Hawaiian Holdings, Inc. (NASDAQ:HA) Q2 2023 Earnings Call Transcript

Hawaiian Holdings, Inc. (NASDAQ:HA) Q2 2023 Earnings Call Transcript July 25, 2023

Hawaiian Holdings, Inc. beats earnings expectations. Reported EPS is $-0.47, expectations were $-0.61.

Operator: Greetings and welcome to Hawaiian 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. [Operator Instructions] As a reminder, this conference is being recorded. At this time I’d now like to hand the call over to Marcy Morita, Managing Director of Investor Relations. Thank you, you may begin.

Marcy Morita: Thank you, Daryl. Hello everyone and welcome to Hawaiian Holdings second quarter 2023 results conference call. Here with me on Honolulu are, Peter Ingram, President and Chief Executive Officer; Brent Overbeek, Chief Revenue Officer; and Shannon Okinaka, 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, Brent 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 to questions. By now, everyone should have access to the press release that went out at about 4 o’clock Eastern Time today. If you have not received the release, it is available on the Investor Relations’ page web page of our website, hawaiianairlines.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.

These include the most recent annual report filed on Form 10-K, as well as subsequent reports filed on Forms 10-Q and 8-K. I will now turn the call over to Peter.

Peter Ingram: Hello, Marcy. Hello. Hi, everyone, and thank you for joining us today. I want to start with the sincere mahalo for our line team, who have 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 are getting back to a work 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 today, RASM came in above the range that we guided to during our last earnings call, a testament to the robust demand environment. I’ll touch on a few highlights of our commercial performance then Brent will address in more detail. Revenue performance from the U.S. Mainland to Hawaii, the largest part of our network remains strong, continuing the trend we have seen for several quarters. There is no evidence of a slowdown or other signs of a looming recession in our demand indicators. Similarly, we have seen the continuation of recent trends on our international routes outside of Japan.

With Australia, New Zealand and South Korea, all seeing solid demand in the second quarter. And on our Neighbor Island network, we continue to be decisively outperform Southwest on load factor, unit revenue and customer preference in an environment that remains challenging in terms of fares and 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 the 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 JAL and ANA, 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 of 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 in 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’ve 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 27, 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 though. There are 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. What is most important though is that our team is now positioned to be successful again, which they really couldn’t be for 8 long months.

I thank them again for their perseverance as we work through these challenges. We’ve also seen some improvement in the availability of our A321 aircraft, which have been constrained in recent months by our engine supplier’s 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. More recently, we’ve experienced two and sometimes three grounded aircraft. Our plan 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 Pratt’s parent company’s earnings call announcing additional removals for this engine type, renders is plan subject to change.

Since this development is late-breaking, we haven’t yet fully calibrated the impact. Our team has already started to work with Pratt & 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 aircraft shortages. Even as the situation improved recently, we always knew that it remained dynamic. And while we receive financial compensation for unavailable aircraft, what we are really looking forward to is full availability of our fleet, an appropriate level of spare engines at our facilities and 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 to Amadeus’ Altea platform and in-sourcing important aspects of our A330 maintenance from a third party.

Altea 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 A330 maintenance, we’re taking full ownership of our A330 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 A330-300 freighter that we will operate for Amazon arrived in Honolulu. Over the next few months, we’ll use the aircraft for employee familiarization work. This is the first of 10 freighter aircraft we will be inducting over the course of the next 1.5 years providing us a new and diversified stream of revenue that will begin to ramp more materially in 2024.

In May, we unveiled our Boeing 787-9 Dreamliner Interior and a new business class product, the Leihoku Suites. These 34 seats feature 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 in 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-month 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 a previous call, we shared with you our exciting news about plans to provide WiFi connectivity on our long-haul fleet using SpaceX’s StarLink.

The Starlink team continues to work through the certification and modification kits for the A321 and A330, the first reach type. At this point, we don’t expect the first installation to occur until at least 4Q, 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 guest from day one, will set a new standard for bandwidth and speed, something 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 and Japan demand move in our favor.

All of these things position us for stronger performance ahead. And 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 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 2 long-standing leaders, Brent Overbeek, our Chief Revenue Officer; and Avi Mannis, our Chief Marketing Officer. Both have been promoted to Executive Vice President as part of this change. I have great confidence that their 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.

