Q2 2023 Hawaiian Holdings Inc Earnings Call

Okay.

Greetings and welcome to no one.

And holdings incorporated second quarter 2023 financial results call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation pretty much require operator assistance during the call. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

At this time I would now like to hand, the call over to Marcia Morita, managing director of Investor Relations. Thank you you may begin.

Thank you Darryl Hello, everyone and welcome to Hawaiian Holdings second quarter 2023 results Conference call.

With me in Honolulu are Peter Ingram.

And Chief Executive Officer.

Grant over peak, Chief revenue Officer, and Shannon <unk> 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 performance Frank will discuss revenue and Shannon will discuss cost and the balance sheet.

At the end of the prepared remarks, we will open the call up 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 Dot com.

During our call today will refer at times to adjusted or non-GAAP numbers and metrics.

Detailed reconciliations 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 uncertainties and do not guarantee future performance and therefore undue reliance should not be placed upon them.

Refer you to Hawaiian Holdings' recent filings with the SEC for a more detailed discussion of those factors that could cause actual results to differ materially from those projected projected in any forward looking statements.

These include the most recent annual report filed on Form 10-K, as Lance just to clarify it fall.

Paul well excuse me reports filed on forms 10-Q, and 8-K I will now turn the call over to Pierre.

Hello, Marci, Yeah, Hello, everyone and thank you for joining us today.

I want to start with a sincere mahalo for our frontline team who've been working in a challenging operating environment for the past several months.

The good news is that things are getting better and our team has once again demonstrated that when things get tough they rise to the occasion.

For that I am incredibly grateful.

Leisure demand remains robust throughout our network reflected in strong second quarter revenue performance and encouraging advanced bookings for the back half of the year.

We continue to make important progress on the strategic initiatives that will make us an even better airline.

And we are encouraged by improvement in some of the outside influences that have affected our operating environment.

With some of the factors, we don't control falling into place, we're getting back to a world in which our team members can do what they do best deliver exceptional hospitality to our guests.

As you have seen in our press release released today RASM came in above the range that we guided to during our last earnings call.

Testament to the robust demand environment.

I will touch on a few highlights of our commercial performance that Brian will address in more detail.

Revenue performance from the U S mainland to Hawaii.

Larger part of our network remains strong.

<unk> the trend we have seen for several quarters.

There is no evidence of a slowdown or other signs of a looming recession that our demand indicators.

Similarly, we have seen the continuation of recent trends on our international routes outside of Japan.

With Australia, and New Zealand, and South Korea, all seeing solid demand in the second quarter.

And on our neighbor Island network.

We continue to be simply outperform southwest on load factor unit revenue and customer preference.

And in an environment that remains challenging in terms of fares in supply.

Where we have seen a divergence from recent trends in a favorable direction is on our routes between Japan and Hawaii.

Since early May Japan, outbound demand has accelerated meaningfully for the first time since the onset of the pandemic.

Combined with historically high demand from U S point of sale. The result has been load factors and RASM that are comparable to historical levels.

Now I will offer one caveat to this recovery.

The performance. We are seeing is currently on a capacity base that has been about 70% of what we operated in 2019.

And gel and a N a the other two major operators between Japan, and Hawaii have been operating a similar proportion of their pre pandemic capacity levels.

So we will have to see a continued growth in demand as capacity comes back both as a result of demand and the likely conclusion.

Slot relief measures.

But having talked about this since 2021 on these calls it's great to see Japanese visitors starting to return to Hawaii and numbers.

And it's important not just for us but for many businesses here in Hawaii that have historically relied on what has long been the state's largest source of international visitors.

We've also seen a positive shift in our operations.

For eight months from last October through almost the end of May we dealt with the consequences of a major runway construction project in Honolulu.

As I previously shared the construction project resulted in a reduced arrival rate at the airport during peak periods and frequent ground holds for some of our neighbor island flights, which severely affected our operations and on time performance.

The good news is that on May 27th the most impactful phase of the construction project was completed and the runway is open for daily operation.

As expected we delivered a significantly improved on time performance in June and are trending even more favorably in July .

We're not resting here is although there were still some work to be done to get all the way back to the historical level of industry, leading reliability. So this is no time to take our eyes off the ball.

It is most important though is that our team is now positioned to be successful again, which they really couldnt be for eight long months I. Thank them again for their perseverance as we worked through these challenges.

We've also seen some improvement in the availability of <unk> hundred 21 aircraft, which have been constrained in recent months by our engine suppliers inability to meet spare engine commitments as we detailed on previous calls.

The worst period saw us with five of our 18 aircraft on the ground awaiting engines.

Recently, we've experienced two and sometimes three grounded aircraft.

Our planned prior to this morning had been for no more than two aircraft out of service for the next few months improving to one in the fourth quarter.

Today's news from perhaps parent company's earnings call announcing additional removals for this engine type renders this plant is subject to change.

This development is late breaking we haven't yet fully calibrated the impact.

