Hawaiian Holdings, Inc. (NASDAQ:HA) Q4 2022 Earnings Call Transcript

Hawaiian Holdings, Inc. (NASDAQ:HA) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Greetings, and welcome to Hawaiian Holdings, Inc. Fourth Quarter and Full Year 2022 Financial Results Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Marcy Morita, Managing Director, Investor Relations. Thank you. You may begin.

Marcy Morita: Thank you, Doug. Hello, everyone, and welcome to Hawaiian Holdings Fourth Quarter and Full Year 2022 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 our 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. Hello, Marcy. Hello, everyone, and thank you for joining us today. It’s encouraging to be entering a year where COVID restrictions are no longer hovering over our network. But we know that we have a lot of work ahead of us as our financial performance remains quite a ways from being fully recovered. As we continue to build upon the progress we’ve made, we’ve also embarked on a number of significant initiatives that will strengthen our company and make Hawaiian a better airline our guests, our community and our shareholders. I want to start by thanking our team. We’ve been tested over the past few years by a global pandemic, intense competition and during the waning weeks of 2022 by Mother Nature.

Through it all, our team has shown their metal and continued to deliver unrivaled hospitality. Our team cares deeply about our company, our guests and each other. And more than anything else, this is what sets us up for success as we move forward. Leisure travel demand remains strong. We’ve experienced a full recovery in much of our network, most notably in the largest part of our network between the Mainland U.S. and Hawaii. Low fares in the Neighbor Island market have stimulated traffic and we continue to materially outperform our competitor on all these routes. Australia, New Zealand and South Korea have all seen strong demand recoveries over the course of 2022. Having said that, despite the removal of COVID travel restrictions in October, Japanese travelers have not yet resumed international travel at a pace comparable to pre-pandemic levels as Brent will discuss in more detail.

With the timing of Japanese demand recovery is still uncertain, we will need to be nimble. In recent weeks, we’ve made adjustments to slow the deployment of capacity to Japan. While we remain confident that with time the long standing affinity of Japanese travelers for a Hawaii vacations will manifest. We also need to be pragmatic in putting capacity elsewhere if recovery remains slow. The natural question for investors is to wonder why it is taking Hawaiian longer to return to profitability than other U.S. airlines. On the cost side, our outlook relative to 2019 is comparable to others. We are facing cost inflation in a number of categories, including labor. I should emphasize that our cost outlook now includes the impact of new contracts for each of our unionized group since 2020, including the economics of the TA we recently reached with ALPA.

Where our 2022 results and our near term outlook diverge from our peers is on revenue. Not because we are underperforming our competitors on specific routes, but because of the characteristics of the markets in which we compete. We don’t control the timing of demand recovery from Japan. We only make decisions on one side of the Neighbor Island competitive battle. And even in North America, the North America to Hawaii market, which is operating profitably, with supply demand environment relative to 2019 is less favorable than in the domestic 48 and transatlantic markets. As a result, I can project the timing of our return to profitability as precisely as I would like. What we can do and what we are doing is to focus on what we do control. We can focus on operational execution to unlock efficiencies, which help offset an inflationary environment.

We can invest in a continuum of initiatives to position our company for sustained success. And we can work to win competitive battles and maximize revenue generation in each of our markets. That is our focus. Everyone in Hawaii is keenly focused on winning in Hawaii. Last quarter, I talked at length about the competitive situation on our Neighbor Island routes. Based on the most recent information available through DOT reporting, we continue to succeed in earning a disproportionate passenger share with higher average fares than our competitors and the gap is substantial. We continue to believe that our place in the community, our product and schedule, our knowledge of the guests and our fabulous employees give us structural advantages here that will enable us to win.

