Q1 2021 Hawaiian Holdings Inc Earnings Call
[music].
Greetings and welcome to Hawaiian Holdings, Inc. First quarter 2021 financial results call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Alanna, James Managing director of Investor Relations for Hawaiian Airlines. Thank you you may begin.
Thank you, Doug Hello, everyone and welcome to Hawaiian Holdings first quarter 2021.
Prince call here with me in Honolulu are Peter Ingram, our President and Chief Executive Officer, Brent ever be our senior Vice.
President of revenue management and network planning and.
And Shannon <unk>, our Chief Financial Officer.
We also have several other members of our management team in attendance for the Q&A.
Peter will provide an overview of our business, including the continued impact of COVID-19, and an update on our priorities for 2021.
Brian will provide an update on our commercial performance and trends and Shannon will provide an update on our cost performance cash burn and liquidity.
At the end of the prepared remarks, we will open up the call for questions.
By 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 Dot com.
During our call today, we will refer at times to adjusted or non-GAAP numbers and metrics.
A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found 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 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 SEC for a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward looking statements. This inc.
The most recent annual report filed on form 10-K, as well as subsequent reports filed on form 8-K.
I will now turn the call over to Peter.
Hello, Lana Hello, everyone and thank you for joining us today.
Our first quarter performance exceeded what we were expecting when we last talked to you at the end of January.
More so than any time in the past year, we experienced a quarter with more rays of Sunshine and dark clouds.
At the time of our fourth quarter 2020 financial release, our outlook was depressed by sluggish bookings at the end in early January.
Which in a typical year is the peak period for first half sales.
What we didn't know then is that we were on the cusp of a positive trend.
As virus case counts in the U S crested in mid January even before the pace of vaccinations accelerated we saw material improvement in bookings for our North America routes.
Week by week for the rest of the quarter the bookings pace continues to accelerate.
Neighbor Island bookings also improved although not as much relative to pre pandemic levels as North America.
If there was any doubt that there is pent up demand for leisure travel after a year of Lockdowns that Delta has now been dispelled.
Despite the positive evolution of the quarter, our financial performance remains dramatically affected by the pandemic.
January results remains significantly depressed, especially after the end of the holiday travel period.
February was better, but only benefited a bit from the demand improvement that became apparent at the end of January.
March was notably better.
So much though that nearly half of our passenger revenue for the quarter was recorded in the final month.
While we arent back to where we were pre pandemic. It feels like we are out of the ditch and back on the highway.
Through this period, we made progress on our objectives for 2021.
Rebuilding our network to drive revenue, reducing our cash burn and strengthening our balance sheet.
There is more work to be done, but we're proud of our progress.
We continue to rebuild our network with the launch of four new North America routes over the past several weeks.
We made important progress on reducing our cash burn and reached a milestone in March achieving positive operating cash flows for the month.
We address any lingering scepticism about our near term liquidity by bolstering our balance sheet through our at the market equity offering and a $1 2 billion debt financing backed by our loyalty program cash flows and brand assets.
With $2 1 billion in liquidity, we are no longer actively looking to raise capital.
Our treasury team has done a remarkable job over the past year and we are confident we have the liquidity to withstand whatever remains of this crisis.
As I look out to the second quarter I'm optimistic about our continued recovery in North America.
Looking to have recovered and remained strong.
Our booking curve is lengthening as travelers become more confident and demand looks much more like pre pandemic normal.
After a year of staying cooped up at home our guests are ready to travel.
Our neighbor Island business is lagging North America in its recovery trajectory.
The requirement to obtain an expensive COVID-19 test to avoid a 10 day quarantine on short neighbor Island flights continues to inhibit demand.
With lower case counts and positivity rates than when travel restrictions were imposed it is time for the state of Hawaii to remove pre travel testing requirements on trips within the state.
For now we will take some comfort in the continued evolution of the safe travels program, which will soon allow Hawaii residents to travel between the islands without testing or quarantine if they have been fully vaccinated in Hawaii.
Our international business remained substantially dormant with.
With strong cargo demand, allowing us to maintain minimal service to Japan and Korea.
Recovery of our international business remains the biggest wildcard and a return to something that better resembles the old normal.
North America as well on the way to recovery neighbor Island has improved and will recover substantially when testing requirements are lifted although the timing of this is not in our hands.
The path to recovery in our international business remains less certain.
Restrictions are persisting longer than we had anticipated, especially as the pace of vaccination lags, what we have seen at home.
We are optimistic however that the rapid recovery in demand in North America is a harbinger of strong demand recovery in our international markets as cross border travel becomes a realistic proposition again.
We think this will especially be the case in Japan, where the affinity for travel to Hawaii is extraordinarily high.
In the meantime, we remain focused on managing what we can control being disciplined about bringing costs back into the business setting the foundation for future growth and rebuilding and serving our guests with signature Hawaiian hospitality.
The first quarter has been an enormous turning point in our recovery and we're excited to once again be charting a path to excellence for our guests our employees and our investors.