Our team has already started to work with Pratt and Whitney to understand the specific impacts on our installed fleet and in the days ahead, we will assess whether we must take any schedule action to mitigate aircrafts shortages.

Even as the situation improved recently, we always knew that it remain dynamic.

And while we received financial compensation for out available aircraft, what we're really looking forward to his full availability of our fleet and appropriate level of spare engines at our facilities in a much more predictable operation.

We're also making progress on many major initiatives, we're tackling this year.

We've achieved major milestones on two such initiatives in the second quarter transitioning our reservation system.

<unk> al Tayer platform and in sourcing important aspects of our <unk> hundred 30 maintenance from a third party.

L. Teo will provide a stronger technology foundation on which to build new revenue generating products and digital experiences for our guests.

By in sourcing management of our <unk> hundred 30 maintenance, we're taking full ownership of our eight 330 fleet reliability, which will provide a lower steady state cost structure and better control and flexibility to accommodate changes in our business, especially as we bring the freighter fleet into service.

Earlier this month.

The first phase III 3300 freighter that we will operate for Amazon arrived in Honolulu.

The next few months, we will use the aircraft for employee Familiarization work.

This is the first of 10 freighter aircrafts will be inducting over the course of the next year and a half providing us a new and diversified stream of revenue that will begin to ramp more materially in 2024.

In May we unveiled our Boeing 787 dash nine Dreamliner interior and a new business class product the Le <unk> suites.

These 34 seats feature a fully flat beds.

Privacy doors and shared double suites.

This aircraft truly will set the standard for premium travel to Hawaii.

Our team has done a great job of building and unique Hawaiian touches that provide a special experience from the front to the back of the airplane.

We have recently learned of an incremental two months delay on the delivery of our first aircraft, but this does not at all diminish our enthusiasm about what the aircraft will mean for us in the long term.

On our previous call, we shared with you our exciting news about plans to provide Wi Fi connectivity on our long haul fleet using Spacex as starlink.

The startling team continues to work through the certification and modification kits for the <unk> hundred 21, and a $3 30, the first three each type.

At this point, we don't expect the first installation to occur until at least for Q and it will be 2024 before we have a steady stream of aircraft mods underway.

Getting this product installed on our fleet.

Which will be free for every guests from day, one we will set a new standard for bandwidth and speed.

We have even more confidence about now given documented performance of the technology on other fleets that are in service.

As you can tell we're very busy right now.

Our message to the team over the last year has been to buckle down and focus on what we can control.

Encouragingly, we're now seeing some of the externalities, we don't control like runway construction in Japan demand move in our favor.

All of these things position us for stronger performance ahead.

What positions US most of all is our team throughout the organization. They continue to do a great job extending a standard of hospitality and care and that sets us apart.

Lastly, I want to mention some changes that we've made recently to our commercial leadership team.

We have consolidated responsibility over commercial to two longstanding leaders Brent over bake, our chief revenue Officer, and Avi Manas, our chief marketing Officer.

Both have been promoted to executive Vice President as part of this change.

I have great confidence that theyre complementary skill sets and vision are going to drive our commercial performance over the coming years.

Let me now turn it over to Brent to go over our commercial performance and outlook in more detail.

Okay.

Thank you Peter and Aloha, everyone as Peter mentioned leisure demand remained strong for most of our markets in the second quarter with our international routes standing out in particular.

Ah later expand in further detail upon each part of our network.

Total revenue was up just over 2% and we operated 11% more capacity versus the same period in 2022.

Which was in line with our guidance.

In the second quarter system, RASM was down 8% year over year, which is slightly better than our guidance range. As it was as a result of the pace of recovery in Japan that Peter alluded to.

North America finished strong as we experienced robust demand throughout the quarter.

Load factor ended at over 90% for the second quarter operating on 5% less capacity compared to the same period in 2022.

We would have liked or flown more to serve the strong demand, but we're limited by the availability of <unk> hundred 21 aircraft due to the engine availability issues previously discussed.

Given today's news from Pratt and Whitney It will likely be a few more quarters until we have the entire <unk> hundred 21 fleet available.

And none of the forward capacity plans that I discussed today, nor the guidance in our press release reflects the potential incremental impact of the newly announced issue disclosed this morning.

Yeah.

In the neighbor Islands, we continue to demonstrate that we are the market carrier of choice with strong demand and load factors throughout the quarter.

Although revenue continues to be affected by competitive supply an unsustainably low fares.

The most recent Dot's statistics show Us generating unit revenue that was two five times southwest with a load factor that was 32 points higher.

Moving that customers continue to value our superior schedule high quality service.

And loyalty value proposition.

While fares remain below historical norms. They did increased 6% from the first quarter.

Yeah.

We saw a tangible recovery in Japan during the second quarter.

Our load factor improved to 77% for the quarter and peaked at 94% for the month of June .