We are Hawaii’s airline. The current battle continues nonetheless, which suppresses near term financial performance. We are standing our ground and remain resolute that we will win in the end and emerge stronger on the other side. Also among our key imperatives this year is to firmly reestablish an efficient operating rhythm. 2022 was marked by an unprecedented level of hiring and training throughout our organization as we rebuilt our network after the pandemic. Almost 20% of my over 7,000 teammates have joined our company since the beginning of 2022. Being in rebuilding mode meant that we sometimes accepted ways of working that were not optimally efficient at scale. For 2023, the focus is on operating more reliably, consistently and efficiently, something that is good for both our guests and our cost structure, countering inflationary pressure in a number of areas.

Over the past few months, we have not performed to our standards operationally. The root causes are not a function of our decisions, but it is our responsibility to overcome external forces and deliver the level of service and reliability our guests expect. Since October, on-time performance at our Honolulu hub has been undermined by construction on a primary arrivals runway and the air traffic control programs that constrain arrivals into the airport. These changes have disproportionately affected short haul Neighbor Island flights. As a consequence, our reliability has fallen below our high standards and we’ve been forced to make adjustments to our scheduled to stabilize operations. This construction will continue into the second quarter and will continue to challenge our operations for the next few months.

We’ve adjusted our schedule to add block time and have created schedule recovery buffers on our lines of flying. As a result of these changes and an intense focus on daily reliability by our operations team, we’ve seen considerable improvement in performance over the past two months. But even with these changes, it will be a day to day battle during the construction period to manage through the capacity constraints at our primary hub and we will be more susceptible than usual to weather our mechanical disruptions. A huge mahalo goes out to our teams and the trenches who are working every day to deliver on our customer promise. We are also not immune to global supply chain challenges. Since late last year, we have encountered constraints on the availability of A321 engines, for which Pratt Whitney’s MRO supply chain has been unable to keep pace.

Most recently, this has resulted in two of our 18 A321s being grounded for an extended period awaiting available serviceable engines. Here again, we have made adjustments to protect the integrity of our schedules, but not without operational challenges and associated revenue and cost headwinds. As we deal with these near-term challenges, we remain keenly focused on completing an extensive list of initiatives that will position Hawaiian for long-term success. Our team has deep in preparation for the launch of freighter operations for Amazon later this year. Over the next few months, we will also be — we will also complete the insourcing of certain elements of the maintenance programs for our A330 fleet, for which we have relied on a third-party for over a decade.

This will improve our cost structure overtime and immediately give us more control over fleet reliability and performance. While separate from the Amazon initiatives, taking on this in-sourcing at the same time as we are adding at least 10 freighters to our A330 fleet makes it even more timely. We’re putting mobile technology in the hands of more of our employees to make us more operationally nimble and to allow us to serve our guests better with real time information. And in April we will go live with our new passenger service system. Not only does this un-shackled us from a core system that has limited our pace of innovation, it also has served as a catalyst to accelerate transformation of our technology, streamlining the connections between the PSS and other systems, enabling better use of data and providing an opportunity to modernize code for our e-commerce platform.

This year, we will begin cycling our long-haul fleet through the installation of StarLink inflight connectivity, which will position us as a global leader in offering free, fast and frictionless Internet to all our guests. We’re also pleased to have reached terms on a four year pilot working agreement with ALPA this month. Since this agreement is currently out for a ratification vote, we won’t be commenting on the specific terms of the contract. But we have reflected the expected economic impact of the agreement and the guidance we’re sharing today. Should our pilots ratify the agreement, we will have reached new contract terms with all of our organized labor groups since 2020. And none of our contracts will become amendable prior to 2025. So we have a lot to do in a year with significant challenges in some of our core markets.

While we might wish for these initiatives to be a bit more spread out, you don’t always get to choose when the opportunity presents. And I believe the priorities I just mentioned will be transformational for our company. 2023 promises to be an exciting year and I am fortunate to have an unbelievably talented team to tackle the challenges and opportunities. Let me turn it over now to Brent to go over our commercial performance in more detail.

