Q3 2021 Hawaiian Holdings Inc Earnings Call
Greetings and welcome to the Hawaiian Holdings, Inc. Third quarter 2021 financial results Conference 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. Please note. This conference is being recorded.
I will now turn the conference over to your host Alanna James you may begin.
Thank you Kyle Hello, everyone and welcome to Hawaiian Holdings third quarter 2021 results Conference call here with me in Honolulu are Peter Ingram, Our President and Chief Executive Officer, Brian Overby, Our senior Vice President of revenue management and network planning and Shannon Okay now.
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.
We'll provide an update on our commercial performance and trends and Shannon will provide an update on our cost performance 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 and responses 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 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, Lana Aloha, everyone and thank you for joining us today.
This will be along those last call, leading our investor relations function as she is moving on to our leadership position in our ESG efforts is our managing director for sustainability initiatives.
Hello, Lana for Stewarding, the Investor Relations team through the last two unusual years.
Actually keeps your modal who many of you on the call will remember is returning to Investor relations and we'll be hosting our calls going forward.
As you have already seen in the financial release, we issued earlier this hour the surge in Covid cases associated but the spread of the Delta variant has dampened our near term financial performance.
As much as we would all prefer to see a straight line recovery the environment continues to deliver twists and turns for us to navigate.
While it is disappointing to see the full recovery of our business is delayed by a few months. We are absolutely confident that the effects of these conditions are short term and we are already seeing signs of a solid rebound in our domestic business at the same time as the necessary conditions for a recovery of our international.
All operations are falling into place.
With that in mind, we are managing the business for the long term preparing for an international rebound in the months ahead.
Focusing on the delivery of outstanding guest experience.
And moving forward with efforts to better position our balance sheet for the future.
One constant over the course of the pandemic has been the outstanding contributions of our team throughout the business.
Constantly evolving conditions have forced us to adapt and overcome.
And they have responded with an iron inspiring display of strength and resilience day in and day out by continuing to lead the industry in operational performance by an impressive margin and always keeping the evolving needs of our guests top of mind.
I am honored to be a part of this remarkable team.
The third quarter began with great promise.
Precedented demand for Hawaii vacations from the mainland allowed us to operate our largest July schedule ever from this geography.
By July we were operating a 115% of pre pandemic level capacity and load factors, which had steadily improved in the first half of the year reached historical levels.
By the tail end of July and into early August we saw at the beginning of the impact of the Delta Varian wave of Covid cases as bookings slowed.
These conditions continued until mid August when Hawaii Governor made public comments, asking visitors not to come to Hawaii in light of a pandemic high level of new cases, and hospitalizations in our home state.
These statements not only further blunted the pace of bookings, but they led to the cancellation of a significant number of reservations, particularly for near term travel in late August September and to a lesser extent October.
The impact of all of this was a significantly lower final load factor in August and September and a deterioration of the strong booking position for the fourth quarter that we had established prior to the Delta search.
By the end of September conditions, we're solidifying, although not yet quite back to where we were in July.
Seven day averages of Covid cases, and hospitalizations in Hawaii, we're clearly in decline bookings have stabilized and begun to recover and cancellation rates had reverted to more normal levels.
Hawaii now has among the lowest rates of Covid per capita in the U S. Returning to the position we have had through most of the pandemic.
Our hospitals have returned to a more normal mode of operations and we are seeing resurgent interest in Hawaii travel.
On October 19th Governor regain acknowledged this progress and encourage visitors to resume travel to Hawaii effective November one.
We have some work to do to recover the bookings we didn't take over the course of this period and that will affect traffic levels for the fourth quarter.
But it is encouraging to see demand back on demand.
Given that trends have quickly started to move back in a positive direction. We think that this delta variant interlude will be remembered as a short term setback on the road to fulsome recovery.
As we've discussed on prior calls the part of our business for which recovery has been most delusive as international.