I would be remiss, if I didn't once again, thank our team for their exemplary contributions through this extraordinary period.
Amidst the uncertainty of the past year. They have remained steadfast in the pursuit of our purpose to connect people with Aloha.
Even as the pandemic keeps us more separated than any of us once.
Im gratified that we are now at a point, where we are calling back increasing numbers of our colleagues from voluntary leaves as our business comes closer to full recovery.
Let me now turn the call over to Brent to give you more details on our commercial performance and outlook.
Thank you Peter and Aloha, everyone.
I'd like to Echo Peter's gratitude to the entire team once again this quarter.
You've done a fantastic job, taking care of our guests and each other as we build back our airline.
Our first quarter revenue performance was better than we expected at the beginning of the quarter as we saw a sharp rebound in close in demand in North America in the back half of the quarter.
Total revenue was down 72% compared to the first quarter of 2019 at the favorable end of our updated guidance on our 49% decline in capacity.
Passenger revenue was down 77% year over two while other revenue was down only about 19% driven by continued strong performance in cargo and loyalty.
While our sequential improvement in first quarter revenue performance was encouraging in and of itself.
The events of the quarter marked an important inflection point for our North America business and pointed to continued progress and improvement for the remainder of the year.
During the quarter, we continued to rebuild our north American network, adding frequency back into markets. We previously served in launching service in three new routes, including Nonstop service from Ontario, California, and Orlando to Honolulu, and from long Beach to Maui.
From a traffic perspective load factors that we're languishing in the low thirties in January doubled to the low sixty's by March.
And finally after a disappointingly slow started the year with booking activity, we saw a material acceleration in February with bookings at roughly 80% of 2019 levels for travel in the second quarter.
We saw another step change during the month of March and had been running at over 110% of 2019 booking levels. Since then.
Unlike previous quarters during the pandemic, we've seen guest confidence in travel extending further resulting in appreciably strengthening booking activity for the latter half of the year as well.
As such our current book load factor for both the third and the fourth quarter of this year are now at or above 2019 levels.
As we move into the second quarter, we've welcomed Austin into our network last week and will bring back Las Vegas Maui in late May at which point, we will have all of our pre pandemic routes back up and running.
Finally, we will launch four times weekly seasonal service in Phoenix Maui late next month and adding it all up by June will be flying in North American network that is larger than our 2019 capacity.
In the neighbor island market, the quarantine and pre travel testing requirement continued to curtail demand.
As we've progressed through the year, we've seen an uptick in traffic driven by North American connections and a moderate increase in local travel.
In the first quarter, we operated about 38% of our 2019 schedule and.
And we expect to operate about 60% in the second quarter.
The sequential increase was driven by an increase in capacity to Hawaii as quite county re entered the safe travels program in early April.
As well as incremental frequencies across the geography to accommodate the increase in demand primarily from connecting traffic.
As Peter mentioned in his comments last week, the state of Hawaii announced that Hawaii residents.
That who have been vaccinated in the state will be able to use their vaccination card to bypass quarantine for travel within the state effective may 11th.
While it still is early we have seen a moderate uptick in booking activity for the back half of the second quarter since the announcement.
But we believe further liberalization of travel within the state for all travelers as warranted necessary for demand to return to pre pandemic levels.
Regarding international.
We operated only 12% of our 2019 schedule in the first quarter and we expect to operate a similar level in the second quarter.
As we remain in an environment with strong cargo performance and weak passenger demand.
We're continuing to operate with limited service to Tokyo, Narita, Osaka, and soul, but temporarily suspended our service to Tokyo, Haneda and consolidated our Tokyo operations at an arena for the time being.
At this point, it's not clear when restrictions will be lifted in Japan, but we strongly believe there is pent up demand and we should see increased booking activity once travel restrictions are eased in Japan.
All other international remains insignificant from a capacity perspective as demand is hampered by travel restrictions and the prevalence of the disease and.
In origination countries.
If we roll all that up we anticipate the second quarter system capacity will be down about 30% to 33% and it system revenue will be down between 45% to 50% compared to 2019.
Looking further ahead, we are maintaining our summer 2021 planning assumption of.
Operating about 75% to 85% of our 2019 capacity at a system level.
While this has been our assumption for several quarters now the composition is a little different from what we originally anticipated with more North America flying based on the strength of demand in that market and less international given the continuing restrictions that are bound internationally.
Overall, we are optimistic about the future and encouraged by the signs of recovery in North America, while the timing of the recovery and our other geographies is still uncertain our experienced with the rebound in North America gives us confidence that we should see similar signs of pent up demand in those geographies once restrictions are lifted.
As we emerge from the crisis, we're continuing to think about how we adapt our policies and services to better meet the needs of our guests.
We've eliminated fees and policies.
Our limited economic value and serve as an irritant to our customers.
We eliminated change fees last year, and we recently announced that we are permanently eliminated mileage exploration for Hawaiian miles.
This change will be particular valuable to some of our less frequent guests from the mainland or international markets by providing them more flexibility and engaging with our loyalty program.
