Hawaiian Airlines - Q1 2022

Transcript

Operator (participant)

Hawaiian Holdings, Inc. first quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Ashlee Kishimoto, Managing Director of Investor Relations. Thank you. You may begin.

Ashlee Kishimoto (Managing Director of Investor Relations)

Thank you, Sherry. Hello, everyone, and welcome to Hawaiian Holdings first quarter 2022 results conference call. Here with me in 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 costs and the balance sheet. At the end of the prepared remarks, we will open the call up for questions. By now, everyone should have access to the press release that went out at about 4:00 P.M. Eastern Time today. If you have not received the release, it is available on the investor relations 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 statement. These include the most recent annual report filed in Form 10-K, as well as subsequent reports filed in Forms 10-Q and 8-K.

I will now turn the call over to Peter.

Peter Ingram (President and CEO)

Mahalo, Ashlee. Aloha, everyone, and thank you for joining us today. We updated our first quarter outlook at the end of March, reflecting better than previously expected results due to strong demand throughout our network. With the effects of the pandemic more muted now than at any point since the beginning of 2020, we are enjoying a period of strong demand for travel to, from, and within Hawaii. COVID restrictions for travel to the State of Hawaii were lifted at the end of March, and restrictions on travel in our key international geographies are appreciably reducing. Looking ahead, we expect record domestic revenue in the second quarter and a steady recovery of international demand as the year progresses. Let me briefly touch on a few of the following themes for 2022 that we've discussed in our previous calls.

Specifically, restoring international service and returning to operations at full scale, enhancing commercial flexibility and operational efficiency through foundational technology, succeeding in a disrupted competitive environment, and preparing for the 787s. Internationally, we are underway with the long-awaited recovery and demand for travel to Hawaii as COVID travel restrictions eased in Australia and South Korea. New Zealand is implementing plans to ease restrictions, setting the table for us to restore service in July with flights three times weekly. In Japan, travel restrictions incrementally eased with the removal of government-mandated quarantine and an increase in visitor arrival allowances. The current restrictions remain a significant barrier to travel, and we will need to see policies evolve further to realize the full demand potential in this geography.

Based on what we've seen in Australia and South Korea, we know that there is pent-up demand for travel to Hawaii in our international geographies, just as we have seen domestically, and we are preparing for our service to return to full scale. We continue to see strong demand for our domestic business, and our premium leisure model remains successful with strong PRASM of performance relative to our U.S. mainland competitors. Especially strong performance of our front cabin and Extra Comfort products shows a continued willingness of leisure travelers to pay a premium for superior products and service. We can market and distribute these products more effectively than ever before because of our technology investments over the past few years. On the technology side, our new revenue management system launched successfully at the end of March.

Work on the implementation of our PSS is underway and on track to launch in the spring of 2023. The revised delivery date of our first 787 has not yet been determined. The delay in 787 deliveries is affecting all of Boeing's customers, and we are working closely with Boeing to bring more certainty to the timetable. There's so much to be encouraged about right now that it's almost difficult to remember that the first quarter began with the Omicron variant suppressing demand and affecting our staffing and operations. I'm very encouraged by how we've started an important year of continued recovery after a bumpy first couple of weeks.

I could not be prouder of our wonderful team on the front lines and throughout the company who are committed to connecting people with Aloha. The progress we have made on our goals for 2022 sets us up well for the remainder of the year and for years beyond. As passenger volume returns, we are actively hiring and training throughout the business. Recently agreed labor contracts ensure our competitiveness as an employer. The ratification of our IAM contracts with our mechanics, airport operations, and cargo employees was an important milestone, and our dispatchers represented by the TWU just last week ratified a five-year contract. Combined with the agreement we reached with our flight attendants union in 2020, these contracts demonstrate a commitment to look forward and do right by our employees.

