatement of the neighbor Island quarantine by the governor about midway through the third quarter.
In July with no quarantine in effect load factors were in the mid Fortys.
Well after the quarantine reinstatement on August 11th load factors in August and September we're in the Twentys.
Despite a schedule that was more than 20 and 50% smaller respectively.
Our schedule for the fourth quarter is expected to gradually build back as we anticipate a modest increase in demand for connections aligned with the increase in visitors to the state.
However, with the recently announced requirement for pre travel neighbor Island testing, we do not expect to see much demand recovery for local traffic given the magnitude of the cost of the testing in relation to the fair.
This could change of course, and if we were to see relief from the quarantine and testing requirements for intrastate travel.
Overall for the fourth quarter, we expect to operate about half of our neighbor island schedule compared to the same period last year.
Regarding international with government mandated travel restrictions on both ends of the journey, we didnt operate any scheduled international passenger flights in the third quarter.
But we brought back once per week passenger service to read out in October to accommodate essential travel between Japan and Hawaii.
We are encouraged by the recent announcement by the Governor of Hawaii that Japan will be included in the pre travel testing program as soon as suitable testing partners are secured.
And we expect that Korea will fall shortly will follow shortly thereafter.
Assuming that testing partners will be in place soon we're planning to increase our service to Japan as well as to convert some of our all cargo flights to Korea to include passengers later in the quarter.
As for Australia, New Zealand, we do not expect to resume service during 2020 as borders are still effectively closed.
At this point, we anticipate operating roughly 5% to 10% of our international network during the quarter.
Overall in the fourth quarter across our network, we are planning to operate about 30% of our capacity compared to the same period last year, reaching a high point of 41% in December.
Now switching gears to demand.
We are encouraged with our inbound load factor from North America to Hawaii running at 57% in the first 10 days since we reopened the state.
Bookings for the fourth quarter has steadily improved as travelers gain confidence and the state reopening.
Before the states latest pre travel testing announcement in mid September bookings for the fourth quarter were coming in at about 10% of historical levels.
After the announcement in mid September that improved to 25% to 35% with greater progress in the front half of the quarter.
And since October 15th this travelers have seen the state finally implement the testing program, we've seen steady improvement with bookings coming in at 35% to 55% of last year's levels with improved trajectory for the back half of the quarter.
While still early in the cobot booking curve world, we are seeing some additional booking activity in the first quarter of 2021 as well.
For most of the summer we were seeing just about half of our new bookings being kicked paid with cash.
In recent weeks this has changed and the level of new buildings being paid with cash has increased to around two thirds.
Although we are clearly still at the beginning of the recent reopening of Hawaii.
And it is challenging to assess demand our latest forecast for net sales for the fourth quarter is approximately $1.3 million per day.
Okay.
We are currently maintaining a cap on our load factor of 70% for all flights in our network to promote physical separation until December 15th.
We are encouraged by the recently published studies that demonstrate airplanes are among the safest indoor places with respect to the transmission of Corona virus.
Given the sophisticated air filtration systems on board.
Continual introduction of fresh air from outside the aircraft.
And the fact that all guests are facing forward.
These environmental attributes are complemented.
By our requirement that all employees and all guests were faced coverings throughout the journey.
The fact that a substantial portion of our guests are now being tested for the virus also gives us further confidence.
We will continue to evaluate our distancing policies for travel beyond December 15th over the next several weeks.
Overall, we look forward to the opportunity to bring back more of our service in the coming months and we remain ready to respond to the evolving demand environment.
And with that I'll turn the call over to Shannon.
Thanks, Fred and.
And thanks, everyone for joining us today.
Today, we reported an adjusted net loss of $172.7 million for the third quarter.
Or $3.76 per share.
Let the continued impact of COVID-19 on our business.
We recorded special items totaling 24.5 million related to the workforce rightsizing initiatives that Peter mentioned.
Which included voluntary separation executed in the third quarter.