Onboard we delivered a higher standard of service to our guests continuing to offer hot meals and limited beverage service in all cabins, even as our competitors were offering crackers and bottled water.
We did show with great attention to safety for both guests and our employees.
Beginning may 1st we'll reinstate priority boarding for elite and other groups, which had been suspended the streamline boarding.
And on June one, we'll be bringing back to other popular elements of our in flight service, including snack and alcoholic beverage sales in the main cabin.
We are sharing these changes with customers with humility empathy and a commitment to earning their business as they begin to fly again.
We stand well positioned to win the business with the best people the right products to meet the needs of the Hawaii traveler.
And with that I'll turn the call over to Shannon.
Thanks, Brent and thanks, everyone for joining us today.
For the first quarter, we reported an adjusted net loss of $119 6 million.
Or $3 85 loss per share.
We closed the quarter with $1 9 billion in cash and short term investments.
Which includes the receipt of $109 million from our aftermarket equity offering of which $68 million was raised in the first quarter.
$167 million from the Piceance to extensions and one 2 billion in proceeds from the royalty bonds private placements that we announced on our last call.
This figure also reflects the repayment of our 45 million carats.
Cares Act ERP alone as well as our $235 million revolver.
With our current $2 1 billion in liquidity, which includes our now undrawn revolving credit facility. We're confident that we have the funds to weather the remaining period of uncertainty as the pandemic winds down.
Furthermore, last week, we received an additional $25 million.
Funds from TSP, too and $19 million from PSP three with another $90 million expected later in the second quarter.
We are no longer actively looking to raise capital and have shifted our focus to strengthening our balance sheet over the long term.
While we are not yet ready to discuss updated leverage and cash target. We know we will be building a long term plan as there are limited opportunities for near term delevering that make economic sense.
While we have significantly increased our debt balance over the past year. Our adjusted net debt is only $35 million higher than the balance as of December 31 2019.
Adjusted net debt includes the debt finance lease obligations and seven times operating lease balances offset by unrestricted cash cash equivalents and short term investments.
Although our higher cash balance one per greater carrying costs. We believe it is appropriate in the near term having.
Having said that we are encouraged by the improving market conditions, which are moving moving us closer to the return of consistently positive free cash flow.
For the first quarter, our total operating expenses, excluding special items were down about 33% compared to the first quarter of 2019 on a 49% decline in capacity in.
In line with our expectations at the beginning of the quarter.
While our fuel expense was higher than expected and was more than offset by some favorability across various other cost categories.
We expect our second quarter total operating costs, excluding special items to be down about 20% to 24% compared to the second quarter of 2019 on 30% to 33% lower capacity.
The sequential increase in costs compared to the first quarter of 2021 is driven by the variable costs associated with operating a bigger schedule.
We remain committed to being cost competitive even ask me as areas of cost pressure such as airport costs.
Having completed our fleet simplification initiatives before the pandemic, mainly the retirement of our 760 Sevens.
Our recent focus has been on fixed cost improvement in areas, such as maintenance planning and scheduling to reduce heavy check time and passed.
And last fall, we reduced management and administrative positions by 14%.
Although not as evident when doing less flying we have also reduced our variable costs.
Which will allow us to grow back our network more cost efficiently Inc.
Including labor savings from important work room improvements for our flight attendants and process and technology improvements for our airport staff.
Although there will be a disparate impact on our unit costs at the timing of bringing back certain parts of our network will vary.
Given the same entity next we believe our unit costs, excluding fuel would be roughly in line with 2019 levels. If our network was fully restored.
Our first quarter daily cash burn was 1.0 million.
Which was favorable to our original as well as our updated expectations, primarily due to higher net sales.
Our net sales for the quarter totaled $4 2 million per day exceeding expectations due to the strength in North America bookings that Frank discussed.
As a reminder, in addition to operating cash flow our cash burn figures include debt service interest payments tax refund inflows and capex and severance payments, but exclude cares act and other new financing as well as the repayment of our cares Act ERP loan and revolver.
As Peter mentioned, we reached an important milestone in March when our operating cash flows our net sales less our operating cash outflows turned positive.
Net sales are expected to maintain these improved levels as we continue to recover in North America, and we should see another step change in net sales when our other geographies open up.
Going forward, we're shifting our focus and guidance that the P&L metrics.
As we're satisfied that we have sufficient cash to carry us through to the point when we are generating consistent free cash flow.
And our decision, making we will focus on returning to positive profitability and providing the foundation for long term shareholder returns.
As we move away from discussing daily cash burn, we believe adjusted EBITDAR will be a better metric to gauge our performance through the remainder of this recovery.
We expect our adjusted EBITDAR to improve from negative $152 million in the first quarter.
To a range of negative 70 to negative $20 million in the second quarter.
On our current trajectory, we see a path to positive EBITDA later this year, even when assuming minimal recovery of our international business.
However, achieving positive pretax net income will require a more substantial recovery both in our neighbor Island, and our international, particularly Japan geographies.