Brent Overbeek: Thank you, Peter. Hello, hi, 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. I’ll 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 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 to flown more to serve the strong demand, but we’re limited by the availability of A321 aircraft due to the engine availability issues previously discussed. Given today’s news from Pratt & Whitney, it will likely be a few more quarters until we have the entire A321 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. 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 and unsustainably low fares. The most recent DOT statistics show us generating unit revenue that was 2.5 times Southwest with a load factor that was 32 points higher, proving that customers continue to value our superior schedule, high-quality service and loyalty value proposition.

While fares remain below historical norms, they did increase 6% from the first quarter. 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 remained 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 has traditionally represented the lion’s share of revenue on these routes. We have 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.

Passenger revenue for our 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. 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, activity is normalized back to 2019 levels. Second quarter revenues were down just under 30% year-over-year, but 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. To give a little more color in North America, our capacity is forecasted to be down a few percentage points year-over-year.

Note again, this forecast does not reflect any changes to our schedules that we might need to make to absorb the newly announced Pratt & 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 fare declines in the shorter season. Our system capacity growth will continue to be driven by our international network, our longest stage-length entity with international ASMs 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, Japan point-of-sale bookings are double where they were compared to the same metrics over the second quarter.

Bookings and 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 are 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. In 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 4 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, it highlights the progress that we were making on the passenger side of our business. Looking beyond this year and into 2024, as Peter mentioned, we are excited for the 787 to join the fleet. The larger 300-seat cabin allows us to grow capacity without changing frequencies. The premium cabin on our 787s not only has an enhanced live flat seat product as mentioned, but also has nearly twice as many seats in the premium cabin as our A330s, 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 of Hawaii, Water colleagues and training and maintenance and we look forward to being able to more optimally use the fleet on longer haul emissions as we grow the fleet. With the exciting prospects of our 787 fleet, rolling out StarLink delivering the benefits from our Amadeus 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.

Shannon Okinaka: Thanks, Brent. Hello, 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 loss of $0.47 per share. Looking back at the first-half of the year, while we acknowledge that there is still work to be done, our 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 wages came in a little higher-than-expected due to operational disruptions that resulted in upgauges and other scheduled changes that caused closing changes to pilot scheduling, offset by maintenance credits we received for grounded A321s, due to engine unavailability.

Fuel consumption was lower-than-expected due to slightly less flying during the quarter. Our third quarter costs remain elevated as we near the apex of our preparations before the 787 and A330 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 to improve as we begin generating revenue from the freighters and 787s. 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 8.5% higher than the same period in 2022. This is primarily driven by about 4.5 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 2 points from a higher number of heavy maintenance events and 1 point from higher airport rates. 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 rates 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 roles that will improve our productivity, not all of which have been fully implemented. And we’re 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 looks like as our costs are tracking largely in line with expectations. With that said, we’ll be tightening our full-year CASM ex guidance range to a 3% to 5% year-over-year. As Peter mentioned, we received notification from Boeing that our first 787 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 adjustments. 2023 is a year in which we’re making substantial investment in our fleet, technology and guest experience, which are reflected in both our operating costs and capital expenditures.

We’re investing in our future, and we’re 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.

Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Conor Cunningham with Melius Research. Please proceed with your question.

Conor Cunningham: Hi, everyone. Thank you. On the Japan bookings, just curious what you’ve noticed anything different versus the 2019 travelers. Like do you have any data around just length of stay, potentially what your expectations are for their spending pattern. And then maybe if you could just touch on the advanced bookings of these. I assume a lot of them are really close and just given what you’re saying, but any color there would be helpful.

Brent Overbeek: Yes, Conor. We haven’t seen any, kind of, material change in length of stay yet. Your comment on advanced purchase is we have seen a real material change as the markets come back, and it is coming back at a lot different pace 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, but we’re really encouraged the pace we’re seeing. We’re going to have I think, a really strong third quarter and the pace that we’re building into the fourth quarter is really encouraging. So I think we’re on a good track. We’re seeing 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 those trends.