U S point of sale traffic remain historically strong, but it was even more encouraging to see Japan point of sale progress as we move through the quarter. Since this segment of the demand is traditionally represented the lion's share of revenue on these routes.

We've maintained good momentum in our international network outside of Japan.

Local demand in Korea, Australia, and New Zealand markets was healthy with additional strength from U S point of sale traffic from both the Hawaii market and the mainland.

Okay.

Passenger revenue for international market, including Japan was up over 160% for the second quarter of this year compared to 2022, when the initial wave of easing restrictions was commencing.

Yeah.

Our co brand credit card had another record second quarter sales with revenue up almost 11% over the same period in 2022.

On the cargo front as mentioned in prior calls.

<unk> has normalized back to 2019 levels second.

Second quarter revenues were down just under 30% year over year I'd like to put in context cargo operations performed better than 2019 for the same period.

Now looking ahead to the third quarter, we are anticipating strong summer demand.

Give a little more color in North America, our capacity is forecasted to be down a few percentage points year over year.

Note again that this forecast does not reflect any changes to our schedules that we might need to make to absorb the newly announced Pratt <unk> Whitney engine challenge.

Advanced bookings remained slightly above 2022.

While fare levels are slightly lower than 2022 for the same period driven by some modest year over year fair declines in the shoulder season.

Our system capacity growth will continue to be driven by our international network, our longest stage length entity with international ASM up almost 44% over the third quarter of 2022.

Since the relaxation of the last Covid related restrictions in Japan, Japan point of sale bookings have begun to accelerate for the remainder of the year.

As a comparison at this point for travel within the third quarter.

<unk> point of sale bookings are double where they were compared to the same metrics for the second quarter.

Bookings in fare levels for the Japan outbound August holiday period are strong.

With fare levels above 2019, despite the headwinds of a weaker yen.

As Peter mentioned, we're still operating with less capacity than our pre pandemic schedule as our competitors.

Even as capacity does come back we're confident that our product and brand remain well regarded by Japanese consumers and that we will compete well in a resurgent Japanese market.

Finally, moving to our neighbor island market, we will soon overlap last year's introduction of $39 fares on every seat by southwest.

Anticipate a year over year improvement in PRASM as we move into the back half of the year.

And viewing our entire network, we expect RASM to be down roughly 4% on capacity growth of just over 6% compared to the same period in 2022.

We also have other continuing headwinds impacting our RASM comparisons year over year.

Spoilage continues to be a headwind of over four points this quarter and will likely continue to be a headwind for the remainder of 2023.

When you combine that with a difficult year over year comparisons for cargo and the growth in stage length that it highlights the progress that we're making on the passenger side of our business.

Looking beyond this year and into 2024 as Peter mentioned, we are excited for the 77% joined the fleet.

The larger 300 seat cabin allows us to grow capacity without changing frequencies.

The premium cabin on our 700 <unk> not only has an enhanced lie flat seat product as mentioned, but also has nearly twice as many seats in the premium cabin is our <unk> hundred <unk>.

Allowing us to capture more of the demand for premium products in our markets that we've seen over a sustained period of time.

Our first route will likely be from the west coast to Hawaii support our colleagues in training and maintenance.

And we look forward to being able to more optimally use the fleet on longer haul missions as we grow the fleet.

With the exciting prospects of our 787 fleet rolling out Starlink delivering the benefits from our <unk> investment and the momentum we're seeing in our markets in particular, Japan. We're encouraged about what we can accomplish for the rest of the year and into next year.

And with that I'll turn the call over to Shannon.

Thanks Brent.

Aloha, everyone and thank you for joining us today.

We ended the second quarter with an adjusted EBITDA of about $26 million.

Which equates to an adjusted <unk> 47 per share.

Looking back at the first half of the year, while we acknowledge that there is still work to be done.

Year over year progress is significant and very encouraging.

Unit costs, excluding fuel were generally in line with our expectations for the second quarter.

Our pilot, where he just came in a little higher than expected due to operational disruptions that resulted in upgrades and other scheduled changes that caused both in changes to pilot scheduling.

Offset by maintenance credit we received for grounded <unk> hundred 21 due to engine on availability.

Youll consumption was lower than expected due to slightly less buying during the quarter.

Our third quarter costs remain elevated as we near the apex of our preparations before the 787 and 830 freighters enter into service.

For example, we currently have about 25% more pilots on property than we did at the end of 2019 for about the same amount of capacity many of whom are in training.

We expect pilot productivity that trail as well.

Again generating revenue from the freighters and 77.

And the number of pilots in training and transitioning fleets will move towards more normalized levels.

That being said, we expect our third quarter unit costs, excluding fuel and special items to be about eight 5% higher than the same period in 2022.

This is primarily driven by about four five percentage points from increases in labor costs, which are primarily a combination of the new pilot contract and the higher number of pilots in training.

About two points from a higher number of heavy maintenance events and one point from higher Airport me.