As well as involuntary separations effective October one.
Our total operating expenses, excluding special items were.
Were down 52% year over year on an 87% decline in capacity.
We closed the quarter with $979 million in cash and short term investments.
This includes the receipt of 459 million from new financing and cares that funding.
More specifically, we received 376 million from the sale leaseback and doubly PC transactions that we mentioned on our last call.
As well as $38 million of care that PSP funding and 45 million from the initial draw of our care that economically program loan.
We have an additional $577 million available to us under the care that economic relief program loans, and we have until March of 2021 to draw any additional amounts.
With access to $1.6 billion in liquidity.
Including the Undrawn portion of our care that loan.
We're confident that we have sufficient liquidity based on our current view of the crisis.
While our focus on liquidity was appropriate and necessary the increased leverage and associated debt service over the next five years presents a sizable challenge.
Until we reduce our debt load will be constrained and capital spending investments and growth.
Over the coming quarters, as we get a better sense of the pace of growth of our cash inflows will turn our focus to managing our balance sheet with an aim to get back to the strength, we had pre covance, including our leverage target.
This won't happen as quickly as we'd like but it is a critical element of our recovery.
As Peter mentioned, we reached an agreement with Boeing to defer the 277 deliveries that were scheduled for the first half of 2021.
To September and December 2022.
And subsequent deliveries to 2024 through 2026.
The re timing of our 77 induction will provide significant relief in terms of the cash outlays related to our aircraft Capex.
Overall this agreement differs over $500 million in aircraft Capex on the 2020 to 2023 timeframe.
To 2024 to 2026.
Our capex for the remainder of 2020 is estimated at $5 million to $7 million, bringing our 2020 total to between 107 and $109 million.
Which includes one athree hundred 21 Neo delivered earlier this year.
Our Capex for 2021 is it is estimated at $40 million to $60 million most of which is non aircraft capex.
We continue to make investments in the business, albeit at a slower pace partner.
Particularly in technology and facilities based on our confidence in the positive returns from these investments.
During the third quarter, we were highly focused on cost reduction and the recycling of our company.
Our strategy has been to reduce costs.
Maintaining the ability to meet increasing demand as nimbly and quickly as necessary.
For the fourth quarter, while our capacity is forecast to more than double compared to our third quarter capacity we.
We estimate our operating expenses, excluding special items will increase only about 15% compared to the prior quarter.
We're currently at the point in our recovery, where we can bring that capacity relatively efficiently as weve been carrying fixed costs and labor expenses that can now be spread over more capacity.
Subsequent growth may not have the same cost implications.
Our third quarter daily cash burn excluding cares at finding a new financing and assuming net sales were equal to zero was $2.9 million, which was favorable to our original forecast of 3.2 million, primarily due to lower volume of operations and a higher uptake in voluntary employee.
You mean.
Net sales for the third quarter were approximately $300000 per day, bringing our net cash burn for the third quarter, excluding cares at the new financing to $2.6 million per day.
This figure includes an average of approximately $400000 per day and benefit from nonrecurring tax refunds during the quarter, which resulted from provisions and the care that which allowed for the carry back of net operating losses to a period with a higher tax rate.
For the fourth quarter, we estimate that our net cash burn excluding cares at the new fun new financing will.
Will be approximately $2.2 million per day, which includes net sales.
Operating cash outflows debt service.
Interest payments cash.
Capex and severance payments.
Our cash burn in the fourth quarter is slightly better than third quarter due to forecasted improvement and net sales.
Which are partially offset by costs associated with increased operations and the nonrecurring tax refund that we received in Q3.
As we look out into 2021, our priority is a swift return to cash breakeven.
We know this will require a recovery in demand as they cannot get there on cost reduction alone.
With the launch of the pre travel testing program less than two weeks ago, we're not yet willing to forecast the timing of achieving this milestone.
As we get a clearer understanding of the pace of demand recovery in the period ahead, we should have a better estimation of when we will get there.