Brent Overbeek: Thank you, Peter. Hello, everyone. During 2022, we saw robust demand for travel to Hawaii from North America and our international markets, excluding Japan, a strong performance by our premium and ancillary products. We saw overall PRASM surpassed 2019 due to the strength in these areas. Our ability to be flexible and adapt our network and schedule to address a dynamic environment served us well. Overall, fourth quarter revenue performance was in-line with what we have anticipated, despite the operational challenges we faced in the last two weeks of the year. Although ASMs were down 6% from 2019 due to a slower than expected rebuild in Japan, our system RASM was up versus 2019, demonstrating the continued strength we’ve see in our U.S. Mainland to Hawaii routes and International routes, excluding Japan.

Consistent with our expectations, approximately $25 million of passenger revenue was attributable to spoilage from pandemic era credits that expired at the end of December, a level that we do not expect to see going-forward. The resilience of the leisure market was evident in our domestic travel demand. U.S. Mainland to Hawaii total passenger revenue was up 29% on 9% more capacity compared to the fourth quarter of 2019 with load factors remaining in the high 80s. We achieved this revenue growth despite 11% more industry capacity between the U.S. Mainland and Hawaii than in 2019. 2022 was also a strong year for our international markets outside of Japan. In July we resumed service to Auckland and pent-up demand to and from New Zealand drove strong RASM gains.

On the back-half of the year, Korean PRASM returned to pre pandemic performance levels and we continue to experience very strong demand in the Sydney market. Unlike our other international markets, Japan’s ramp-up has been slower than we anticipated when it began reopening. This difference can be attributed to three primary factors. First, Japanese consumers have exhibited a degree of conservatism in returning to the long-haul international market — international travel. Second, the Japanese government is encouraging major domestic travel agencies there to promote domestic travel in lieu of international travel. And lastly, the weakness of the yen has made it more expensive to travel to Hawaii now than it was prior to the pandemic. The relationship of Japanese travelers to Hawaii is a strong one.

Photo by Towfiqu barbhuiya on Unsplash

And Hawaii is still a cherished an aspirational destination, more so than other international destinations. This drives our belief that the weakness in demand is transitory and we will be well positioned to fully serve Japan to Hawaii market when demand returns. Moving on to the Neighbor Islands, it continues to be a challenging market from a fair perspective. Our competitor is no longer offering $39 last seat availability as they were for much of the second half of 2022. But low fares are widely available in the market. We continue to manage yields above $39 when possible and the low fares have had the near term effect of stimulating demand. We continue to offer the best service and schedule in the market and we are seeing positive signs that our strategy is paying-off.

The most recent DOT statistics show that for the third quarter, our load factor was 22 points higher than our competitor. And our average share of roughly $50 million was nearly double there’s. While our ticket PRASM of — while our PRASM of $29.3 was well below our historical standards, it vastly exceeded our competitors $10.6 result. With our premium products demand remained strong, both domestically and internationally. For the fourth quarter, North-America premium cabin unit revenue improved over 30% compared to 2019. In the longer-term, we’re excited about both expanding our premium — expanding our premium offerings with the arrival of our first Boeing 787-900 at the end of 2023. The 787 fleet will offer 34 lie flat suites versus the 18 seats our A330s — on our A330s, as well as additional extra comfort seats.

Ancillary revenue remains strong. We saw continued momentum in Extra Comfort sales. Our newer preferred seat option performed in-line with our expectations and we launched this product for international flights during the second half of 2022 with promising initial results. Among other successful products our co-branded credit card had another record quarter and year with spend up over 19% compared to the fourth quarter of 2019. This program is uniquely designed to reward people who love Hawaii and those who live here. We’ve also implemented a new benefit for cardholders, a second free checked bag. Our cargo team had its best fourth quarter on record, which contributed over $34 million in revenue, driven by strong yields from the international market.