Peter Ingram: And Conor, I might just add specifically with respect to Japan. One of the differences, if you go back to 2019 and prior, is 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 data as opposed to having a big chunk of inventory that’s already accounted for with the blocks.

And we’ve obviously got to calibrate ourselves for that demand curve, but we’re pretty pleased with what we’ve seen. And Brent mentioned the 94% load factor in June. I think that’s an indication that we’re capable of filling up the airplanes and certainly at least on the capacity that’s in the market right now.

Conor Cunningham: Okay. Helpful. And I know it’s obviously really early on the whole Pratt issue, but just curious if you could provide any context around potential capacity headwinds that you’re thinking about there? And then on the flip side, Shannon, I think you mentioned that you’re getting maintenance credits. Is that how we should expect this to kind of play out for you going forward? Just again, any goalpost that you may have, and you realize that it’s only hours old. So any help would be helpful. Thank you.

Peter Ingram: Yes. I appreciate that. Not only is it only hours old, but the announcement 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 we’ll need to go through inspection. Some of them will be by the end of this year and some will be going out over the next nine to 12 months. I think it was the announcement that they made. As it pertains to us for the engines that will be looked at this year, it’s a fairly small number. 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 a combination not only of what gets removed, but what we have fair support for, either from our engines coming back from the shop or from spares that are supplied by Pratt & Whitney to support the operating carriers that are out there.

And I think one of the things, frankly, that Pratt & Whitney can do to support their installed operating base is work with Airbus on the allocation 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’re 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, the time to do that is now. So we really do want 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 you.

So there will be more developments to come in the next little while on this. As far as the credits, I can just tackle that one, too, since I’m 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.

Conor Cunningham: Appreciate the detail. Thank you.

Peter Ingram: Sure. Thanks, Conor.

Operator: Thank you. Our next questions come from the line of Michael Linenberg with Deutsche Bank. Please proceed with your questions.

Shannon Doherty: Hi, good afternoon. This is actually Shannon Doherty on for Mike. So just my first one. Now that we’re in the second half of the year, can you provide us some update for the start of the Amazon service. It sounds like from the opening script that the store may have been pushed back out just sometime in 2024. But have you thought about how you’re going to break out the cargo guidance? And any broader update here would be really helpful.

Peter Ingram: No. The start hasn’t been pushed back. We expect to be operating in revenue service in October. The first aircraft has been delivered to us here, and we’re doing employee familiarization. So I think you may have confused that with the comment about the 787, which the delivery is being pushed back to ’24 but we didn’t actually expect to have the 787 in operation before early ’24 anyway. So no changes to our 2023 plans on either of those except for the timing of the 787 CapEx. This year, because 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 investments as we go through the preliminary preparations we need to do. And so it’s a bit of an expense drag on us in 2023, and we’ll see revenue rent more materially as we go into 2024.

Shannon Doherty: Okay. Got it. Thank you. And can you also share what the potential cost savings will be from transitioning the A330 maintenance in-house? Should we expect to see CASM ex be lower next year as we lap the labor training costs and maintenance events? That’d be helpful.

Peter Ingram: Yes. I think there’s a couple of things. So just from the A330 maintenance transition, we do expect to have savings. So what would be third-party expenses will now be reflected in the combination of maintenance expenses on our lines and labor costs as we do some of that work ourselves, but the net of that is a savings. Overall, in terms of the impact from CASM ex, 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 and all of those things are going to play and when we get around to guiding for a 2024 CASM outlook, we’ll be incorporating all of those factors.

Shannon Okinaka: Yes. The one thing, Shannon, that I would add there is where we’ll see a lot of the savings, it will be hard to tease out in the financial statements because it’s really as we grow the 330 fleet with the Amazon traders, we can now grow that fleet with a lower per unit maintenance cost because we’re able to get better productivity through shared resources — internal resources. So that’s really, I think, more of a benefit on the cost side.

Shannon Doherty: No, thank you both.

Peter Ingram: Sure.

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

Helane Becker: Yes. Thank you very much, operator. Hi, everybody and thank you very much for the time this afternoon. My first question is, are you concerned about the revenue outlook or maybe the unit revenue outlook being down relative to capacity being up so much? Maybe capacity is not up so much, but up.