As we rebuild our network, we're focused on balancing the need to capture demand, where it isn't where it exists while also reducing cash burn.
We're at the beginning of our recovery phase.
And with that generally longer booking curve for travel to Hawaii, there may be a slight lag in the recovery of revenue relative to the increase in costs, we will incur to bring that capacity.
However, we know that this is a critical first step as we restore our network and bring our fleet that to put up to service.
We will be nimble and aggressive and we'll continue to do what we do best focus on the needs of travelers to from and within Hawaii.
Well the events of this year have unfolded very differently from what we envisioned at the beginning of the year. We're confident we have a winning formula and we are positioned for long term success.
With that operator, we can now open up the call for questions.
Thank you, we'll now be conducting a question and answer session in the interest of time, we ask that you. Please limit yourself to one question and one follow up.
I would like to ask a question. Please press star one on your telephone keypad.
And Tom will indicate your line is in the question queue.
Press Star two if he'd like to remove your question from the Q.
Since using speaker equipment.
To pick up your hands at the floor pricing with Barclays.
One moment please poll for your questions.
Our first question comes from the line of Hunter Keay with Wolfe Research. Please proceed with your question.
Hey, everybody how are you.
Couple of quick ones on the 77 delivery schedule could consume with the new Capex profile is for 2000 line, if I missed it and just so I'm clear.
You are taking to 70 sevens in late 22, and then your your next one is not coming for like a year or am I did I get that right for like a year and a half after that's you're going only have 270 sevens for about a year is that is that correct.
Yes, that's the plan I mean, the Hunter the deliveries are September in December as we will probably not introduce those into service until the early part of 2023 by the time to go through proving runs and certification efforts. So we'll do a lot of that with the the September delivered.
Okay, and then bring the December one and likely start in 2023, and then we'll have.
The next ones are scheduled in 2024, and I think on Capex.
And then you gave the number for next year, Yeah Hunter. Our total Capex is estimated at $40 million to $60 million for next year, most of which is non aircraft Capex. We really don't have very much aircraft related Capex next year I'm.
Im sorry, I missed that thank you Shannon for you guys and then.
Is there an appetite Peter to buy it by locals to roll back the enforcement of the regulations on the STR market, even only if temporarily though to bring some tourism back.
You know that is a.
A hot button topic Uh huh.
Here are locally I think a lot of people are concerned about vacation rentals that have existed particularly in.
Areas, where they're they're not currently zoned for that purpose and I think sometimes illegals vacation rental debt.
Vacation rentals get wrapped up in the negative sentiment around those.
Illegal operations.
So it's not something that has been gathering a lot of attention right now I think people are.
Sales candidly getting comfortable with the notion of having so many visitors back in the state right now and Thats why its important for us to have a successful reopening and and make sure that we're making people aware.
Aware of of what they need to do to get tested so that we can keep the cases down and we can just improve the overall comfort level with increased visitors in the state.
Okay. Thank you.
Sure. Thanks Hunter.
Thank you. Our next question comes from the line of Catherine O'brien with Goldman Sachs. Please proceed with your question.
Hey, good afternoon, everyone. Thanks, so much for the time maybe.
Maybe one actually quick follow up a hard question on the 77, so if I understood you correctly, you're now going to have to 77 by the end of 23 versus your original plan for seven I think at least for the last 10-K.
This decision based on your view of what international demand is going to look like over the medium term or is it more of a cash outlay decisions, where you'll potentially keep some of your athree 30 left I'm going to plan. Thanks.
So I I am not sure that that.
Let's go back and check the numbers I seven seems like a lot for us to have had by the end of 2023, I would've thought to be more like five but then some coming at the end but.
And any of them really what this is less about a change in our view of the long term and more about the fact that the short term we're.
We're just in a dramatically different demand environment than we were at the beginning of this.
This year, it's going to take some time to build back.
We have.
We've obviously had pressure on our cash levels and we've had to do a lot of borrowing this year. So.