Airport rate increases will be an ongoing headwind to unit costs as they are increasing on average at a rate higher than that of industry average, most notably our rates for Hawaii airports, where we have the most activity.

As labor and other rate increase we're focused on finding efficiencies throughout the company.

As we invest heavily in technology to modernize legacy systems, we have a distinct focus on accessing data to enhance our analytical capability.

We have also negotiated work rules that will improve our productivity not all of which have been fully implemented and.

And we are investing in tools for our frontline to help them become more efficient and effective.

Now that we're midway through the year, we have clear visibility to what the remainder of the year. It looks like at that cost are tracking largely in line with expectations.

With that said, we'll be taking our full year CASM ex guidance range.

3% to 5% year over year.

As Peter mentioned, we received notification from Boeing that are first 77 delivery will be slightly delayed from November of this year to January next year and will also impact our remaining 2024 deliveries.

This delay will move some capex from 2023 to 2024. So we now believe our capex for this year will be about $280 million.

The decrease due to the deferred delivery is combined with some puts and takes from changes in the PDP schedule and other adjustment.

2023 is a year in which we're making substantial investment in our fleet technology and guest experience.

As I reflected in both our operating costs and capital expenditures.

We're investing in our future and rig executing on multiple initiatives to build a stronger business that will generate significant shareholder value.

And with that we can open up the call for questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue you.

You May press Star two if you would like to remove your question from Mchugh.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

We ask that you please limit yourself to one question and one follow up question.

One moment, please while we poll for your questions.

Our first questions come from the line of Conor Cunningham with <unk> Research. Please proceed with your question.

Hi, everyone. Thank you.

On the Japan bookings just curious you know.

What you've noticed anything different versus the 2019 travelers like do you have any data around just length of stay of potentially what your expectations are for their spending pattern and then maybe if you could just talk touch on the advanced bookings are these I assume a lot of them are really close them, just given what youre, saying, but any color there would be would be helpful. Thank you.

Yeah Conor.

We haven't seen any kind of material change in length of stay yet your content on.

On advanced advanced purchase as we have seen a real material change.

As the markets come back and it is coming back.

Pace.

We relative to like 2019, we don't have some of the advanced booking base that we would have and so as we look out in the further quarters.

That's a little bit more challenging.

Really encourage the pace, we're seeing we're going to have.

A really strong third quarter and the pace that we're building into the fourth quarters is really encouraging. So I think we're we're on a good track.

Being a little more individual bookings and so a little less through agencies, a little more direct with us which is great because it allows us to market and merchandise directly to customers and so we're encouraged with all of those trends.

And I might just add specifically with respect to Japan, one of the differences. If you go back to 2019 and prior.

As we would typically tell sell a significant proportion of our inventory through blocks with the major Japanese travel agencies and that would give us a sort of.

Very early committed share of traffic. So the curve now is very different since we haven't.

At this point reintroduced blocks through the travel agency and we're getting a much higher proportion of our shares directly through our website and through online travel agencies that didn't use the blocks. So it's more of a steady build up to departure date as opposed to <unk>.

Having a big chunk of inventory that's already accounted for with the blocks.

We've obviously got a calibrated ourselves for that demand curve, but we're pretty pleased with what we've seen and Brian mentioned, the 94% load factor in.

June I think thats indication.

We're capable of filling up the airplanes.

Certainly at least on the capacity that's in the market right now.

Okay helpful.

And I know, it's obviously really early on the whole <unk> issue, but just curious if you could provide any context around potential capacity headwinds that youre thinking about there and then.

On the flip side Shannon I think you mentioned that Youre getting youre getting maintenance credits is that how we should expect this to kind of play out for you going forward just again any goalposts that you may have and you realize that it's.

Only hours old so.

It will be helpful. Thank you.

Yeah.

I appreciate that not only is it only alba resolved but.

Smith was was when at least I was sleeping. This morning, So I had to catch up a little bit when I got up.

What I can tell you is that.

They've identified a number of engines and it's specific by engine serial number that would need to go through inspection some of them will be.

By the end of this year end and some.

We'll be going out over the next nine to 12 months I think was the announcement that they made.

As it pertains to us for the the engines that will be looked at this year.

It's a fairly small numbers. So I don't think there is major surgery that might be needed and but it's too early for us to speculate specifically because.

The impact on our schedule is as a combination not only of what gets removed.

But what we have spare support for either from our engines coming back from the shop or from spares that are supplied by Pratt <unk> Whitney to support the operating carriers that are out there and I think one of the things frankly, but.

The Pratt and Whitney can do to to support their installed operating bases work with.

Airbus on the allocation.

<unk> of engines to between the proportion that goes to new production for aircraft that are not yet delivered and the proportion that goes to supporting that.

Spares pool. So all of that I think is going to have to be sorted out over the next little while we will.

We are eager to firm up a plan because to the extent that we did have to make any changes to our schedule for the back half of the year or the time to do that is now.