Peter Ingram: Yes. Let me start with that, and we expect that 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 I would say is we’re pretty pleased with the revenue environment right now. We’ve got some 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 Brent 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 aren’t in the third quarter. If you separate out the spoilage and cargo, our RASM is sort of flattish to a little bit up.

And that’s 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 not raising caution flags today. I think we’re in a good environment, and I hope, particularly as it relates to Japan, but things are just going to accelerate from here.

Brent Overbeek: Yes. I think the only thing I would add is that we’ve got that positive — excluding those couple of items, we would be positive on the RASM side. And when you look at what our stage link growth, given almost all of our capacity growth is on the international side, pretty encouraging results and pretty good progress from where we had been and relative to the rest of the industry as we look out in the third quarter.

Helane Becker: Okay. That’s very helpful. 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 the islands was down 6.5% in the domestic market. And every month sequentially was worse than the month before. And I’m sure, Peter, you see that data as well and the whole team since you’re so close to it. But do you expect that Hawaii vacation to continue to be — or maybe the question is really, do you know what percentage of your travelers that come off the West Coast and from North America are people with second homes in Hawaii and kind of repeat travelers versus that aspirational vacation that you get from people that generally come from the East Coast?

Peter Ingram: Yes. 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 at my fingertips. What I would say in terms of the traffic numbers you mentioned at the beginning is 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 started to reallocate some of that capacity away.

So it’s 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 that sort of causes me to question whether Hawaii is going to continue to be a desirable aspirational vacation location for people. It’s the best visitor place to go in the world, and we expect it to continue to be that way going forward.

Helane Becker: That’s hugely helpful. Thank you very much for all of that. I appreciate it.

Operator: Thank you. Our next questions come from the line of Catherine O’Brien with Goldman Sachs. Please proceed with your questions.

Catherine O’Brien: Hey, everyone. Thanks so much for the time. So your trimming capacity but seen Japan improved, was the capacity cut based on any change in your demand outlook? I know the GTF headlines aren’t incorporated into your changed outlook yet. So just kind of trying to figure out what drove that cut. And then maybe just a quick related one on the GTF IC 16 A321neos, the GTF engines, it’s close to 30% of your fleet. Is your understanding that most of those don’t fall in the inspection objective?

Peter Ingram: Sorry, Catherine, you mentioned capacity cut, I’m not sure what you’re referring to on that.

Catherine O’Brien: Maybe I’m backwards, on the full-year.

Peter Ingram: For the full-year? Yes, for the full-year, it’s really a function of having much lower Japan flying in the front part of the year, I think.

Brent Overbeek: Yes. And just to really — Catherine, just tightening up as we work through kind of the 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 321 schedule, so it’s 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…

Peter Ingram: I mean if anything right now, we’re — the constraint on how much we fly is not demand, it’s how many aircraft we have. We’re looking forward to getting the 787s next year and helping to give us more capacity to expand.

Catherine O’Brien: That’s more like an operational adjustment versus demand.

Peter Ingram: Yes. That’s correct. And then sorry, can you repeat the second part of your question? I think you had one about the engines.

Catherine O’Brien: Yes, yes. So I mean, this is just from ASCEND data, so take with the grain of salt. But when I looked at it this morning, it looks like you had 16 A321neos with the GTF engines that’s about 30% of your fleet. Is your understanding that most of those don’t fall within the inspection directive? And listen, to repeat Conor, I know this is like hours old. So I appreciate any color.

Peter Ingram: Yes. So the fact is all of — we have 18 aircraft. All of the 18 aircraft were delivered to us during the period that the, sort of, 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 of the parts replaced, some of the engines that are operating on our fleet today are engines that are lease 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 the folks from Pratt & Whitney. And I should just say that 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 & Whitney has got a safety management system, and that’s the process they’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. And that’s the first thing we’re going to do before we think about any adjustments that needed to be made to what we’re flying and how we’re flying the aircraft.