The complexity of entering a new.
Fleet into the business and the inherent inefficiency you have to go through a periodically in this business, but it is a lumpy process. When you go through we just wanted to move that to the right a little bit too.
To allow us to focus in 2020, and 2021 on stabilizing restoring and beginning the recovery of the business and we think we'll be in a much better position in in 2022.
I might add.
Katy I might add as well that the timing of the original timing of the 70 Sevens.
Really gave us the ability to kind of throttle our growth rate higher or lower as they were synced up with.
With 300 Thirtys in terms of lease returns and so given that we won't be pushing the existing fleet as hard and the period, leading up to that we decided to push some of that flexibility out into the later years.
Okay got it understood and then maybe just so I really probably very early for this but do you are you guys tracking.
Yeah data on travelers coming to Hawaii, and the success of the testing programs in preventing inbound.
Spread of the disease and the reason I am asking is just the last time, we thought spike in quality, if you add the clean power.
Sorry departure test or ground got delayed so I wanted I wanted to see if you guys working with the government just to show the efficacy of this program I'm just in light of the recent uptick in cases, maybe as a way to avoid.
It's being rolled back thanks, frankly, there appreciate it.
Yes, let me start and then I might ask RV mannose who's in the room with us who's been doing.
A lot of interactions with.
With the sales policymakers in the state around the program.
We certainly are are pushing to get some data we don't we really like understand what proportion of gas are being tested with test from the pre approved providers, we'd like to use that so that we can communicate that much better with our gas and make sure. They know about what the requirements are and.
And how to get the task.
We're still you know with today's the 27, so were 12 days since people started arriving without testing.
We've been on a positive trajectory certainly hearing a wahoo.
With cases in the last little while as a result of some of the.
Some of the interventions to prevent community spread and really the spread recently of the disease has been from.
Community spread but yes, we would we would certainly like to understand that and the whole purpose of pre travel testing is to make sure that that you've got a much much higher comfort level around the people who are traveling to and from whether its visitors or whether its residents returning from from travels on the.
Mainland to to have a comfort level about what is coming into the state and were hopeful that it's that's going to work as Avi anything you want to add to that I think I would just add it's too soon for there to be a real data driven.
Real data driven evidenced that the efficacy of this but there have been secondary testing protocols that has been implemented either on a sampling voluntary basis Theres a surveillance study that's going on in the state in for a period of time, Hawaii Island was requiring every arrival to take a second test and I think what that demonstrated thus far is that there is a very.
Very low incident, I think there have been maybe one case identified have someone on a secondary test.
So too soon to tell but the results thus far are encouraging.
And I think the state remains very committed to continuing to roll out the program.
Thank you very much.
Thank you. Our next question comes from the line of Joseph Denardi with Stifel. Please proceed with your question.
Yes, hi, everyone.
Peter you and Shannon spoke a little bit about kind of the structural cost improvements that are that are underway our efforts to variabilize the cost structure I guess and.
It's not entirely clear what that means from an earnings power standpoint post Covance I'm. Just wondering if you could speak to that a little bit it would seem like one way to quantify that would be to say what level of 2019 capacity. You think you need to get back to in order to get.
The next back to where it was in 2019, but some of your peers have struggled to answer that specifically so any way that you want to talk about that would be helpful. Thank you.
Yes, yes, I think the reason people have struggled to talk about is that theres, just a lot of variables going on in there.
I think what we have tried to do is take.
Take some of the cost structure permanently out of our business, where we can we unlike some carriers, we haven't reduced our fleet or haven't removed an entire fleet type from our fleet.
And so that.
We haven't had that lever to pull but we have certainly reduced our labor cost some and tried to as you say make.
Make the cost we are operating more variable. So if you if you end up being 15% smaller you'd you'd like to reduce your costs by 15%.
It is complex with some of the training requirements, particularly around the pilot group when you have a.
Multiple aircraft type fleet.