There are restrictions on cross border travel continued to stifled demand.
What is encouraging now is that the necessary preconditions for recovery are falling into place.
Most importantly, vaccination rates in Japan, South Korea, Australia, and New Zealand, which lagged the U S. In the early part of 2021 have dramatically accelerated.
In Japan, which is the most important international country in our network, 70% of the population is now fully vaccinated and 77% has received at least their first dose.
These numbers compared to 57% and 66% for the U S and 71% and 79% in Hawaii.
Similarly, we expect in the weeks ahead, the vaccination rates in our other important international markets will meet and most likely exceed U S levels.
This environment sets the stage for a relaxation of restrictive cross border travel policies that have been in place throughout the pandemic.
Notably New South Wales in Australia has announced the elimination of quarantine requirements for vaccinated travelers beginning in November.
Allowing us to recommence service to Sydney in mid December for the first time since March 2020.
This is a harbinger of expected policy relaxation in the Asia Pacific region in the months ahead, and particularly notable given that Australia previously had some of the strictest COVID-19 travel restrictions of major nations.
We expect quarantine requirements to be shortened or eliminated replaced by vaccination <unk> testing requirements.
When this happens pent up demand for leisure travel should be unleashed in our international markets paralleling the experience we have already seen for domestic travel.
People want to travel, especially for leisure.
The confinement associated with this pandemic is unprecedented in our lifetime and when domestic travel restrictions have been relaxed in the U S and elsewhere leisure demand has responded quickly.
I am confident the international experience will be similar.
We continue to ready ourselves for this eventuality, making sure that we are prepared with staffing training and fleet to take advantage of demand while delivering the operational performance that our guests expect of Hawaiian Airlines.
We are planning for the addition of more international flying to our schedule beginning in late December and ramping up through the first quarter of next year.
Given that the policy environment is still evolving we expect that the recovery of international demand will have a limited impact on our fourth quarter financial results, but we expect a more material recovery in 2022.
Elsewhere in our business, we experienced a number of notable events from the past quarter.
Ryan was proud to respond to the activation of the Civil Reserve Air Fleet for just the third time in the history of the craft program.
Our team helped relocate refugees from the Afghanistan evacuation to a new life in the United States and experience. It was extremely moving for all those involved.
We also continue to use aircraft and crews that are temporarily surplus from our scheduled operations to support charter flights for the U S military and other customers.
In addition, we marked a notable milestone with the opening of the new Melka concourse at our Honolulu hub.
The Melco gates represent the first major expansion at our home airport in 28 years with the ability to simultaneously serve 11 narrow body or six wide body aircraft in.
In conjunction with ongoing projects to improve our lobby experience in Honolulu, we are taking meaningful steps to enhance our award winning guest service.
We're also taking concrete steps to reduce our debt levels, most notably by conducting a tender offer for the a and b tranches of our 2020 double ATC issuances.
As our investors are aware our focus through 2020 and into the early part of 2021 was bolstering our liquidity to manage through the Covid crisis.
While COVID-19 is still with US we have a clearer line of sight today to long term recovery and the tender offer is an important first step towards restoring our balance sheet to a superior long term position.
All of this fits in the theme of focusing on the long term, even as we look to manage near term performance in a turbulent environment.
As we navigate the day to day twists and turns of our current environment. It is easy to forget that just a little over a year ago. It was impossible to travel to Hawaii without enduring a 14 day quarantine.
Now we have seen our mainland business recover and are confident that it will recover again from the recent dip.
Conditions are falling into place for a recovery of our international franchise.
By the Middle of next year, we expect to restore system capacity to pre pandemic levels and beyond justified by the full restoration of demand for travel to Hawaii.
And through it all I am immensely proud to share this journey with a fantastic team of aviation professionals, who are laser focused on serving the needs of our guests.
As we close out this Europe recovery over the next couple of months. We are looking ahead to even better days in 2022.