We do anticipate our cargo activity to slow moderately as we head into 2023, as international yields continued to decline. Additionally, we don’t have any charter flying in 2023 for the U.S. Postal Service, as we did for the first three quarters of 2022. As Peter mentioned, we will face some operational challenges associated with the maintenance of our A321 engines. With the reduced scheduled to and from Japan we have the ability to shift our A330 aircraft to cover A321 routes. That results in a heavier A330 schedule into North-America for the first quarter than we would normally plan and (ph) season. While that allows us to maintain service in well-performing Mainland markets, we’re not optimized on gauge and that will have an unfavorable impact on first quarter 2023 RASM.

We continue to work with Pratt Whitney and anticipate improvement in the quarters ahead. Our first quarter 2023 capacity is forecast to be approximately 15% higher than the same period in 2022. Compared to the first quarter 2022, we plan on operating a slightly lower capacity for North America routes, higher in the Neighbor Islands and substantially more international markets where our network rebuild was only starting to take shape in early 2022. The first quarter of 2022 had some unique pandemic related challenges. So we expect a difference versus 2022 to narrow as we progress throughout the rest of the year. At the end of last year, we saw some softness in North America bookings for travel in the first quarter of 2023, but these have improved over recent weeks, and we’re encouraged with booking index.

Even with some fares discounting initiated by other carriers. We are now forecasting first quarter 2023 PRASM to be up approximately 15% compared to the first quarter of 2022. As with capacity, we expect 2023 PRASM to be closer to 2022 levels in future quarters. We look forward to strengthening our international and U.S. Mainland to Hawaii markets. Rebuilding our presence in Japan and continuing to be the airline of choice for Neighbor Island travel. 2023 does not come without challenges in some of these markets. But we are equipped to be nimble as we review demand and opportunities. We have a well thought out product lineup for our market, a strong brand and team that is second to none. I’d like to thank our amazing team for their outstanding efforts, not just during the quarter, but during the entire year.

We’ve had some challenging weeks to wrap-up the year. And it’s great to see everyone pulled together. With that, I’ll turn the call over to Shannon.

Shannon Okinaka: Thanks, Brent. Happy New Year, and thank you for joining us today as we walk through our fourth quarter and full rear Results, share our 2023 first quarter and full year outlook and talk about initiatives that we have on the horizon. We finished 2022 with an adjusted EBITDA of $25.6 million for the fourth quarter and adjusted EBITDA loss of $31.0 million for the full-year. This equates to an adjusted loss of $0.49 per share for the fourth quarter and $4.08 per share for all of 2022. These fourth quarter results are slightly better than expected due to the strong demand in North America and certain international markets, partially offset by the competitive Neighbor Island market and slower buildup in Japan. Our fourth quarter unit cost, excluding fuel and non-recurring items were up 14.2% compared to 2019, which was in-line with our expectations.

As mentioned on the last call, we saw increases in wage rates and airport rents, and as expected we also incurred costs related to future growth opportunities such as startup and pilot training costs for our new cargo flying for Amazon and the induction of our 787 later this year. Regarding the 787s, we recently announced the amendment of our deal with Boeing which solidified our delivery schedule and increased our order with Boeing from 10 to 12 aircraft. We’re very excited about the delivery of our first 787 aircraft, which is scheduled for the fourth quarter of this year. Several factors influenced our decision to add two more 787s to the order, including the exceptional revenue generating capability of the larger premium cabin and increase in overall seat count.

In addition, the 787 delivery schedule will provide flexibility in our growth rate as we decide whether to extend or return A330s when leases expire. Our next four A330 lease expirations occur in 2024. The finalization of the 787 deliveries schedule resulted in just over $70 million of capital expenditures moving from 2022 into 2023. We now expect 2023 aircraft related CapEx to be in the range of $290 million to $300 million. In addition, we expect our 2023 non-aircraft related CapEx to be in the range of $40 million to 80 million, which is higher than normal due to preparation for the 787 induction and the in-sourcing of our A330 maintenance. Our investment in technology and facility initiatives will also be slightly higher than 2022. Notable facility investments include reconstruction of the security checkpoints at Honolulu airport for better throughput and guest experience.