That adds a certain amount of of inefficiency in that and.
You know that inefficiency were just going to have to absorb because operating our network with just got some varied missions.
We we need to serve that and the the best revenue outcome, we get is from serving that by having multiple aircraft type.
Types available, but but that does create some complexity as we look to next year.
Im not quite well.
Willing to try and give you a you know if we get back to X percent of revenue we will.
We will produce actual result, whether it's.
CASM or.
Breakeven or retract breakeven or positive cash flow, but.
I will will as we go forward in the next few months, we get a little bit more comfort on the pre travel testing program I think we'll be able to give you a little bit more comfort about what the world looks like as we're going into next year.
Okay.
Sure Okay.
Yeah. The only thing I'd add there is from a cost perspective, you know it.
We did not in all areas, bringing our cost down to the minimal level of cost that we could up because.
Well, what we're trying to also maintain that flexibility to ramp back up quickly if if demand.
Is such that we should wrap the capacity backup and part of the difficulty in giving you some.
Forecast for 2021, as we I think a lot of the cost pieces to dependent on how the man ramp back up.
If you know demand is slow to ramp back up and we find that we don't need the flexibility that we've given ourselves then we can bring our cost down even further than we have or if we find that we needed that flexibility and we need to ramp up quickly then would have a different cost profile.
And then the farmer situation, so that's where that's where we have even more difficulty right now in giving you more concrete guidance for next year.
Okay got it and then Brent can you just talk about the kind of competitive environment that you're seeing on the North America side. It seems like to this point, it's been pretty benign because there wasn't much volume, but as it comes back.
Maybe what you're seeing and what your expectations are for terms of how much revenue will lag the recovery in demand. Thank you.
Yeah, I think at a high level.
The industry has been adjusting capacity rather late.
They've been doing that kind of across the network, but certainly Hawaii has probably been.
A little more extreme and with that kind of given the uncertainty of demand based on where we were with the quarantine.
So we're still seeing the industry continue due to more fun and adjust capacity in November and December quite a bit.
Yes, I mentioned in my prepared remarks, we're encouraged with how the demand is coming back.
On a positive trajectory.
We are obviously seeing quite a different booking curve our normal booking curve is.
As much longer that has been compressed quite a bit which in the short term clearly helps.
We have started to see a little bit more promotional activity as the state has opened up I would say as we worked our way through the summer.
Broadly speaking there wasn't nearly the level of promotional fares put out there by.
By the industry that has ramped up a little bit more with with opening up and it's something that it's important for us to be competitive and while we've got a bunch of cash.
Competitive advantages that we've talked to overtime.
Something that we'll make sure that we get our fair share or more of traffic.
Thank you.
Thank you. Our next question comes from the line of Mike Linenberg with Deutsche Bank. Please proceed with your question.
Yes, Hey.
I guess good morning, everyone, I'm, Hey, Peter I want to just go back on the on the testing for Hawaii is that the you know to commit to the state of Hawaii is it the more intense PCR test.
Which obviously takes it's a longer turn around or is there some possibility that the state of Hawaii will be willing to accept the more rapid antigen test thing and I'm. Just wondering if there is an opportunity to maybe implement that cheaper faster test between the islands because you have started to zero.
Policy.
Which which is not reliable in the world of Commerce and mobility and I'm just curious what the states habitat is with respect to that and then just the islands of Hawaii Rd Rd I heard.
Talk about that second test is that still in effect and are you actually seeing much weaker demand to the island of Hawaii, because they have an extra step.
So let me let me start on the test first and then maybe I'll, let abhi chime in again on on where we are on the testing regime in Hawaii, and I'm I'm going to while you with what I have learned about COVID-19 testing over the last several months here.
The word tests in Hawaii in Hawaii is a nucleic acid amplification passed or a nat gas and it has to be from a we approve lab.
PCR tests are a part of that category of task, but they're not all of it. It also includes some of the other.