Our pilot agreement with ALPA becomes amendable on July 1st, but for the moment, we are rather uniquely positioned in the industry with no amendable collective bargaining agreements. We are managing through the challenges of recruiting in a competitive labor market. The hiring challenges are most pronounced for our airports and maintenance teams. I know there is a lot of interest in pilot hiring, and for this group, we continue to see good supply, but training is a constraining factor in getting the right pilots into the right classification to support our operations. Lastly, we will continue to make investments that strengthen our brand as a premium leisure airline. Yesterday, we announced that we will be providing our guests the best in-flight connectivity product in the world after reaching an agreement with SpaceX to deploy their Starlink Wi-Fi product on our long-haul aircraft.

These speeds will support fast web browsing and streaming that we've gotten used to on our devices on the ground. Also, importantly, we will be deploying it with a simple interface and free of charge to all our guests for however many devices they are accessing on board. We have deliberately trailed the industry in deploying in-flight connectivity because current and previous generations of products perform below our standards over the Pacific, where most of our time in flight is spent. Until now, there was no offering that provided a superior product to match the rest of our in-flight experience. Starlink changes this, and we think our guests will be delighted when they have the chance to experience it. We expect to begin aircraft deployment in 2023, and we'll provide an update later in the year with greater detail as we build out our timeline more discreetly.

Next month, we will reinforce our commitment to sustainability with the publication of our third annual Corporate Kuleana Report. As part of an island community, we have a profound responsibility to contribute to the environmental, economic, and social well-being of this place. I'm incredibly proud of the contributions our team has made through corporate action, employee volunteerism, and charitable giving to support our community through these difficult times. We are actively engaged in dialogue around some of the most difficult challenges facing our community, including managing the impact of tourism and addressing issues of social justice and inequality. We're also looking inward to ensure our own very diverse workforce feels valued and heard, and that Hawaiian remains a great place to work and build a career. We have much to be encouraged about as we move towards the peak summer travel season. Our unparalleled brand is getting stronger every day.

Our purpose and values serve as our compass and are imbued in everything we do. I get to come to work every day with the best team in the airline industry. With external conditions in a better place than we have seen in the past two years, I am confident that we are poised for success ahead. With that, let me turn the call over to Brent to discuss our results and commercial outlook in more detail.

Brent Overbeek (CRO)

Thank you, Peter. Aloha, everyone. Our first quarter revenue performance was better than expected throughout our network and in line with the updated guidance we provided at the end of March. Passenger revenue was down 33% from 2019 as we operated 118% of our domestic capacity and just 25% of our international. Our premium products are performing particularly well. We saw continued strength and demand for our front cabin, with North America premium cabin PRASM up 8% for the quarter. Extra Comfort revenue in North America also exceeded 2019 levels for this quarter. Other revenue continues to be a bright spot, up 32% this quarter from 2019. Cargo recorded the highest quarter of revenue as we benefited from strong yields from Asia.

We generated the highest first quarter of revenue ever for our HawaiianMiles co-branded Mastercard on strength of card member acquisition and strong portfolio net retail sales. Looking ahead, we're encouraged by bookings and are expecting strong demand for travel to Hawaii. The Governor of the State of Hawaii announced the removal of all COVID-related travel restrictions, and we saw robust sales in the days following the announcement in early March. Three days in early March were among our all-time top 10 single days for direct sales. Our business is recovering, and for the second quarter, we anticipate that our revenue performance will accelerate, with overall revenue down 8%-12% from 2019. Let me take you through each segment of our business.

In North America, we're seeing strong demand and anticipate our load factor to be near second quarter 2019 levels, which were close to 90%. While we are seeing more signs of industry capacity from the mainland to Hawaii continue to abate throughout the summer, industry capacity remains historically high at roughly 117% of 2019 levels. The revenue environment is improving, and we anticipate our second quarter RASM for North America to be above 2019 levels and a greater than 20-point sequential improvement from the first quarter. We expect to fly a similar schedule to the first quarter at about 115% of our 2019 schedule. We remain well-positioned, and based on the latest data from the DOT, we continue to materially outperform our competitors on PRASM in North America.