Catherine O’Brien: That’s super helpful. Maybe if I could just sneak one revenue one in for Brent. Just thinking through your three main markets, how should we think about that, the sequential performance of underlying the system sequential improvement you’re expecting in 3Q versus 2Q. It sounds like based on your fare commentary, maybe North America decelerating sounds like Inter-island might be accelerating and then International. I wasn’t sure it sounded positive, but I wasn’t sure it’s given some of the comments on capacity, that would be super helpful.

Brent Overbeek: Yes. There’s several moving parts in there, Catherine. I think it’s a fair characterization. I think we’ll be kind of flattish 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’ll see a little bit of sequential improvement again, a lot of moving pieces in last year from a comp perspective from both 2Q and 3Q. And given kind of the lateness of booking in that market, we still have a little more runway to go in terms of how 3Q pans up. But I think overall, your assessment was pretty fair.

Catherine O’Brien: Thank you.

Operator: Thank you. Our next questions come from the line of Andrew Didora with Bank of America. Please proceed with your questions.

Andrew Didora: Hey, good afternoon, everyone. First question just for Peter. Just given this whole kind of international theme this summer of U.S. travelers out bound, I would have to think it’s taking away some 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 a bit. A – Peter Ingram Yes. I don’t have something that specifically answers that question. But I’d come back to 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 capacity from our domestic competitors has moved elsewhere as well. So that’s why you may see a little bit less in terms of total traffic to the islands this year. But I don’t think it’s demand weakness here so much as it’s capacity being allocated to other geographies as people shift to changing demand globally. So we feel pretty good about where we are. Hawaii is an incredibly desirable destination and we’re blessed to be here every day.

Andrew Didora: Got it. Understood. And then two follow-ups for Shannon here. Just one, just in terms of CapEx. I think I caught the 2023 new number, but obviously some moving parts, kind of any guideposts that you have for 2024 right now?

Shannon Okinaka: Thanks, Andrew. Not this point. Obviously, it will be higher. We’re taking in more 787s next year, but we’re still working through some of the details on things like the PDP is moving with the recent notification by Boeing. And so not quite ready to put guidance out yet.

Andrew Didora: Okay. Got it. And then lastly, just in terms of Amazon. Sorry, I forget, are those — are the start-up costs this year included in your CASM ex? And then how should we think about kind of 2023 start-up and training costs for Amazon moving into 2024?

Shannon Okinaka: Yes. I’ll take that one as well. Yes, we have all of the Amazon costs included in our CASM guide, that includes the start-up as well for the full year, the direct operating costs in the fourth quarter. As Peter mentioned, they’re pretty small this year, which is why we’re not splitting them out. I think for next year, we’ll definitely be able to talk in more detail and put some of that stuff out of the passenger business, because it does — here, we have cost and revenue that aren’t necessarily linked to ASM. So it’s not a great ratio to report on, it’s not that helpful to you. So we will definitely talk about that more a little later this year, early next year as to how we’re splitting that out and what the direct guide is. But next year for ’24, we definitely will have that put out better.

Andrew Didora: Okay, thank you.

Operator: Thank you. Our next questions come from the line of Chris Stathoulopoulos with Susquehanna. Please proceed with your questions.

Chris Stathoulopoulos: Thank you. Peter, I just have one question, three parts here. Your mention of strategic initiatives in your prepared remarks, could you comment on that? And then also, I realized that this Pratt & Whitney 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 upside there 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.

Peter Ingram: Yes. Let me tackle the first part and I may have to have you go back again and remind me of the second and third part. But in terms of strategic initiatives, this has been one of our themes as we went into the year, that this was a year we had started a number of projects coming into 2023 that were slated to be delivered this year. And things like our transition to Amadeus Altea, our A330 maintenance, bringing 787 on board, bringing Starlink on board. 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 monumental technology achievement for us.

And we have our safety management system work was something else we are working on. That’s been progressing over the last couple of years, and we’re in a much better place right now, bringing the A330 maintenance fully in-house and getting that over the line. We now unfortunately have the timing of 787 slipping a bit, but only by a couple of months, and there’s been a lot of great work by our team done. So that is moving a pace, and we’ll have that plan early next year. We’ll have the freighter business online this year, another significant project. So these are all important initiatives and really big investments of time and resource and in some cases, capital for us, but things that we know are going to pay off and make us a better airline going forward.