Which is unsurprising since neighbor island and international flying combined represented over 45% of our revenue pre pandemic.
Although the timing is difficult to predict given the uncertainty surrounding government travel restrictions.
We are ready to restore our network and serve our guests in those markets as soon as we're permitted to do so.
While the pandemic is not over the price has substantially subdued and we are encouraged by our positive trajectory.
We're focused on rebuilding our network and making investments that are in the best interest of the long term profitability of our business.
And with that we can now open up the call for questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Hunter Keay with Wolfe Research. Please proceed with your question.
Hi, everybody.
Thanks for your thanks, Patrick today so.
Peter how are you doing so after your bankruptcy earlier this decade and after the GSC you guys decided that you needed to diversify a little bit and you did you guys get bigger in Japan.
While we are in the south Pacific, but now it seems like a lot of airlines out there globally. These days are kind of just sitting around hoping that things go back to ways that they were sort of pre COVID-19.
Are you one of those airlines that are kind of hoping things go back to where they were or do you see this crisis is a good reason to maybe overhaul something strategically like you did last time.
Yes.
Correct, one part of the question. The bankruptcy was was closer to 20 years ago that in the last decade. It was it was.
And then a century I know.
Yes.
My mistake I'm, losing track of time, but yes.
No.
My mistake that you get the point it was really after the GSC was whether that overall really occurred I guess, so you get the question.
Sure and I think we have done some things in motion, even before that point with the the fleet decision on the <unk> hundred 32, <unk>, which was really positioning ourselves for more international.
I think broadly speaking.
<unk>.
The next 12.
To maybe 18 months I wouldn't expect any anything dramatic more evolution than than revolution, but I think our business and our industry is going to continue to evolve and we have to anticipate where where things are going and positioning ourselves.
Where we can can be successful.
I don't have any specific plans, obviously to announce them in that regard today, but we're continuing to look at a variety of options that are out there for us.
I'm sure, we're going to continue to adapt and evolve our business too.
To position ourselves for success long term, what I do think where I do think we are particularly positioned well right now though is that even before the <unk>.
Pandemic, where we've seen leisure come back stronger than business and quicker than business travel.
That's that's a continuation of a long term trend where leisure travel has been growing very well and I think we're particularly well positioned here with a.
Our premium.
Quality of service and.
And an approach to taking care of our guests that positions us well for the continued evolution of the industry.
Okay, No that's fair.
And your ATL was back up to $690 million or so from that mistake, and which is pretty much where it was in <unk>.
<unk> 19, but your capacity still down 30% I know that you said that.
June youre going to be up I think you said, but are you just booking wait further out than normal.
Have you locked in some really strong yields and we're going to see like 90% load factors, how is that going to manifest itself those two metrics together.
Yes.
Maybe I'll start and then.
See if Brent or Shannon want to embellish a little bit.
Right now as Brent said in his comments North America is booking out.
Very similar to.
2019, pre pandemic levels for the third quarter. The bookings are basically in line second quarter, we're still a little bit below I think what you see reflected in the ATL and why the balance maybe a little higher even though the international bookings are not there is we're still carrying some.
Some.
Some bookings.
For trips that were not flown from 2020, even though that.
That balance has been working down as some of that we booked some will continue to work down over time and so you've got that.
That is at a higher level than what you would've seen before the pandemic, whereas you don't have the international advanced book in there and those are largely offsetting I think that's what you're observing in the APL numbers.
Alright, yes, alright, thanks a lot.
Go ahead.
It's a follow on to Peter's comments, we have seen.
Really the last.
I'd say kind of eight to 10 weeks, we've seen tremendous strength across North America.
And we've kind of hit a consistent.
Intake of bookings that have been above.
2019 levels for <unk> and <unk> as I mentioned, we kind of close the gap from historical load factor for the back part of the year and average fares in those periods have been.
More aligned and frankly average fares in the second quarter has continued to improve.
As we move through the period as well that have helped to strengthen the ato.
Thank you Pam.
Okay.
Our next question comes from the line of Catherine O'brien with Goldman Sachs. Please proceed with your question.
Hey, everyone. Thanks, so much from the time.
Maybe just a question on on network given that.
I think to quote you guys. That's the biggest wildcard what international is going to come back are.
Are you guys looking at shorter term market, where you could deploy your AC thirties I saw that some of your new routes like Orlando and Austin are using these aircraft but.
I guess any short term opportunities to deploy those aircraft just given the north America strength or or do not like.
Clicker tactical and in other markets just any color there would be helpful.
Sure.
I think we actually already have taken advantage of some of that as we alluded to in some of our prepared remarks.
We've shifted gears a little bit with.
Less international flying than we had planned in the bigger North America network than we had planned.
Some of the changes that we've announced for the summer we've made some up gauges for the summer on some 321 routes that will be flying a street <unk> and we've also entered some stuff seasonally for the summer that that we might not have had the luxury to do before so.
I think we're well positioned for the summer and have a really strong summer here in North America will continue to look at that and assess the pace at which.
Okay.