This demonstrates the strength of our North America network, focus on the Hawaii premium leisure and leisure traveler, award-winning service, and optimally configured aircraft. In the Neighbor Islands, we're encouraged as load factors are approaching 2019 levels as we expect to fly about 80% of our 2019 capacity in the second quarter. The pace of recovery has been tempered by the increase in direct flights to the Neighbor Islands, the lack of international connecting traffic, and some sectors of the local market that have remained persistently down during the pandemic. However, we are seeing some recent improvement in these sectors, such as travel associated with in-person events, including sporting tournaments and annual festivals. We continue to refine our second quarter flight schedule based on some pilot training bottlenecks impacting our 717 fleet.

Despite these challenges, we remain well-positioned and continuing to earn a share of local traffic well in excess of our seat share, maintain a material load factor premium, and continue to generate a sizable yield premium versus our competitor. Let me take some time to go through our international network and the various policy changes in that geography. Australia lifted its remaining travel restrictions for visitors in February, and we continue to see solid demand out of that market. South Korea made it easier for travelers by eliminating quarantine with proof of vaccination beginning April 1st. We have seen an increase in demand, with load factors expected to increase from the mid-30% in April to mid-70% in June. In response to demand, we're adding additional frequency during the summer and will be flying five times weekly to Seoul.

Moving to Japan, we've seen incremental progress towards reopening, with an increase in daily arrival caps and the removal of government quarantine requirements for vaccinated Japanese nationals. We remain uncertain on when Japan will fully reopen, but know there is substantial pent-up demand for travel to Hawaii. We are now expecting to fly about 30% of our 2019 international schedule in the second quarter. We remain well-positioned with our brand and quality of experience to capitalize on demand for Hawaii vacation when it materializes in each international market. Rolling all that up, we anticipate our overall system capacity for the second quarter to be down 11.5%-14.5% from 2019 levels.

Turning to an update on our 2022 commercial initiatives, we implemented our new PROS revenue management system this month and are encouraged with the early results that we're seeing. The team is developing experience with the system, and things are going great so far. It'll take some time for us to reach a level of expertise with the system and fully utilize all its capabilities, but we have confidence that this will unlock incremental revenue as it continues to ramp up to steady state. On ancillary seats product sales, we are seeing steady growth from our Extra Comfort seat product due to strong demand for this premium product, along with seating price changes we implemented at the end of 2021. These resulted in higher first quarter revenue than in 2019 for North America.

Looking ahead, we expect continued improvement in our second quarter North America Extra Comfort revenues per seat to exceed 2019 by about 15%. Lastly, in January, we launched our new NDC-supported technology platform to a positive response, and we are in the process of signing agreements and onboarding major travel agency partners. In addition, this change in distribution strategy will help us provide better information about our product offerings to our guests, which will enhance our revenue generation, while at the same time controlling our distribution costs over the long term. We expect these commercial initiatives to drive incremental benefits of approximately $10 million this year as they ramp up to steady state. We are well along on the road to recovery.

Domestically, we anticipate strong demand with load factors close to 2019 levels, premium cabin PRASM improvements to continue to accelerate to historical highs, and Extra Comfort revenue to record levels. Internationally, travel restrictions are easing, and we are seeing robust demand for Hawaii vacation. We have the right products for our markets, a strong brand, an exceptional team, and a winning formula for success. With that, I'll turn the call over to Shannon.

Shannon Okinaka (CFO)

Thanks, Brent, and thanks everyone for joining us today. Let me start with an update on the balance sheet. We closed the quarter with $1.9 billion in total liquidity, inclusive of cash, short-term investments, and our undrawn revolver of $235 million. Adjusted net debt was $931 million, which is near our 2019 levels. Our scheduled debt and lease principal payments for this year total $122 million, $67 million of which was paid in the first quarter. Our balance sheet is strong and we have ample liquidity, and we continue to look for ways to fortify our financial position. We're comfortable holding a higher liquidity position as we continue to recover and move to profitability and consistent generation of positive cash flow.