Point of care Abbott labs device, but it doesn't include antigen tests, so antigen tests or a different classification and I think as.
As the policymakers were thinking about this that there they really wanted to.
Set a standard that had high efficacy and accuracy and responding to the concerns of the community about bringing more travelers back I think as.
As testing becomes.
ER continues to evolve and its evolved a lot over the last several months.
There is ought to be an opportunity to expand the pool of acceptable tests in our opinion.
As long as maybe provide high efficacy and accuracy. So as long as you believe you can get a reliable resolved and we would like to see that but that is something that is pursued an end and particularly as I said in my remarks.
We don't think the SER 100 dollar 200 dollar test is going to.
Help unlock demand for neighbor Island.
A lower cost test might do better certainly the removal of the quarantine if we get to a more standard level of the prevalence of disease throughout the islands.
Would be the best outcome from a demand standpoint in that regard. However, you want to just cover we narrowed the testing is between the islands right now sure. So.
So the.
With respect to the Hawaii Island mandatory test that was discontinued after about a week. So they did something like five okay.
10, false positives and one true positive and they decided to move to a move to a voluntary.
And that was an antigen test and one of the issues with it with the rapid antigen test is the false positive rate.
False negatives create problems with false positives are also an issue and so I think it is a prudent decision to focus on testing that has very high sensitivity and specificity. Initially I do think everyone here recognizes that.
Technology is going to change and that this is a first step and they started with something that has both PCR testing has both good sensitivity and specificity, but also very mature supply chain and so.
But I think everyone recognizes that over time, obviously it is going to migrate as technology improves to hopefully what are cheaper equally accurate tests as they become more available.
Thanks, Scott you just Peter just a second question on.
Uh huh.
What's what's the trigger in the pilot agreement that lets you restart that operation and are you using your seven one sevens to still try to connect I guess what is it now.
And Molokai or are those are they cut off from from your network. Thank you. Thanks for taking my questions Yeah.
Yeah sure. So so the trigger is we have a we have a requirement to to allow us to operate a feeder carrier relationship within the Hawaiian Islands, we have a requirement that if you do a 12 month look back of the block hours of our neighbor Island mainline main.
Line airline flying that is above 29000 hours and so as weve reduced our schedules for April May June July through to do now we hit a point in we will hit a point here in October where we go below 29000, and we don't make that that.
That 29000, our look back and that's why we announced that we were going to suspend the ohana by Hawaiian service effective November Onest.
Subsequently, there's there's a couple of of developments, where we actually.
Riverside announcement yesterday and.
That is based on the fact that.
That although we do not accept we have not historically accepted he asks subsidies for those those are to be essential air service markets and there is a notice requirement and so we anticipate.
But the duty is going to require us to continue flying those and so we're we're we're continuing we've now said we're going to continue flying those with a minimal baseline scheduled to Molokai and lanai.
Through.
Lisa Middle of.
January.
As as far as 71 Sevens.
We really don't think Thats a good option the 717 relative to prior generations of that aircraft type and I know I know you're a long time.
Like Mike. So you that you know that that's sort of a predecessor of the.
The old M.D. line and the NDC.
Yep.
This airplane flies, a little bit faster and with the very short runways and some of the the obstacles, particularly obstacles around the runway Imola Kai we don't think that someone seven is a viable aircraft for for regular operations and so if we're going to fly into.
It is going to be with the with the Trs and operated by Empire in our Rehana livery.
Thanks for that Tippett, Peter because I know on Hawaiian use declined with the DC nine so I thought maybe they could start with the second one but does it make sense. Thank you.
Yes sure.
Sure.
Thank you. Our next question comes from the line of Helane Becker with Cowen. Please proceed with your question.
Hi, Thanks, very much operator, hi, everybody and thank you very much for your.
Your time.
Afternoon.
So one of my questions is on that industry capacity coming into the market.
Do you feel you need to match the industry in terms of pricing or.
You evil because it's your core market.
So much better than on the pure group.