International is likely to come back and how does that fit into our fleet and crew capabilities as we move into the fall and take advantage of that in the latter half of the year as well.
And that I think.
Brent in the network planning team have also been very.
<unk> nimble over the course of the last year looking for some opportunities and in.
In the charter market that we wouldn't have.
<unk> is much before looking at flying.
Cargo only flights with with our aircraft some of that activity is going to wane, a little bit now as as we have restored much more of our schedule, but to the extent we have availability of aircraft in the back half of the year, we've still got the ability to look at those things as well.
<unk>.
Got it so people are getting spoiled on these lifestyle AC thirties.
At least for this summer.
And then one more.
<unk>.
Kind of I guess network type question.
Maybe this is tough to fully derive.
In terms of just contact tracing but are you able to pull out what proportion roughly of your entire island traffic was historically driven by international travelers.
Just thinking about this as the majority of your international flight to arrive in Honolulu.
Yes international connecting traffic in neighbor Island was kind of.
Mid to high single digits in terms of percentage of traffic I think overall, if we look at our portfolio of connecting traffic that was around around 30% overall, which is a mix of our own online connecting stuff domestically and then as well as some of our partners and then and then a component of international.
As I mentioned there.
That'd be great. Thanks.
Our next question comes from the line of Helane Becker with Cowen. Please proceed with your question.
Thanks, very much operator, hi, everybody hope you guys are doing well.
And you're thinking about these bookings that are coming in.
There are 110% I think from 2019 levels is what you said.
How are you how are the yields on those and I ask because you'll have a lot of new markets interest first with markets that you're going back into and I'm wondering if you have to be very promotional in some of those markets.
So I.
I think since the last time, we talked we've certainly seen some improvement in the pricing environment, we still see.
We still see some sale activity for the spring, albeit those levels have clearly improved from where they were at I think the probably the biggest change that we've seen has been just the progression and our ability to inventory manage flight. So when we're running load factors in the <unk>.
And <unk> and <unk>.
The revenue management side of my team is an extraordinarily busy the pricing teams busy but they arent team so much.
That has clearly moved forward and we've become a lot more active in that space and so really over the last I'll say four to five weeks, we've seen some continued progress in that.
Furthermore, one area that we didn't include our prepared remarks thats done that we're seeing.
Good amount of strength is in our front cabin.
That business has come back exceedingly strong in is in the area. Both on the pricing in the inventories side that we're going to we're going to push hard on and I think will come closer to 2019 levels and may even exceed some of our 2019 RASM levels.
In the front cabin as folks have.
They have some money some folks have some money pent up from.
From the quarantine and are clearly interested in our higher end experience and we look forward to delivering that in terms of new markets. We've had to do a little bit of promotional pricing to get our name out in some of the select markets. So.
In places, where our name is a little less known.
Notably in Austin, and Orlando, we've done a little bit more promotional activity than we had to do in places like long Beach in Ontario, where our brand is as well known on the West coast, but overall, we're encouraged with how both booking and fare levels have come in in those markets as well.
That's great. That's very helpful. Thank you and then my follow up question is are you thinking about this.
From the perspective of people.
People are traveling to Hawaii, because they can't travel overseas and so there's all this demand for our for Hawaii and you guys are like in Hawaii right just from.
There you have the capacity.
And and so on and then as international opened at some point in the next I don't know when that's just a year or two are you thinking that you ship. This capacity back to international or are you thinking Hey, This is working really well in North America to Hawaii.
So, let's just go out and buy more planes and do internationalize and add on.
How are you thinking about that dynamic.
Thank you there are so yes, thanks, Helane and I'm glad to see Youre travelling again, now as well coming back to the Chinese.
Thank you.
Thanks.
I think the way I would put it people are traveling to Hawaii, because they love traveling to Hawaii and so.
I don't think it is because all of a sudden Hawaii became the alternative when they couldnt do what they wanted what they've wanted to do for the past year as travel to Hawaii and they were waiting until they could.
And so I think that's what we're seeing we do have a little bit more capacity in in North America. This summer than than we did before the pandemic, but it is it is more on the margin than a sort of a seismic shift of activity from from.
Based on airplanes that were flying international So I think we will largely be able to restore our.
Our <unk>.
International flying as demand opportunities improve.
And to the extent, we are having to choose.
Where to put scarce aircrafts capacity, that's a that's a high class problem relative to some of the things we've been working on for the last 13 months.
Okay. Thanks, very much that's really helpful.
Our next question comes from the line of Joseph de Nardi with Stifel. Please proceed with your question.
Thanks, very much good afternoon.
Brent just kind of following up on <unk> question, a little bit it looks like you.
Sure.
Second quarter, North American capacity is going to be pretty close to where it was pre COVID-19. It looks like industry capacity is maybe up a few points, but what are your expectations for your North America PRASM in <unk> kind of as a result of those dynamics.
Yes, Hello, Joe, we're not giving guidance at the geography level I will say.
We expect to see continued progress relative to historical norms as we move throughout the quarter and eight.