Turning to the P&L, we finished the quarter with an adjusted EBITDA loss of $106 million. While reflecting the impact of the Omicron variant and pandemic-related restrictions in much of our international network, these results were better than we originally expected given the strong domestic revenue results that Brent discussed. On the cost side, our first quarter non-fuel costs and non-recurring items totaled $472 million, with unit costs up 12.2% compared to 2019. These results are at the higher end of our expectations as the higher wages resulting from the ratification of our IAM contracts in mid-February were not included in our original guidance. As a reminder, our IAM contracts primarily cover our mechanics, airport operations personnel, and cargo employees, as well as certain administrative positions.

Upon ratification, we paid a signing bonus totaling $2 million that was adjusted as a one-time expense, and we also recorded a one-time increase to our vacation liability for higher pay rates. As Peter mentioned, coming to negotiated agreements with our unions is critical to our success, and we are well-placed in the industry in this respect. Fuel costs rose in the first quarter to $2.83 per gallon, up approximately 12% from our original outlook in mid-January. Our consumption was outside of our range, with higher than expected fuel burn as we flew our A330's a little harder and heavier. About 55% of our fuel was purchased based on Singapore jet fuel prices, 35% on U.S. West Coast jet fuel prices, and 10% on other jet fuel prices.

We have limited exposure to New York Harbor crack spreads that exploded in recent weeks. Our leadership team continues to focus on initiatives that keep our costs competitive and offset inflationary and other pressures. Specifically for 2022, tailwinds include productivity benefits from recent technology investments and amended labor contracts, lower aircraft rent expenses through the re-renegotiation of several of our A330 leases, as well as lower depreciation and amortization expenses. Significant headwinds pressuring our unit costs include airport-related costs as airports return to fully charging airlines for both operational and capital expenses and increasing labor rates from recently amended contracts with our flight attendants, grounds crew, mechanics, and dispatchers. Lastly, we are incurring costs to adequately train and position our crew as we grow back our network.

For the second quarter, we expect our unit costs, excluding fuel and special items, to be up 16.5%-19.5% compared to the second quarter of 2019 on a capacity decrease of 11.5%-14.5%. Sequentially, our unit costs are expected to be consistent with the first quarter on a capacity increase of about 5.5%. In addition to higher selling and other variable costs associated with the expected increase in revenue and continuing ramp-up of our network, cost increases from the first to second quarter include a full quarter of new IAM wages versus half a quarter in Q1, other contractual wage rate increases, and one-time maintenance costs.

We are suspending our full year guidance for capacity and CASM ex-fuel as the uncertain timing of Japan's reopening impacts our ability to predict ASMs and therefore unit costs. Although we don't know the exact timing, we believe the impact of steady-state flying in Japan will reduce CASM ex-fuel by a double-digit %. We expect our fuel consumption for the second quarter to be down 14.5%-17.5% as compared to 2019. We're forecasting our fuel price per gallon for the second quarter to be $3.59 based on the forward curve as of April 21. It is worth noting that the forward curve includes a substantial increase in the refined margin and a widening differential between the geographic indices.

Our capital expenditure forecast for 2022 is $105 million-$125 million, with about 2/3s for aircraft and the remaining third for non-aircraft spend. The non-aircraft expenditures reflect investments in technology and in our facilities. Despite the increase in fuel costs, our adjusted EBITDA is expected to improve in the second quarter to a range of -$50 million to +$10 million. We are encouraged that we have line of sight to positive EBITDA, and we're focused on profitability as our full network recovers. We're confident that we are on the road to recovery, and our focus is on the long-term success of our business.

Our priorities are our investments in technology to unlock new sources of revenue and enhance cost competitiveness, our commitment to strengthening our brand and award-winning hospitality and service to differentiate us from the competition, and hiring and training our people as we plan and prepare for our future. We believe that these priorities are the winning formula to growing value for our shareholders. With that, we can open up the call for questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Conor Cunningham with MKM Partners. Please proceed.