Uh huh.
Sure.
Well Helane this is Brad I would say that it is.
We feel like we've got a superior onboard product and we are really grateful that the product.
The physical product that we've got being tailored for Hawaii, but our our frontline team is fantastic and that as we've talked about numerous times that helps us generate.
Revenue premium ultimately how that revenue premium versus our competitors.
Is created is ultimately really by creating better than average demand and that can either be.
Yes kind of more passengers and more volumes at competitive prices are a little bit more and I would say.
Right now we've seen a little bit of both networks are still.
Shaking out in People's previous server.
Service in certain no wendy's is changing and evolving as we move month to month and it's something that the that my teams keeping a keen eye on and we'll continue to do 10.
To ensure we're making the optimal revenue decision for Hawaiian Airlines today and going forward.
Okay. That's.
And then the other question I know I think and.
Actually Joe is it was kinda like you don't have the information or you don't.
I want to share.
You know I was listening earlier today to Jeff with Ceos say, they're doing $8 million of revenue per day I need to get to 13 to 15 to kind of reach cash flow breakeven and I think you mentioned that you don't really have a number but I was wondering if.
You can say.
Where.
Prior to the pound.
Where you are relative to that.
Okay and be like.
We're what percent maybe historical bookings you would need to get to.
Reach.
Cash flow breakeven.
And how quickly could you actually bring capacity and stuff back at say demand improves in December.
Thank you.
Yeah, So let me sort of.
Try and respond to that a couple of ways. One one I would say part of the challenge for us in terms of thinking about what cash.
What revenue we need per day to get to cash breakeven is has been changing pretty rapidly as Brent went through you know just what was in place between September 16th on October 15, we saw a big acceleration right after that and we're continuing to ramp up and some of that frankly is getting an expense.
None of the booking curve because that that provides a cash flow as well even above what you're you're flying today.
As we ramp up our operations that's the other side of the equation changes as well not weight. That's why it makes it a little bit difficult to give these.
Forecasts, because you've got to think about what load factor, you're running what yield youre generating how much capacity you are operating and all of those things are part of a gen.
Generating the revenue.
I think generally you've heard some numbers by other carriers and they all gravitate around the same general level of how much cash you need to get back to.
Yes relative to where you were before and our number is probably not going to be too terribly different from those but we're not going to give a specific forecast.
Forecast about about that while we're in a period of of so much.
So much flux really as we just are 12 days into ramping back up to where we actually have an environment that is conducive to generating revenue.
Right Okay.
Perfect, Yes, Shannon and.
On your question on how quickly we could bring capacity back on we really haven't done very much from a fleet perspective to put anything in long term storage, we've deferred a little bit of maintenance.
But for US our fleet is generally completely available in December.
We haven't gone too far down into pilot training that we can reverse and if we had noticed probably around now beginning of November and as far as our flight attendants and ground ground staff, we can bring them back pretty easily as well. So we're very flexible in the near term on capacity.
Okay. Thanks, very much everybody. Thank you for your time, yes.
Yes, thanks Wally.
Thank you. Our next question comes from the line of Dan Mckenzie with Seaport Global Securities. Please proceed with your question.
Yes, hi, thanks, guys.
I guess, just a clarification here how many destinations have a pilot program for a rapid testing in place and if you know if you in I guess, if it's embraced what percent of the network could it realistically encompass here in the fourth quarter.
So.
The the pre travel testing is in place for travel inbound from from the U.S. mainland the state has indicated.
That there is our discussions underway to identify testing providers in Japan, which is our biggest international market.
Korea is in discussions and Canada, which is not part of our historical room network is there are discussions going on as well. So you know theoretically for.
For for our network that brings the all the destinations except for Australia, and New Zealand all the origin points that we bring people from back in play pretty quickly here by the end of the quarter I would say that that doesn't necessarily mean that we're going to be back at 95.