April will be okay may load factor will be better average fair will be a little bit better on historical terms.
We anticipate continued progress in June and then as we get out to the latter part of the year I anticipate that continuing to narrow so not ready to give guidance there, but we continue to see material progress both on the traffic side and on the yield side as we move through the latter part of this quarter and into and into the third.
<unk>.
Okay. Okay, and then Peter can you just talk a little bit about kind of confidence in Hawaii <unk> ability to digest all of this demand are kind of the demand that's coming or any concerns from a labor standpoint, or a hotel capacity that that sort of thing that gives you pause or now.
But in the short term I don't think we're budding up against any hard capacity constraints I think in the.
First quarter as we saw.
Demand inflect positively very quickly I think there may have been a little bit of a lag.
And some of the response to bring hotel capacity back on I think there is.
It was initially some hesitancy, having seeing fits and starts over the course of the past year to say do we really want to be.
Bringing capacity back on bringing people back.
To work in the hotels and other travel businesses not knowing if if things were going to be sustained I think theres a lot of confidence that things are being sustained right now so.
I think we've got the capacity there are a couple of things.
That I think are going to be more transitory like rental cars are unavailable because of some overcorrection in inventory in that part of the business but.
But those are the sorts of constraints that work themselves back out I think one of the things that I do have some concerns about when we continue to work with our partners at the state Department of transportation on is.
With the safe travels process.
The verification of test results and looking forward on neighbor Island, and perhaps following that on North America of vaccination results.
Just making sure. We are we are working to process people through the airport.
And so that that doesn't become a bottleneck is is something that.
We remain concerned about I think it is very solvable, but it is something we want to make sure that our partners in the system are key.
Keeping our focus on the guest experience as we continue to evolve going forward.
Thank you very much.
Sure.
Our next question comes from the line of Mike Lindenberg with Deutsche Bank. Please proceed with your question.
Oh, Yeah, Hey.
Good morning, everyone.
Peter is there with the PCR testing requirement in place is there any move anything behind the scenes high level.
That goes away, maybe sometime this summer and I'm, just sort of mentioning it in the context that it seems like I'm hearing by Memorial day, most any sort of quarantine restrictions in the lower 48 should be over with and so I'm curious if this summer.
We're going to see some movement on that or are you just working under the assumption that that testing requirement will be there through summer and as peak demand hits like you said on the earlier question to Joe.
You'll just have at the airports will have to have the appropriate personnel to deal with being able to check those people as they come in.
Yes.
Thanks, Mike Good question.
I think were.
Anticipating that.
Some of these restrictions will continue to evolve over time.
I think it goes without saying having been under the strictest corn team in the country in the second quarter in the third quarter last year, but the.
The government officials in Hawaii have taken a very cautious approach throughout the pandemic.
Especially with regards to travel and so I think some of those restrictions may linger or some of those.
Limitations may linger, a little bit longer than we think.
We're encouraged that we're making a step with allowing.
Vaccines to replace testing for neighbor Island travel going forward. There has been a suggestion and I think it is likely to happen.
For North American travelers that.
That flexibility will be offered at some point, although we don't have a date certain on that yet.
Yes.
We continue to advocate that the testing requirements on the neighbor island side should be lifted.
In the near term and.
I am hopeful that thats going to happen sometime this summer candidly with North America positivity rates in case numbers going down broadly in particularly in key places like California.
It is going to presented argument that we should consider that sooner rather than later and for travel from North America as well. So we will continue to work with the state on that obviously I can offer no assurances of what decisions will be made and when but we're going to continue to work to try and lead.
The restrictions when it's appropriate.
For the safety of our community.
Okay. Now that's helpful. And then I guess a question to Brent when I think about you know inter island, our neighbor Island travel.
You versus the competition did you see any sort of evolution in share over the period.
And I'm really trying to get at the fact that you know there were times, where the competition is.
Some markets basically either went to a skeleton schedule or disappeared you guys continued to maintain service as the hometown carrier you, obviously employ a lot of who live in the state.
Typically you know you'd see.
People rally around the local carrier and be supportive of a local carrier.
That you saw from.
Over time, and maybe some permanent gains through this process.
Well I think it was obviously a.
Not only did our competitor pulled down their schedule, we had a materially different schedule. Then we will have as we build that network and continue to strengthen there.
I think our load factors.
We're certainly impaired during that time period, and I think you can go look at the stats and see how we performed on a relative basis relative to <unk>.
So the other competitor in that market, but im not sure Thats, a great indication going forward.
But certainly we believe that being the hometown carrier, having the right product the best schedule depth of service and breadth of market I think we stand well positioned to succeed as that market comes back and we certainly look forward to coming back.
Later, this quarter and into the back half of the year.
Great. Thanks, and just if I could squeeze in one on the fuel Shannon the $1 75 is there an embedded hedge gain in there what is your hedging position if yes.
Our fuel consumption volume, so I think there might be a little bit I don't even remember from I think all of the game, but it's really really small just because we don't have very many hedges on the books right now.