Chris Stathoulopoulos: 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 that 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.

Peter Ingram: Yes. In terms of our sort of block hour efficiency, I don’t have the number on my fingertips, but I would tell you that with particularly early in the quarter with the lower Japan demand, we weren’t flying our A330s as intensely. We expected — or was always our plan this year for that to pick up through the back half of the year. In some ways, that was fortunate because that absorbed some of the challenges we had with A321 availability as we substituted those aircraft. So there is an opportunity for us to improve aircraft utilization next year. Offsetting that, one of the things we’ll be thinking about is making sure we have the right level of spare aircraft capacity to provide resilience. So it’s not just trying to squeeze everything out of that efficiency as 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. And particularly, as we have had less than full utilization of our flight attendant workforce without the Japan flying that has — that is heavier staffed in terms of flight attendance. And in 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 last couple of years.

Chris Stathoulopoulos: And then on core inflation?

Shannon Okinaka: I’ll take that a little bit on the cost side. So from about 2019 to where we stand today, we’re looking at a, call it, a 4% to 4.5% increase from a CAGR perspective on our costs. And that’s really — as we look across the industry, it’s generally in line with the industry and what we’re seeing around us. When you take our significant costs, primarily, labor, fuel and airports. On the labor side, the vast majority of our employees are covered under collective bargaining agreements, and we have fully executed agreements with all of our unions through 2023 and 2024, the next one to become amendable is in 2025. And so from that perspective, we’re kind of insulated from significant inflation that we may not be factoring in.

From an airports perspective, we do workload and I mentioned earlier, that’s where we’re seeing pretty significant cost increases and especially in Hawaii. There’s a lot of capital projects in the Hawaii airports that are coming through our rent rates. And so we work pretty closely with the State of Hawaii on that. But I mean we’re also just investing a lot to try and kind of offset a lot of these cost increases. So while we don’t – I don’t have what our core inflation assumptions for our forecast at my fingertips, there’s a lot that goes on to really offset or mitigate that risk.

Chris Stathoulopoulos: Okay, thank you.

Operator: Thank you. Our next question is come from the line of Dan McKenzie with Seaport Global. Please proceed with your questions.

Dan McKenzie: Yes. Hey, thanks. It kind of sounds like we’re all after the same information here. So at the risk of kicking a dead horse, Shannon, I know you don’t want to talk about capacity next year, but what it sounds like is directionally, next year could be a pretty big catch-up year. So I guess maybe we could 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 the departures. And as you were sharing earlier, efficiency metrics could finally normalize next year. So is there any fly at least to this line of thinking?

Peter Ingram: Maybe I’ll just give you some general comments to think about the capacity piece of that. A lot of what you’re going to see next year, some of the growth is just going to be the annualization of flying that we’ve been adding back over the course of this year, particularly as we have in our plans that we ramp up our operations to Japan over the back part of the year and into 1Q. That will be in place throughout the year next year. So really what we’re looking at in terms of growth beyond that sort of annualization is going to be a couple of 787s coming into the fleet over the course of the year. That will be spread throughout the year. So the last delivery may be later. They’ll have the A330 freighters coming on.

And then the other thing we have the capacity to is we do have A330s of next year and over the next few years that are coming or 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’ll calibrate that appropriately to make sure that we can absorb it and make sure the market can absorb it and it will be efficient growth for us as we get into those periods.

Daniel McKenzie: Yes. Okay. That’s helpful. And then a 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.

Brent Overbeek: So yes, I think, Dan, as you look into ’24, we’ll 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 kind of in ’25 and beyond. And I think as we’ve looked at the resource, the 787 is going to be a fantastic airplane, but we’re going to get most value out of it as where it can fly out of longer ranges and where we have high levels of premium demand, and those are places like Sydney, like Tokyo, like New York, Boston, those kinds of places. We’ll 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 — 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. While we’re excited to have a new product and the growth in the space that’s really where we’re going kind of in ‘25 and beyond.

Dan McKenzie: Yes, understood. Okay, thanks for the time guys.

Operator: 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.

Peter Ingram: All right. Thank you, Darryl. Hello, 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.

Operator: 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.