So we really do want to to understand this quickly, but it's sort of happening in real time right. Now in fact, our team is on a conference call with the Pratt team as we're sitting here on a conference call with us.

There'll be more developments to come in and announced next little while on this as far as the credits I can just tackle that one too.

Already talking.

They do come in the form of.

Credits back on our what would otherwise be our power by the hour expense and so they get reflected in the income statement as.

Reductions to our maintenance expense lines.

I appreciate the detail. Thank you.

Sure. Thanks, Scott.

Thank you. Our next question is come from the line of Michael Lindenberg with Deutsche Bank. Please proceed with your questions.

Hi, good afternoon, actually Shannon Jordy on for Mike.

Thank you for taking my question.

My first one now that we're in the second half of the year can you provide us an update for the start of the Alibaba survey it sounds like from your opening script, but you made the sorry may have been pushed back out sometimes when you've been before but have you thought about how you're going to break out the cargo guidance and any broader update here would be really helpful.

No the start Hasnt been pushed back we expect to be operating in revenue service in October .

The first aircraft because has been.

Delivered to us here and we're doing employee familiarization.

So I think he may have confused that with the comment about the 787, which the delivery is being pushed back to 'twenty four but we didn't actually expect to have the 787 in operation before early 'twenty four anyway. So so no changes to our 2023 plans on either of those except for the timing of the seven.

Eight seven capex.

This year.

Because of our operations from Amazon for Amazon will be fairly limited.

It's not particularly material to our financial results to the extent. It is it's been incorporated as as investments as we go through the.

The preliminary.

Preparations, we need to do and so it's a bit of an expense drag on us in 2023, and we will see revenue ramp more materially as we go into 2024.

Okay got it thank you.

Can you also share what.

Potential cost savings will be from transitioning the <unk> maintenance in house it.

Should we expect the next few lower next year as we lap the labor training Hoffman maintenance event.

Very helpful.

Yeah.

I think there is.

Couple of things so just from the.

The <unk> hundred 30 maintenance transition, we do expect to have savings so what would be third party.

<unk> expenses.

I'll now be reflected in the combination of maintenance expenses on our lines and labor costs.

We do some of that work ourself, but the net of that is a savings.

Overall in terms of the impact from CASM, Max I think we'll hold off on guiding 2024, right now, but I would say that there are other factors that influence it like the timing of maintenance events and heavy checks on all of those things are going to play and when we get around too.

To guiding for a 2024 CASM outlook will be incorporating all of those factors, but one thing I'm. Shannon then I would add there is where it will see a lot of the savings it will be hard to tease out in the financial statements because it's really as we grow to 330 fleet with the Amazon freighters, we can now grow.

With.

A lower per unit maintenance costs, because we're able to get better productivity.

Through shared resources internal resources, so thats really I think more of a benefit on the cost side.

Got it thank you both.

Sure.

Thank you. Our next question is come from the line of Helane Becker with TD Cowen. Please proceed with your questions.

Thank you very much operator, hi, everybody. Thank you very much for the time this afternoon.

So my first question is are you concerned about the revenue outlook or maybe the unit revenue outlook.

Being down.

Relative to capacity being.

Much.

Or maybe capacity is not so much back up.

Yes, let me, let me start with that and we expected there may be some questions here given some of the other earnings calls that have been going on this season, so far and earlier today.

What what I would say is.

We're pretty pleased with the revenue environment right now we've got some change.

Changes this quarter in terms of the mix of our flying with longer stage length flying as we bring more of the international business back year over year.

And we had a couple of factors that brand called out in this call in terms of.

Spoilage and cargo revenue that we're running at.

Unusually high rates.

Last year in the third quarter that arent in the third quarter. If these separate out the spoilage and cargo.

Our RASM is sort of flattish to a little bit up and thats compared to a strong demand environment last year and I think we feel pretty good about that and we feel pretty good about how bookings are coming in going forward. So I am I am not raising caution flags today I think we're in a good environment and I hope, particularly.

<unk>.

It relates to Japan, but things are just going to accelerate from here.

Yes, I think the only thing I would add is that we've got.

<unk>.

Positive excluding those couple of items, we would be positive on the RASM side and when you look at what our stage length growth given all almost all of our capacity growth is on the international side.

Pretty encouraging results in pretty good progress from from where we had been in relative to the rest of the industry as we look out in the third quarter.

Okay. That's very helpful. Thank you and then my other question is this I was looking at some numbers today from the Hawaii Tourism authority and they showed the second quarter travel to.

To the islands, it's down six 5% in the domestic market and every months sequentially was worse than the month before and I'm sure Peter you see that data as well.

You know the whole team since you are so close to it but do you expect that Hawaii vacation to continue to be maybe.

Maybe the question is really do you know what percentage of your travelers.

They come off the West coast and from North America.

People with second homes in Hawaii, and kind of repeat travelers versus that.

<unk> vacation that you get from people that generally come from the East coast.

Yeah, I think it's a mix and I don't have precise numbers on those although we could probably.