Conor Cunningham (Executive Director)

Hey, everyone. Thank you for the time. Just in terms of I mean, I know you're in the early stages of your international recovery, and I get that you don't have a ton of data, but I was just curious if you could provide any context around, you know, how bookings look with, like, maybe the day that restrictions are eased and just how that flushes out, you know, over the next couple weeks until you actually get to flying again. Then I'm trying to figure out, like, the Neighbor Island flying. It seems correlated with the international recovery.

I'm just curious on, I mean, you talked about how you're doing a lot better than your competitor there, but is there a maximum that you'll be flying in terms of Neighbor Island flying until you have a full recovery on international side? I know there's a lot there, so I'm sorry about that.

Brent Overbeek (CRO)

All right. On the international side, Connor, thanks for the question. We have seen, you know, particularly in South Pacific, in Australia, New Zealand, and in Korea as well, when announcements have been made and changes in policy, we've seen a pretty quick and pretty dramatic move towards bookings. I think what we've seen, I would say, is more direct bookings, shorter booking curve, folks keen to travel, as those policies have changed. You know, we've had a really good experience there, and we're certainly encouraged what we've seen there. We fully anticipate we'll see similar behavior out of Japan.

We know that there's a keen interest in getting to Hawaii, the safety that we have in terms and comfort, level of comfort around us as a destination. We know we're gonna be really appealing to Japan as it opens up, and so we're very much looking forward to that. In terms of Neighbor Island, I think we've said before, you know, we anticipate coming back a bit smaller post-pandemic than we did going in. Some of that really is just a function of how we're scheduling the network. Before we had some capacity at the beginning of the day out of Honolulu and returning later in the day, that was really about positioning aircraft, and we switched our scheduling paradigm to now overnight aircraft in the Neighbor Islands.

We've eliminated some of that flying, which was, frankly, not that productive from a revenue perspective. We anticipate that we'll likely end up in the mid- to high 80s probably over time, will be the window that we end up in there. As you mentioned, you know, we are missing kind of the international connecting and stopover traffic there. As we talked about in our prepared remarks, we have seen, particularly with some of the governor's announcements, and changes in policy here in Hawaii, we have seen certain segments of the market start to come back in, I'll call it late March and April. We still have a ways to go, admittedly, in some of those, but we've seen some encouraging initial signs of that.

Conor Cunningham (Executive Director)

Okay. Great. As a follow-up, just on Japan, just to talk a little more about that. The Japanese yen has obviously come under a lot of pressure, and I don't know if that's changed your expectation for the recovery ramp over, you know, when it does. I know there's a lot of unknowns, but like, has that move in the currency, you know, made you contemplate a rebound there a little bit, but a little differently? I appreciate the time. Thank you.

Brent Overbeek (CRO)

Yeah. I think, you know, we have seen a material move in the yen over the last, I'll call it the last month really, or last 45 days. I think it'll have a bit of an impact. That being said, we've seen the desire to travel and people's willingness to pay out of international markets be quite strong. On the margin, obviously, the, you know, the cost of a Hawaii vacation for a Japanese resident will have gone up, with the appreciation of the dollar versus the yen. I think it has maybe a minor impact, but overall I think we're still pretty bullish on how folks are gonna come back and their desire to travel here and spend.

Conor Cunningham (Executive Director)

Great. Thank you.

Operator (participant)

Our next question is from Mike Linenberg with Deutsche Bank. Please proceed.

Mike Linenberg (Managing Director and Senior Company Research Analyst)

Yeah. Hey, Brent. Yeah, this is another sort of multi question here. I'm curious if you sort of index the price of a sort of typical Hawaiian vacation, and I'm just in the context of the inflationary pressures that we're seeing everywhere. I think the Hawaiian vacation was always somewhat aspirational, and I suspect that, you know, it's probably a bit higher. Again, not from a yen perspective, just from a U.S. dollar perspective, so coming from the other way. The reason I ask is there has been a sizable amount of, you know, competitor capacity withdrawals, you know, whether it's, you know, West Coast to Neighbor Island or even to Honolulu.