With that let me turn the call over to Brent to discuss our commercial performance in more detail.
Thank you Peter and Aloha, everyone.
Our third quarter revenue performance was better than our updated guidance range as the impact of the Delta variant, while significant was not quite as bad as we anticipated when we provided our updated guidance.
We also had a noncash accounting adjustment that increased revenue by about $10 million.
Total revenue was down 33% compared to the third quarter of 2019 on a 21% decline in capacity.
Passenger revenue was down 35% year over two years, while other revenue was down just 10% driven by strong performance in loyalty charters and cargo.
As Peter mentioned the quarter started off strong in North America, Despite elevated competitive capacity, our North America traffic volumes in passenger revenue exceeded 2019 levels in July.
At the same at the time of our last call at the end of July our book load factors for August and September were roughly in line with 2019 levels.
But as we move through the quarter, we saw traffic decline traffic volumes decline with the increase in the prevalence of the Delta variant and public officials comments discouraging travel to Hawaii.
Commensurate with the slowdown in bookings, we also experienced an increase in sale activity and lower sale fares initiated by a few of our competitors.
Over the past several weeks, we've seen an improvement in booking activity and the sale levels have begun to show nominal signs of improvement.
As we move forward, we're hopeful that as load factor continues as load factor deficits continue to ease we will see pricing firm up a bit more.
While we've seen pressure pricing pressure in the main cabin front cabin demand and pricing has held up relatively well.
In both July and August front cabin PRASM was up double digits compared to the same months in 2019.
We don't think we will get back to those levels of improvement over the next couple of months, but as we work our way through the fourth quarter. We continue to expect stronger relative performance in the front cabin.
Not surprisingly our ancillary revenue streams that are tied to passenger volume such as extra comfort and bags.
Seen a commensurate decline in revenue over the back half of the third quarter.
Credit card revenue held up well credit card spend was strong during the quarter and while we did see a temporary slowdown in digital credit card acquisitions as bookings softened in flight acquisitions remains strong throughout the quarter.
Looking ahead to the fourth quarter the impact of the Delta variant and the Governor's comments were significant.
In the short term we went from being ahead by four points on our fourth quarter advanced book load factor compared to 2019 to where we are now down double digits.
Advanced bookings have firmed up and we're seeing positive build relative to 2019 for the past few weeks.
As Peter highlighted in his opening remarks, we weathered a short term setback, which doesn't change our long term view of success moving forward.
The recovery of our neighbor Island business was also impacted by the Delta variance.
We operated at about 76% of our 2019 capacity in the third quarter, but.
But at much lower load factors than previously anticipated.
We've trimmed capacity in the fourth quarter from our previous expectations.
And expect to operate about 72% of our 2019 capacity.
Booking trends have improved over the past several weeks and neighbor Island.
And while October has been a difficult month, we are optimistic that booking trends will continue to improve as case counts have come down on the mainland and particularly here in Hawaii.
In our international geography, we've seen an easing of travel restrictions in Australia, and we're excited to reinstate five times weekly service to Sydney, Australia, starting in mid December.
By then vaccinated Australian citizens will no longer be subject to quarantine upon returning to Australia.
While we don't have perfect clarity on the timing of our other international markets opening up we're undoubtedly much closer than when we spoke in July.
Vaccination rates have been increasing in each of our key international geographies and now exceed that of the U S mainland.
Furthermore, if theres been a dramatic drop in case counts, particularly in Japan.
We're encouraged that the bite and administration has announced that vaccinated foreign travelers will be able to enter the U S. Starting November ace and have encouraged and encourage the state of Hawaii to align its safe travels program with federal requirements.
While timing for reopening may still be uncertain for some of our markets. What we do know is that similar to our domestic markets. There is pent up demand for leisure travel.
E in Hawaii and are well positioned with the brand safety and quality of experience to capitalize on this expected increase in demand.