Okay very good thank you.
Thanks, Mike.
Our next question comes from a lot of Derby Kenzie with Seaport Global Securities. Please proceed with your question.
Oh, Hey, Thanks, guys couple of questions here I'm, just wondering if you can share where the conversations are at with respect to a.
Travel passport. So we are seeing the EU embraced the idea of a passport, but I'm really not sure what's happening on the Pacific entity.
And I'm just wondering are those talks ultimately going to be led by the Dod at the federal level or is that something has to happen at the state level.
And how are you guys involved with those those potential tox.
So there is a variety of discussions going on globally IATA has been working on this ultimately.
One of the important building blocks, but that isn't in place consistency is.
Government authorities need to set the policy standards.
<unk>.
And that has been a moving target and jurisdictions, including here in Hawaii continued to have differ.
Different requirements.
So that makes.
Make some of that evolution challenging and creates an environment, where it's difficult for the private sector providers too to really know what product Theyre building here.
Here in Hawaii.
There have been a.
A couple of pilot projects.
<unk> ones, which we've been participating with com.
Common paths and clear too.
To develop.
A.
Digital.
Authentication platform.
With the.
Safe travels policies embedded in that.
Those those developments are ongoing and we're continuing to work on those but I don't have a.
A ability to tell you today when that is going to be in place and how it's going to be I think it does go into the notion for as long as we do have.
Either texting testing requirements or.
Or vaccines.
Proof as an alternative to that having some way too to electronically.
Validate that is helpful to the guest experience in terms of processing people when they get in the airport. So we certainly encourage that and want to participate in that in any way, we can but we don't control the entire infrastructure.
Okay. So is it I guess.
At this point.
With respect to Japan is there any other specific.
I guess commentary going on or discussions going on with respect to that I'm just wonder if you can.
Kind of elaborate a little bit more on the country level here.
Sure well.
Let me talked about Japan in particular, I mean, Japan and Korea are already part of the Hawaii Safe travels program, so people, arriving from Japan and Korea.
Kipp could today and do today.
Arrive with the test from a unapproved testing provider.
And there is a network of those available in both of those countries and that's been in place for some time.
The bigger challenge, we have candidly with travel to Japan, where the.
And Korea, where demand is being impeded and I'll talk specifically about Japan is the restrictions on the other end of the route from the Japanese authorities and so in addition to needing to get attached to travel to Hawaii someone returning to Japan.
Have to get.
Get a.
First before they leave Hawaii and another test after arrival, so now youre talking about three different tests potentially.
Potentially some.
Some quarantine or stay at home restrictions on top of that and.
This past week as they are struggling with the.
Spread of the virus some of the major cities in Japan, including Tokyo have moved back to.
Two significant lockdown restrictions and emergency declaration so.
It's really less the case of.
The policies and procedures needing to be in place in Hawaii and more of a case of some of the challenges in.
The other home countries that we serve.
Or why we say in the timing of international is a wildcard I think our optimism that international is going to come back strong as is undeterred and in fact, we are encouraged by the experience. We've had in North America, but the timing is a little bit difficult for us to predict right now.
Understood Okay.
And then if I could just squeeze one more in here for I guess Shannon going back to a question that's come up in the past.
Structural cost savings and I guess with the worst of the pandemic in the rearview mirror and I just wonder if you can share about cost sort of permanently commodity the operation what that might mean for CASM ex say versus 2019.
I'm thinking Hawaiian has become a more efficient airline, but I'm just wondering if you can help us.
Triangulate the dots on what that might mean exactly.
Yeah, Hi, Don Thanks.
And at this point, we're not really able to we're not giving CASM guide.
Our guidance into the future and the main reason for that is because we.
We have three distinct entities radar are very long haul international at the West Coast and your neighbor Island and the unit constantly you know what I mean.
Entities are so different that the mix really does impact quite significantly the system average it.
And so things like not knowing the timing of the international return and how that mix looks against North America flying makes it really hard for us to.
Guide to unit costs.
But yes, we have done a lot of work on our on our cost structure.
As I mentioned, we didn't have a real big bullets at some of the other carriers had with fleet simplification, because we had already done that.
But when when a lot of work stopped last year, while we werent able to do is look at the cost as we bought them back to make sure that they were.
We're adding value for the airline that we know are not the airline that we were two years ago. So.
James.
I'd like to call it zero based budgeting, but sometimes you carry alone cost because that's what you've done in the past when we stopped everything we do.
Really didnt look at some things and found ways to do them better if I mentioned maintenance planning and scheduling.
We also looked at our fleet and thought.
We had 20 717 and we.
Knew that we could do the same amount of 707 flying with 19 and as we looked at things like price cost it made better economic sense to part out of $707. So that's what we did we've also looked at things like in sourcing some things like.
Purchasing are acquiring 707 simulator.
That well right now obviously, it's hard to see the economic or financial benefit, but as we ramp up our flying again, we will definitely come back.
A lower cost.
Airline so well I can't give you guidance I've got a long list that we can lock them up.