Percent in fact, you heard brands forecast, we're not going to be a 95% of our capacity because were operating lower frequency and in some cases smaller aircraft based on the demand environment, but but a substantial proportion of of the sort of addressable demand is is avail.
Mobile to access that pre travel testing here pretty soon as we go through the quarter.
Got it and is the expectation that the rapid testing would have a similar impact on travel volumes internationally as you are seeing domestically here or.
Would they is there some additional hurdles that might impact the kind.
Kind of how those volumes might might spool up relative to what you are seeing domestically.
So that the testing that is in place as I talked about earlier with Mike was the say the Nat testing from in the U.S. from a CLIA approved lab and it will be other.
Other.
Regulatory approvals for the labs, so it's not the rapid antigen test.
Testing, although there are point of care.
Nat tests that that are available one of the other issues that as we think about some of these international.
Destinations and bringing them back is it's not just the case of demand being limited by the two week quarantine into Hawaii, but it's also the two week quarantine on return so jurisdictions like Canada.
Canada, Japan Korea. They also have quarantines on the other end and so that is.
Something that is still going to be an impediment to accessing all of the historic demand that we have had.
Got it and I guess, just with respect to that impediment, though is there a travel insurance policy you could sell you know people that if they got stuck in Hawaii for another two weeks that the you know that that some kind of travel insurance could could kick in for some reasonable price.
I have I have not seen a product like that yet but.
You know, there's always there's always entrepreneurs out there for everyday.
Okay. Thanks for the time.
Thank you. Our final question comes from the line of Steve O'hara with Sidoti. Please proceed with your question.
Hi, Thanks for taking the question.
Yeah I guess.
It seems like some airlines have at least.
Or at least appear to be focused on offense rather than.
Just on defense.
I think I can understand why you.
You guys appear to be still more on the defensive.
Yes, I mean does it does that put you to greater disadvantaged longer term relative to peers.
And might that change.
Changes cash burn improves.
You know I don't necessarily except the characterization that we're on the defense I think we have we have always been.
Repair two and ready to compete Weve had a a home market and the core of our traditional network that has really been.
In accessible.
Substantially and accessible for the past several months. So I think that has limited our ability to do things, but now that we we have the pre travel testing in place I think we intend to compete aggressively to win our share of revenue.
Okay. No that helps and then can you I mean I know you said your capacity is down.
70% for the quarter for the full quarter.
You know what the competitive capacity is roughly I mean, obviously, it's I'm sure. It's in a constant state of flux, but.
I mean is it do you expect the more or less have.
Kind of similar share than what you normally have or any greater or lesser share.
Just as of right now.
As you mentioned it is quite a bit in flux in that I think we're probably out a little bit ahead of some of the competitors and getting something that's closer to a final schedule out there. So we'll certainly have to wait and see how other folks make adjustments, particularly to December where.
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Some of the carrier still have a vast majority of their scheduled published but I think I think by the end of the quarter will be in it will be in a similar ballpark, maybe a slightly different trajectory to get there, but I think by the in the quarter.
My expectation is we'll we'll look and feel a little more similar to the rest of the industry here in Hawaii and one of the thing Thats important to US was was getting to the point, where we will be by mid December.
Where we have all of the 13 origin points in North America back.
In the network and we've got the ability we don't feel like we have to add.
At every seat back in because we've got the ability with our neighbor island connecting network to be able to connect those 13 origin points to all of the points in the island. So it gives us the ability without adding seats that there may not be demand to fill to be able to provide the network Brett that that will allow us to compete for all the revenue.
The way that we we want to compete for.
Okay. Thanks for the time appreciate it.
Sure. Thanks, Steve Thanks.
Thank you we have reached the end of our question and answer session I'd like to turn the conference back over to Mr. Ingram for any closing remarks.
Hello, again for joining US today, we are encouraged that we have reached an inflection point from surviving the crisis to beginning the recovery there.
There is much work yet to be done and we look forward to updating you again in a few months on our progress.
We appreciate your interest Aloha.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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