I don't know if it was just that so many carriers had loaded up so much, and now that the rest of the world is opening up, we're just seeing a recalibration or maybe it's higher fuel prices. I'm not sure if there's a demand element there. It's obviously to your benefit for your competitors to scale back, but I was somewhat concerned that there may be some impact on the demand side and/or it's just very expensive to fly some of these long-haul flights given where fuel prices are. I know that's kind of a multi-pronged question, sort of following up on Connor, but however best you can answer it. Thank you.

Brent Overbeek (CRO)

Yeah. I think I will say certainly over the last 15 months, we've seen a lot of capacity go directly off the West Coast and the Neighbor Islands. Really, Maui, Kona, and Lihue have all seen a material increase in industry capacity, kind of well in excess of what previous levels were. I think what we've collectively seen from an industry perspective is that some carriers were suffering from a load factor perspective, and if you look at some of the competitive data there, people were struggling to fill some of that capacity. Combined with higher fuel, it only is a bit rational that some of that is probably finding its way out of the market.

Mike Linenberg (Managing Director and Senior Company Research Analyst)

Mm-hmm.

Brent Overbeek (CRO)

In terms of kind of cost index, it has been. Certainly, we've seen lodging prices that have been quite high, more so in the Neighbor Islands than in Oahu.

Mike Linenberg (Managing Director and Senior Company Research Analyst)

Mm-hmm.

Brent Overbeek (CRO)

That could be a contributing factor. Now all that being said, you know, most of our capacity is in Honolulu and Maui. We do have a bit of direct service into Kona and Lihue. You know, forward-looking demand looks strong, and we're really encouraged with how kind of bookings look for us. While some of that capacity has come out, we still see a pretty strong demand environment, really across all of our markets, into Hawaii from North America.

Mike Linenberg (Managing Director and Senior Company Research Analyst)

Okay, great. That's helpful. Then just another question to you on the Japanese market. You said earlier that, presumably as Japan, you know, starts to relax some of these COVID restrictions, and I know they've been already starting to relax, that you expect to maybe see a similar response as what you've seen with Australia, New Zealand, and Korea. Historically, though, I always thought, and I know this is past and things probably have evolved, but that a large portion of Japanese trips to Hawaii, you know, the consumer discretionary element, was a large portion of it done through the travel agencies and the Japanese being planners would book those six to nine months out in advance.

With summer upon us, you know, assume, say, the rules are relaxed in the next month or two, do we get that type of snapback, or has that Japanese consumer already booked for his or her family a trip to, I don't know, Okinawa, you know, Okinawa or somewhere, you know, somewhere else in Asia-Pacific? I'm curious about how that has evolved and whether or not it will snap back as quickly given that historical trend.

Brent Overbeek (CRO)

I would say historically, we did have more Japanese point of origin traffic that would work through a travel agency partner and plan in advance. Maybe not quite as much as you had indicated in your comments.

Mike Linenberg (Managing Director and Senior Company Research Analyst)

Mm-hmm.

Brent Overbeek (CRO)

We had seen over time that continues to kind of narrow in terms of planning time relative to departure. I think what we've seen broadly across the pandemic is people are more interested, and I think this will apply in Japan as well.

Mike Linenberg (Managing Director and Senior Company Research Analyst)

Mm-hmm.

Brent Overbeek (CRO)

People are more interested in planning on their own and getting things done. They'll continue to work with our key agency partners. I do think we will see more direct sales, more OTA sales, and people planning and shortening their planning horizon. Is it perfectly analogous to what we saw in Australia? Maybe not one for one. I do think a lot of those same characteristics will continue to change as Japan comes online.

Peter Ingram (President and CEO)

Mike, this is Peter. I would just underscore the point that over time, the distribution, the third-party distribution paradigm internationally is evolving. We are seeing more direct sales. We have over the course of the pandemic when sales were limited, the direct channel held up much better than third-party channels. In fact, the pandemic itself has likely has caused in some of these international markets where third party is important, a retrenchment in those those businesses that are focused on that, a closing of some of their retail outlets. We expect that evolution to continue, but we also expect they're gonna remain important partners in those geographies in the coming years.