Overall for the fourth quarter, we expect that system capacity will be down 18% to 21% compared to the fourth quarter of 2019.
And revenue to be down between 32% to 37%.
Unsurprisingly the nominal decline.
From our third quarter 2021 performance is driven by advanced booking loss during the time when the Delta variant was searching as well as the Governor's comments discouraging guests from travel to Hawaii until November one.
We're encouraged that were on the road to recovery. Despite some temporary setbacks, we're confident that demand will continue to rebound in North America, and neighbor Island and accelerate in international once conditions permit.
Got a great product strong brand exceptional team and a winning formula for long term success.
With that I'll turn the call over to Shannon.
Thanks, Brent and thanks, everyone for joining us today.
For the third quarter, we reported an adjusted net loss of $48 7 million or.
<unk> 95 per share.
We closed the quarter with $2 billion in cash and short term investments or $2 2 billion in liquidity, including our Undrawn revolver.
Our adjusted net debt as of September 30 was $885 million.
Or about $90 million lower than the pre pandemic balance at the end of 2019.
I'll start with our tender offer.
The WPZ tender is our first step towards strengthening our balance sheet.
Our adjusted net debt continues to be lower than <unk> levels. The negative carry of the excess cash weighs on our income statement.
Now that the path to cash generation and profitability is clear we're comfortable that our current cash balance exceeds 90.
And the tender for our double EPC notes provides an opportunity to reduce our debt.
Although it is a relatively small portion of our total debt balance lowering the balance of our highest interest bearing WTC notes will provide valuable interest expense savings.
If we repurchased 50% of each of the 2020 WTC tranches, we will save $8 million in interest expense next year.
We expect to know the results of the tender by November one.
In addition to paying contractual debt maturities and investing in our business will continue to look for opportunities to use our excess cash to produce positive future return.
For the third quarter, our total operating expenses, excluding special items.
Down about 15% compared to the same period in 2019 on a 21% decline in capacity.
This result is at the better end of our updated expectations and was due to favorability across a variety of cost categories.
Given the current volatility in fuel prices, we're providing our fourth quarter operating expense guidance metric excluding fuel.
We expect our fourth quarter total operating costs, excluding fuel and special items to be down about 7% to 11% compared to the fourth quarter of 2019 on 18% to 21% more capacity.
These figures do not include any assumptions related to our amendable labor contracts.
With capacity essentially flat quarter over quarter, the corresponding increase in ex fuel operating expenses is primarily driven by costs related to capacity readiness as we position ourselves for the resumption of more substantial international service.
We're also expecting some smaller increases in technology equipment purchases volume of heavy maintenance events and contractual wage increases.
The slight pause in a recovery will result in some excess labor in the fourth quarter, which we're opting to maintain to stay on target for our international recovery expected in the next few months.
We're forecasting our fuel price per gallon for the fourth quarter to increase to $2 41.
Which we expect to increase our total operating expenses by about $18 million compared to the prior quarter.
Looking further ahead, we're focused on improving margins and investing in the long term success of our business, including technology initiatives that will position us to be agile in responding to market demands.
We also recently made the decision to continue investing in our growth extending two of our <unk> hundred 30 leases that were due to expire in 2021 for tumor years, which positions. The 77 deliveries that we're expecting in 2022 as growth aircraft rather than replacement.
We intend to share more details on our 2022 planning assumptions and outlook, including ASM CASM ex in Capex at an investor call to be held in mid December.
We will provide more information regarding the investor call in the coming weeks.
While we are disappointed that the negative headwinds on the delta variants have temporarily interrupted our recovery where confidence in the strength of our business model.
Zillions of demand for travel to Hawaii, and our success over the long term and with that we can open up the call for questions.
Yes.
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One moment, please while we pull for questions.
Our first question is from Michael Lindenberg from Deutsche Bank. Please proceed with your question.
Hi, This is hilary actually calling in for Mike.