And new below the wing workspaces to increase the efficiency of our operations in the new terminal at Honolulu. Looking at costs going forward, it’s clear that our costs will remain structurally higher than pre pandemic levels, much of which is driven by industry wide cost inflation. To address this, we’re focused on productivity above people and assets, as well as on revenue generating capability. While we did not expect to be at pre pandemic levels of productivity this year, we believe that our investments and the recovery of our network position will yield sizable improvement in the future. And as we start-up our new Amazon service and enter the 787 into service we’ll reap the revenue benefits and grow shareholder value. For the first quarter, we expect our unit cost ex-fuel and special items to be about flat to the same period in 2022.

And that’s low-single digits on a percentage basis for the full-year compared to 2022. This includes our estimate for the cost of implementing the new ALPA TA effective March first. The primary drivers behind the increase in unit cost are training of our pilots for the Amazon flying and for the new 787 fleets, contractual rate increases in our power by the hour agreements and a more intensive heavy maintenance schedule for our A321s. 2023 is a year in which we are making substantial investments in our fleet, technology and guest experience, which reflected in both our operating costs and capital expenditures. These initiatives are building blocks to make Hawaiian Airlines a stronger business. And as we get back to operational excellence and fight to win in our markets, our investments in technology and product are going to better enable our frontline team to deliver that aloha and hospitality that is one of our primary competitive advantages.

Having faced the challenges of the last few years, we have renewed energy around innovation to improve our revenue generating capability and manage our costs. We’re excited about our future as we lay the foundation that will set us up for success. With that, we can open up the call for questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. Our first question comes from the line of Conor Cunningham with Melius Research. Please proceed with your questions.

Conor Cunningham: Hey, everyone. Thank you for the time. I’m just going to the 1Q RASM guidance. I’m a little confused on what’s kind of happening there. So you talked a little bit about higher utilization kind of impacting the results there or the outlook there, but just when I think quarter-over quarter, it implies a pretty massive step-down versus historical trends. I would just wonder if you could maybe provide a little color on what’s kind of happening there? And then why you expect it to snap-back in the remaining quarters after? Thank you.

Peter Ingram: Well, I mean, we guided, Conor, to year-over-year and not over the sequential quarter. I do think we’ve got some different moving pieces as you look through, we talk through some of the — some of the changes in spoilage in particularly as you move through the quarter. And like I mentioned, we saw a little bit of softness in the front part of the quarter, particularly in North America in addition to some of those .

Conor Cunningham: So it’s basically a function of just like a larger spoilage in 1Q and then it kind of normalizing like high level…

Peter Ingram: On a sequential quarter-over-quarter basis, we see that from 4Q to 1Q, but from a year-over-year perspective, it will be a little bit different, yes.

Conor Cunningham: Okay, all right. That make sense. And then just — your cost cadence is going to be probably a little bit different than some of your other peers. I realize you have the final contract in your numbers. But I was wondering if you could just provide a little sort of color around the Amazon cost build there? I would imagine it’s much more second half weighted, but I’m just trying to figure out the lumpiness it’s going to happen through 2023. Thank you.

Shannon Okinaka: Thanks, Conor. This is Shannon, I’ll start. Yeah, we do have — we haven’t broken this piece out, we do have a good amount of pilot training going right now and it’s kind of combined with the preparation for 787s as well, because we, of course, have one pilot training planed, which includes getting ready for both. So that is definitely in our first quarter cost in our guidance. As we move throughout the year, that training kind of stays at that rate, but we will be, to your point, adding in forward costs as we get ready and get closer to flying for Amazon. Once we are actually flying the airplanes and we can specifically identify costs related to the Amazon flying. I’ll try to point that out. But for right now, it is somewhat intermingled with all of the other things that we’re planning for.

Conor Cunningham: Okay, thank you.

Operator: Our next question comes from the line of Helane Becker with Cowen & Company. Please proceed with your question.