By looking at certainly for what's booked on our website by looking at ZIP code data, we can probably discern a little bit how that mix has changed I just don't have that up my fingertips, what I would say in terms of the the traffic numbers you mentioned at the beginning as a couple of things one.

Industry capacity right now is a little bit lower than it was.

It's down a small bit on our capacity I think some other carriers as they have responded to very strong demand in other geographies have moved some of the capacity that they had when Hawaii was.

One of the few places that was working back in 2021 and the early part of 2022, they've started to reallocate some of that.

Capacity away. So it is not being reflected in empty airplanes. Our airplanes are very full revenue is holding up well and I don't have anything that I look at sort of causes made a question whether.

He is going to continue to be a desirable aspirational vacation location for people, let's say.

The best visitor place to go in the World and we expect it to continue to be that way going forward.

That's hugely helpful. Thank you very much for all of that I appreciate it.

Thank you. Our next question is come from the line of Catherine O'brien with Goldman Sachs. Please proceed with your questions.

Hey, everyone.

Time.

So.

Human capacity between Japan improve was the.

Capacity based on any change in your demand outlook I know the GTS headlines arent incorporate interchange outlook, yet so just kind of trying to figure out like what drove that and then maybe just a quick related one on the GTS.

16, <unk> GTS engine, that's closer to obtain your fleet is your understanding that most of those don't fall in the inspection objectives.

Yes.

Sorry.

And you mentioned a capacity cut I'm not sure what you're referring to on that.

And then maybe go backwards on the full year.

For the full year.

Yes for the full year, it's really a function of having much lower Japan flying in the in the front part of the year.

And just really.

Catherine just tightening up as we work through kind of a back half of the year, where we were versus our expectations calibrating a little bit on when we thought we would be back to a more robust through 'twenty one schedule. So it just kind of working through the timing of that in the back half of the year and then just tightening up for the full year. So.

I mean, if anything right now.

The constraint on how much we fly is not demand its how many aircraft we have and we're looking forward to getting the 780 Sevens next year and in helping to give us more capacity to expand.

Okay, that's more like an operational adjustment versus demand.

Yeah, that's correct. Okay, and then sorry can you can you repeat the second part of your question I think you had one about the engines.

Yes, yes. So I mean this is just from.

Ascend data.

Take with a grain of salt, but you know what.

And I would say at this morning. It looks like you had 16 <unk> hundred 21 news the GTS engine.

About 30% of your fleet is your understanding that most of those don't fall within the inspection directive and listen I terrific. Conor I know this is like hours old so.

Any color.

Yes, so so.

The fact is all of them. We have 18 aircraft all of the 18 aircraft were delivered to us.

During the period.

That.

It's sort of a production issue.

Was in place I think it goes from 2015 to 2021.

Not all of our engines on wing now, though are currently affected because.

A number of those engines have been in the shop since then some.

Parts replace some of the engines that are operating on our fleet. Today are engines that are least spares that may have been produced outside that window. So we do think it's a limited number of.

Serial numbers of specific engines that need to be worked on and again our team is going to work through that in the days ahead with.

With the folks from Pratt and Whitney.

And I should just say.

We hate it when these things come up but we also recognize that the whole foundation of our industry is that we operate safely.

And Pratt and Whitney has got a safety management system and Thats the process that we're going through to decide which engines need to be evaluated we have safety management systems and processes that are in place to make sure. We operate that's that's the first thing we're going to do before we we think about any adjustments that needed to be.

Made to what were flying and how we're flying the aircraft.

That's super helpful. Maybe I could sneak one revenue one in for Brian just thank you for your three main markets. How should we think about that the sequential performance of underlying the system sequential improvement you expect anthem to queue.

Sounds like based on your fair commentary, maybe North America decelerating. It sounds like you can trial and might be accelerating and then internationally I wasn't sure sounded positive, but I wasn't sure just given some of the comments on capacity that'd be super helpful. Thanks, So much.

Yeah, there's several moving parts in there Catherine I think that's a fair characterization I think will be.

Yes.

Laddish to down a little bit in North America from a sequential basis, but I would say mostly flattish.

International continues to improve and that's really on the strength of Japan and the strength, we're seeing on the traffic basis there.

And neighbor Island, I think we will see a little bit of sequential improvement.

Again, a lot of moving pieces in the last year from a comp perspective from both <unk> and <unk> and given kind of the lateness of booking in that market, we still have.

A little more runway to go in terms of how <unk> pans out, but I think overall your assessment was pretty fair.

Yes.

Thank you our next questions come from the line of Andrew <unk> with Bank of America. Please proceed with your questions.

Hey, good afternoon, everyone.

First question just for for Peter just given this whole kind of international theme. This summer of U S travelers outbound.

How do you think it's taking away so Hawaii vacations do you have any sense or any metrics that you provide that give us a sense for maybe how much volume or revenue has been kind of lost this summer as people travel abroad, just trying to get a sense of how things could look as kind of travel patterns normalize it.