Question on the liquidity with the cash tender offer.
Covenant <unk>.
In a quarter.
It looks like you are on the path too.
Great team leveraging strategy.
Just wanted to.
You can find out if you can kind of go over your deleveraging strategy going forward. Because you had mentioned last quarter that you have two buckets of that whether you have interest rates that would teach it to pay down and the other was with where you would incur a penalty for prepayment so I guess going forward.
In tenda and buying back debt.
One of your strategies or.
How should we think about that going forward and what your normalized liquidity level going forward as well.
Yeah, Hi, Thanks, Hilary this is Shannon.
Yes, Youre right, we do have some limitations on what we can do at this point on delivering as you mentioned, we have a lot of that with really low interest rate that really doesn't make sense to prepay and outside of that double atc's, some a little higher.
Right that has make whole provisions in some penalties that would make it non economic to repay.
So.
Yes, the tender.
And our first step.
We're also being very creative about how we use our cash we are investing in technology initiatives.
As well as growth.
The next question I think really that will have to answer from a liquidity and leverage perspective, that's how we're going to pay for the 787%.
We do have a lot of excess cash on our books right now so.
Of course, one of the options is to pay for the at least for the first 277.
With cash.
We do have over the next few years.
A fairly regular amount of.
Natural maturity payments on our debt that will help us.
With our leverage and to also decrease the interest expense.
We haven't.
Quite yet established a new leverage target I can't imagine I don't think it would be significantly significantly different than our pre pandemic level.
Target, which was 152 times at one five to two five times.
Our debt to EBITDA, but.
We havent reestablished and target so I think that's pretty safe to use for now.
Great. Thank you that's helpful. And then just one more question on your.
International.
It's great to hear that Japan, you know about 70% back Knaidel Danielle.
For international economy.
Hum.
Definitely.
And I wanted to find out last quarter U.
You said, you expect South Korea, and Japan to meet a recovery.
Australia, New Zealand to lag.
Let's go to page two I think you are opening up the market the Sydney market again.
Has that changed.
Obviously with the restart of Sydney, we've seen an update on that and it was really a positive surprise to see Australia move.
As quickly towards.
Reopening so we think that really does set the stage for further reopening.
The conditions are falling into place everywhere I think is the main message that we want to make sure. We've delivered and there are some elections coming up in Japan that are probably going to two <unk>.
Set up a decision making environment for the policymakers coupled with the high vaccination rates in the very low case counts that we think there's a good prospect for positive news from Japan in the coming weeks.
Okay.
Okay. Thank you. Thank you very much that's helpful.
Our next question is from Hunter Keay from Wolfe Research. Please proceed with your question.
Hey, everybody.
800.
Peter two quick two quick ones unrelated.
And I'll accept a one sentence answer is if you are up for it and then I got a little bit more of an involves on after that.
First one pre COVID-19 what percentage of your passengers.
Were under age 12.
I'm going to hand that to brands.
I'll try and let Brent why don't you look that up and I'll ask you. Another one that's cool.
And then the question I have for you Peter is a second quick one is yes or no are you contractually permitted to walk away from the 780 sevens because of Boeing's production problems.
We are not unless they.
Were to delay delivery to the point when it kicks in delay provisions, but since we have re phased those deliveries to only began in 2022 I do not expect.
That condition to be in place.
Got it.
Okay, and then Brent I'll give you another couple of minutes on this question. The last question I had.
<unk> on hotel rooms that Hawaii is going to impose why do you think thats happening.
Incremental.
Buybacks, Yeah, I think there is a variety of things I think a lot of it had to do with some of the <unk>.
Financial challenges that the state.
<unk>.
The economic impacts of the.
The pandemic and.
Create an environment, where they were looking for places to.
To raise money Unfortunately.
Taxing of visitors traveling into states is one of the easiest pockets to reach into for policymakers and we've seen that a few times in.
In recent years.