Mike Linenberg (Managing Director and Senior Company Research Analyst)

Okay.

Brent Overbeek (CRO)

Actually one important thing that's happened over the last little while in terms of more symbolic right now than generating bookings, but during the pandemic, actually, a lot of the wholesalers couldn't actually promote packages to Hawaii, and that has changed recently now, with some of the governmental policy changes to where they can get to the point where they can actually start to market packages to Hawaii. That at least will be in place and will be ready for, as additional restrictions come off, particularly the arrival cap, as Peter alluded to, is kind of probably the most important one for us to move forward.

Mike Linenberg (Managing Director and Senior Company Research Analyst)

Okay. Good to know. Yeah. Thanks, gentlemen. Thank you.

Operator (participant)

Our next question is from Helane Becker with Cowen and Company. Please proceed.

Helane Becker (Managing Director and Senior Research Analyst)

Hi, everybody. Thanks for the time. Two questions here. As you think, maybe for Shannon, as you think about going forward, where do you think your liquidity or your cash balances need to be for you to feel comfortable?

Shannon Okinaka (CFO)

Hi. Thanks, Helane. You know, we're still looking at it. We're not really in a rush to do a big balance sheet analysis and figure out our target. I think we're really comfortable right now with our cash balance. Obviously, it's higher than it probably needs to be, but I think for now, it's okay, as we still don't know exactly when Japan comes back and what that rebound looks like from Japan. We're also working out, you know, still trying to determine the delivery schedule for our 787s, and with that, then we'll look at the financing, how we choose to finance them, as well as just quite a large debt maturity wall in 2026.

We're just, I think until some of those things become a little bit more certain, we're not gonna establish a you know a cash target or a liquidity target. We're just really comfortable with our position for now.

Helane Becker (Managing Director and Senior Research Analyst)

Okay. That's hugely helpful. On the 717s, I guess I've been reading, and you guys just talked about the training issues that you have. Does it make sense to take a look at that aircraft type and think about. I think it was mentioned that you're basing aircraft in Neighbor Islands overnight, which you've never done before. Does it make sense to maybe think about replacing those with larger aircraft that might be more fuel efficient and enable you to still achieve the goals of being, you know, an important part of Neighbor Island travel?

Peter Ingram (President and CEO)

Look, the 717 is a terrific aircraft for what we do, as we've said, for really as long as I've been with Hawaiian. It's a pretty good size for the demand levels in the market. It is a low operating cost airplane from a cycle perspective, which in many cases the cycle impacts on maintenance costs is a bigger driver on very short-haul flying than fuel costs is. We do, you know, we're able to keep that airplane flying well through the middle of this decade. We've got a majority of our fleet that is owned with no outstanding debt on it, and so that makes it an extremely low ownership cost fleet for us.

Eventually we will be looking at replacements. I think a couple of things that we consider is whether an airplane slightly larger would be better. I don't think it would be dramatically larger because at the fringes of the day, that would give us an airplane that was putting more seats in the market than we needed. You know, we're gonna continue to evaluate that over time. Maybe a little bit bigger than what we have now would be better, but I don't think it would be dramatically bigger. You know, it wouldn't be the size of our 321s with 189 seats. That's just more than you need a lot of times of the day on the Neighbor Island routes.

Helane Becker (Managing Director and Senior Research Analyst)

Right. Yeah. Gotcha. That makes a lot of sense. Okay. All right. Well, thanks very much for your time and the help.

Peter Ingram (President and CEO)

Thanks, Helane.

Operator (participant)

Our next question is from Andrew Didora with Bank of America. Please proceed.

Andrew Didora (Senior Equity Research Analyst)

Hey, everyone. Thanks for the questions. I guess, Brent, I know, you know, obviously a ton of moving parts here in terms of the international recovery. Since you don't break out the unit revenues by entity, can you just give us a sense of kind of sort of the RASM differential between, say, mainland, inter-island, and international? I'm just trying to get a sense of how RASM will trend based on mix as your international network comes back.