<unk>.

Yeah.

Yeah, I don't have.

Something that specifically answers that question, but I'd come back to the the point that our revenue has been strong in the North America routes, it's very comparable.

To where we were a year ago. When we were in a very strong demand environment.

Some of a slight amount of our capacity is lower year over year as we've shifted back to some of our own international flying and some of the other.

Cat capacity from our domestic competitors has moved elsewhere as well so.

That's why you may see a little bit.

Les in terms of total traffic to.

To the islands this year, but I don't think its demand weakness here so much of its capacity being allocated to.

Two other geographies as people shift to changing demand globally. So.

We feel we feel pretty good about where we are Hawaii as a.

And incredibly desirable destination and we're we're blessed to be here every day.

Got it understood and then.

Two follow ups for Shannon here, just one just in terms of of Capex I think I cut the 2023, new number, but obviously some moving parts.

The guide post that you have for 2024 right now.

Thanks Angie.

Not at this point.

Obviously, it'll be higher we're taking in more than 77 fair, but we're still working through some of the details on.

Looks like the PDP is moving with the recent.

Notification by Boeing and so not quite ready to put guidance out yet.

Okay got it and then lastly, just in terms of of Amazon.

Sorry, I forget are those that are the startup cost of share included in your CASM X and then how should we think about 2023 startup and training costs for Amazon moving into moving into 2024.

Yeah, I'll take that one as well, yes, we have all of the Amazon costs included in our CASM Guide does that include the startup as well for the full year direct operating costs in the fourth quarter.

As Peter mentioned, they're pretty small this year, which is why we're not putting them out I think for next year.

I'll definitely be able to talk in more detail.

Some of that stuff out of the passenger business because it does okay.

We have constant revenue that arent necessarily linked to ASN.

Rate ratio.

Quite honestly not that helpful to you.

So we will definitely talk about that more later this year early next year.

As to how we're putting that out and what the direct guidance, but next year for 'twenty four we definitely we will have that put out better.

Okay. Thank you.

Thank you our next questions come from the line of Chris step up step uplift with Susquehanna. Please proceed with your questions.

Thank you.

Peter I just have one question three parts here.

Sure.

Of strategic initiatives in your prepared remarks could.

Could you comment on that and then also I realize this is quite.

News here is very new but could you help us frame.

Assuming you get to where you need to be with the fleet.

How much potential.

Potential upside there is.

Is there within utilization block hours per day, or however, you want to frame that and then part C.

I realize it's early but if you could help us think about core inflation.

For cost for next year. Thank you.

Yeah.

Yes, let me.

Let me tackle the first part and I may have to go back again, and remind me of the second and third parts, but.

In terms of the strategic initiatives. This has been one of our themes as we went into the year that this was the year. We had started a number of projects coming into 2023.

We are slated to be delivered this year and.

Things like our transition to <unk> <unk> hundred 30 maintenance.

Bringing 787 onboard, bringing starlink onboard and so we really sort of identified as much internally as externally that.

We wanted our team focused on making sure we got those major initiatives over the finish line and delivered on our commitments and.

I do feel good that we're making good progress.

The Amadeus transition was a sort of a monumental technology achievement for us and.

And we have at our safety management system work with something else. We are working on Thats been progressing over the last couple of years and we're in a much better place right now, bringing the <unk> hundred 30 maintenance.

Fully in house and getting that over the line.

We know unfortunately have.

The timing of 787, slipping a bit but only by a couple of months and theres been a lot of great work by our done our team done so that that is moving a pace and we will have that plane. Early next year, we'll have the freighter business online. This year. Another significant project. So these are all.

All important initiatives and.

Really big investments of.

Time, and resource and and in some cases capital for us, but things that we know we're going to pay off and make us a better airline going forward.

Okay, and then for the second quarter curious, where you were in terms of block hours per segment or however, you measure.

Your core utilization and where you'd like to get to assuming these.

Pratt Whitney issues are worked out and then the last part was.

Again, I realize it's early but how should we be thinking about core inflation for next year. Thank you.

Yes.

In terms of our sort of block hour efficiency.

I don't have the number at my fingertips, but I would tell you that.

With.

Particularly.

Early in the quarter with the lower Japan demand, we Werent flying <unk>.

<unk> hundred 80 <unk> is intensely.

We expected our was always our plan this year for that to pick up through that through the back half of the year in some ways.

<unk> was fortunate because that absorbs some of the challenges we had with a $3 21 availability as we substituted those aircrafts. So there is an opportunity for us too.

Improved aircraft utilization.

Next year offsetting that one of the things we'll be thinking about is making sure we have the right level.

Spare aircraft capacity to provide resilience. So it's not just trying to squeeze everything out of that.

Efficiency is possible, but it's also making sure you've got the right level to have a resilient operation as well as good efficiency.