Different types of cost categories, where we've found savings.
That's helpful. Thanks can you just put a big number big round number around with all those cost savings might be without it.
Employing what that would mean for CASM.
No not really because from a lot of them are variable.
Well costs and it really does you can put numbers when you know how much youre going to fly and when youre going to fly it but it.
It really is difficult to quantify until we know.
Where we ended up from.
At a more stable point and capacity.
Understood. Thanks for the time guys.
Yes.
Our next question is a follow up question from the line of Catherine O'brien with Goldman Sachs. Please proceed with your question.
Yeah, Ron Thanks for letting me back on this line really quick modeling one that's actually kind of a follow up to the.
Unit Economics question is Dan, but on the RASM side, how should we think about the impact of.
International being quite a bit smaller than normal going forward on RASM.
Typically you would have some of your you know all that all 18 30, driven a lot of opinions, but also a lot of assets. So as we go through the summer should we if you know international kind of stays in line with cash.
Current level should we think about that actually potentially being a boost to unit revenue or I've got mixed up.
Yes, so if you compare again similar to shannon's answer of having kind of three distinct.
Pieces of the network in terms of the short medium and long as we are.
The weighting of those as we worked through the summer I think the pace of which neighbor Island comes back we'll probably have a <unk>.
Bigger influence on that overall and so.
Clearly clearly will have an impact but kind of based on the uncertainty of.
How much will fly a neighbor island as we build that back that will probably have a bigger influence in terms of overall revenue change in the second and third quarters.
Yeah.
Okay got it.
Our next question comes from the line of Chris Stephens with half Lewis with <unk>. Please proceed with your question.
Okay.
Thanks for taking my question so.
Two here.
And maybe trying to get to Dan's question in a different way, but as we look at the S in recovery and granted.
There's still work to do here with the.
The return of neighbor Island International travel, but.
Could you help us frame or how should we think about the cadence of CASM ex performance and what are some of the metrics aside from that.
Absolute number that we should be looking for is it something perhaps marginal cost per mile and then just remind us on the fixed versus variable cost mix, what what that is in a typical steady state and then how should we think about that as you.
Ramp back up.
Yes.
Yeah, Hi, Chris Yeah, I think in general.
As we ramp back up capacity, our CASM will continue to decrease.
Our fixed costs are pretty stable.
At this point so really.
Depending on what entity that.
<unk> return is in.
Generally the P S.
Additions will lower our unit costs.
I don't think we are adding.
Like I said it depends on the entity next but generally we're not adding.
Higher cost ASM than where we were in 2019, our variable costs are not generally higher than where they were.
<unk> thousand 19.
It really does depend on Anthony mix.
From a fixed versus variable I don't have that off the top of my head.
It's been changing obviously over the past year and we can get back to you on some of what we've thought about that.
But generally speaking the percentage of fixed is decreasing.
Relative to variable of course, as we as we think about flying.
Okay. Thanks, and then my follow up.
And I realize.
You may not want to give.
Your guidance here, but as we look at where our pre tax margins were in 2018 2019 call. It around 11, 5% there on average.
What do we need to think about it if you could put into buckets, where weight. These areas, what we would need to see with respect to raws.
RASM appreciation and the savings from any structural cost reductions and then few.
And labor productivity.
Yeah, Chris Peter So.
Shannon.
In her comments that.
As we see capacity overall.
Recover two to 2019 levels, we would we would.
I expect our.
Our cost unit cost two.
To also be.
In the ballpark of 2019 levels with and Thats made up of some improvements and things like the maintenance planning and the reduction in our administrative staffing helping to offset some of the inflationary pressures that we and other airlines see like areas like airport.
Costs.
Then.
Sort of just filling that back to the margin question.
The open question, then becomes revenue and I think on the revenue side, where we're really encouraged by the demand recovery in.
In domestic and how that is ramping back up and how as load factors come back to more historic levels, but you can.
Mark to see.
An environment, where yield can be managed closer to historical levels and ultimately drive for improvements.
Not there yet in in neighbor Island as we are getting there in North America, Inc.
In International I think the beyond the fact that were sort of really in the starting blocks in terms of seeing any sort of recovery.
Is.
The question of are we going to see any.
Structural changes in the supply and demand makeup and the competitive sets in some of those geographies and we internally will speculate some about what may or may not happen externally I'm not going to speculate on that but certainly were.
We're going to be in a position, where we'll be looking for for opportunities to drive revenue improvements and in some of the international geographies as they start to come back online. So it's a little bit too early to be saying, we're going to hit a.
Our pre tax margin level of assets by 2020 ask.
But certainly we're thinking through how some of those things kind of evolve making sure. We're doing what we need to be doing on the cost front and driving the revenue side as we have opportunities presented by the market.
Thanks for the time.
There are no further questions I'd like to hand, the call back over to Peter Ingram for closing remarks.
Mahalo again to everyone for joining us today, we appreciate your interest and we look forward to updating you on our progress again in a few months.
Hi.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
May disconnect your lines at this time and have a wonderful day.