In terms of employee efficiency just to touch on that as well I'd say, there's still opportunities for us to make some gains going into 2024 in particularly.

As we have.

<unk> had.

Less than full utilization of our flight attendant and workforce without the Japan flying that has that is a heavier staffed in terms of flight attendants and then our pilot ranks. We still have a lot of people I think Shannon mentioned this in her remarks, who are either in training or instructing and that means they're not flying.

Revenue block hours, so one of the things.

We're looking forward to over the next year or so is getting that back into a normal steady state level as opposed to the accelerated level of training that we've had over the course of the last couple of years.

And then on core inflation.

Yes.

I'll take that a little bit on the cost side. So.

Yeah.

From about 2019 to where we stand today, we're looking at call. It a four to four 5%.

Increase.

Can you hear her perspective on our costs and that's really as we looked across the industry is generally in line with with the industry and what we're seeing around us.

You take our significant costs primarily labor.

<unk> and airport on the labor side, the vast majority of our employees are covered under our collective bargaining agreements and we have.

Yeah.

<unk>.

Execute agreements with all of our unions.

Union through 2023, and 2020 for the next one to become amendable as in 2025, and so from that perspective, we're kind of insulated from Cigna.

Significant.

Information that we may not be factoring in.

From an airport perspective, we do work closely and I mentioned earlier, that's where we're seeing pretty significant cost increases, especially in.

Why there is a lot of capital projects and the Hawaii airports that are that aren't coming through our rent.

Brent Bates since there'll be work.

Pretty closely with the state of Hawaii.

On that I mean, we're also.

Investing a lot to try and kind of offset a lot of these cost increases.

Well, we don't I don't have the what our core inflation assumptions for our forecast at my fingertips.

A lot that goes on.

Two really.

Offset or mitigate that risk.

Okay. Thank you.

Thank you. Our next question is coming from the line of Dan Mckenzie with Seaport Global. Please proceed with your questions.

Yes, hey, thanks, Ken.

It sounds like we're all after the same information here so at the risk of kicking the dead horse.

Shannon I know you don't want to talk about capacity next year, but you know what I'm what it sounds like as you know Directionally next year could be a pretty big catch up years. So I guess, maybe we can just start with the fleet if we.

It looks like that will be about 13% larger than 2019 and please correct me on that but then just and also just given the runway construction there it seems logical that departures in.

As you were sharing earlier efficiency metrics could finally normalize next year. So is there any fly at least to this line of thinking.

Yes.

I'll just give you some general comments to think about the capacity.

Piece of that.

A lot of what Youre going to see next year. Some of the growth is just going to be the annualized nation of flying that we've been adding back over the course of this year, particularly as.

As we.

Having our plans that we ramp up our operations to Japan.

Over the back part of the year and into one Q that'll be in place.

The the year next year, so really what we're looking at in terms of growth.

Beyond the that sort of annualized <unk> is going to be.

A couple of 780 sevens coming into the fleet over the course of the year they'll be spread throughout the year. So the the last delivery.

Maybe later.

They'll have the.

The <unk> hundred 30 freighters coming on and then.

The other thing we have the capacity to as we have we do have.

<unk> hundred <unk> over next year and over the next few years that are are coming.

Our to the to the end of their leases and what we've always said about the 787 is it's going to be a combination of replacement.

And growth and we will calibrate that appropriately to make sure that we can absorb it and make sure the market can absorb it and that will be.

It'll be efficient growth for us as we get into those periods.

Yeah, Okay. That's helpful.

And then second question here just the I'm wondering if you can clarify the story around premium seats, where are we at today with respect to growth and in 2024 Big picture.

What is the expectation in this part of the story.

And I'm thinking most of the premium growth is going to be on the international side of the business.

So, yes, I think Dan as you look into 'twenty four we will have.

Still a relatively limited number of 787, so that premium growth will start to come in that will be really more of a story in kind of in 'twenty five.

Beyond.

And I think.

We've looked at the resource.

77 is going to be is going to be a fantastic airplane, but where we're going to get most value out of it.

And where it can fly out at longer ranges and where we have high levels of premium demand and those are those are places like Sydney like Tokyo like New York Boston those kinds of places we will work our way into that over the course of next year, but I really think that.

The growing number of premium seats for US is really you know, we'll see some of that as we trickle into next year, but it's really probably a little bit more of a 25 story lowered.

While we are excited to have the new product and the growth in this space, that's really worth going kind of in 'twenty five and beyond.

Yeah understood. Okay. Thanks for the time you guys.

Yeah.

Thank you we have reached the end of our question and answer session I would now like to turn the floor back over to Peter Ingram for closing comments.

Alright, Thank you Daryl mahalo again to everyone for joining us today with some of the operational challenges behind US we're focused on delivering on our commitments and executing on our initiatives. We appreciate your interest and look forward to updating you on our progress in the months ahead.

Aloha.

Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.

Yeah.

Yeah.

Yeah.

Okay.

Yeah.

Yeah.

Yeah.