Brent Overbeek (CRO)

Yeah. I mean, I think, Andrew, at this point it'd be kind of hard to think about, you know, kind of guiding for third quarter for the reasons you mentioned. A lot of that really depends on the pace that Japan comes back, both the amount of resources that we've got to it beyond what we've got in kind of our 2Q guidance, and the pace of demand in terms of booking curve. But again, I think we feel pretty confident about those. You know, I would say, Japan is fairly close to West Coast from a PRASM perspective, typically higher than the rest of our international network. You know, probably in line, I think, with long haul, and so that will be consistent.

As we think about things going forward, you know, we're encouraged with the progress we've seen in North America. You know, I'm not sure we're kind of at the high point of where we can get North America, so I'm optimistic that there's more runway in third quarter that we can continue to perform at and grow some unit revenue there as well.

Andrew Didora (Senior Equity Research Analyst)

Got it. Okay. That gives me a general sense on the international RASM. I guess, Shannon, as pre-pandemic, you did hedge fuel. You had some nice hedge gains back in 2018, if I remember correctly. I guess any plan to go back to a more meaningful hedge policy, kind of what needs to change for you to reconsider that? Thanks.

Shannon Okinaka (CFO)

Yeah, thanks, Andrew. Although it doesn't show up in our results, we actually still have a hedging program in place. We did some analysis through the pandemic when we were determining whether or not to start hedging again as the domestic business came back. That analysis showed that over time, you know, we didn't have really big gains or losses over a longer period of time. We moved the program to be a little bit more opportunistic, where we'd buy more at lower prices and less. At this point, right now, it's at zero at higher prices. We really look at it as like an insurance program.

If you think of it like insurance, right now, the premium is really high and you're getting a lot less coverage. We tend to buy out of the money options. If you're getting, you know, 10%, 15% out of the money right now, you're looking at really high prices. What it would take to get us to buy some hedges is for some of that pricing to come down to make it a more reasonably priced insurance program for us.

Andrew Didora (Senior Equity Research Analyst)

Understood. Thank you.

Operator (participant)

Our next question is from Dan McKenzie with Seaport Global. Please proceed.

Dan McKenzie (Senior Equity Analyst)

Oh, hi. Thanks, guys. Continuing on the international theme, and, you know, leave it to me to kick a dead horse here. I believe international revenue in 2019 was just over $700 million, and I'm just, you know, sort of extracting that from the 10-K, so please correct me on that. What percent recovered were you in the first quarter, and where—you know, what recovery are you expecting in the second quarter and the guide here? You know, I guess I'm just trying to get a more precise idea of what's missing exactly.

Just related to that, is the expectation that just given pent-up demand, and I know you've talked about this in prior questions, but is the expectation that the international side of the business could ultimately be better than 2019 once things open up here?

Peter Ingram (President and CEO)

Yeah. Dan, on the international, I think you're in the ballpark with the $700 million. I think of it as about 25% of our revenue pre-pandemic. In terms of the recovery, I don't have at my fingertips what percent we were recovered in the first quarter, but it was still pretty dramatically off. You know, through most of the last several quarters up till this one, we were probably between 90% and 95% still missing from the market. We did start to see the ramp up in the first quarter from Australia, but even that was held back a little bit.

Probably, you know, of the 25% of our revenue pre-pandemic that was international, about 70% of that was Japan, maybe even a little more than 70% Japan. The biggest by far of the international markets is still sort of, you know, trying to grind out of the starting gates for us. We've still got a lot of runway left in terms of getting international back. It is encouraging to see, you know, Australia up and running and gaining some momentum, South Korea gaining momentum, New Zealand getting ready to go. We just, you know, are looking forward to having Japan join the party in a meaningful way.

Dan McKenzie (Senior Equity Analyst)

I guess the expectation that, you know, given pent-up demand, you can have business ultimately that's gonna be higher than 2019?

Peter Ingram (President and CEO)

Look, I think there's some opportunities there. I don't think it'll snap back right away. If you look at how, when cases are down in Japan, the demand for domestic travel appears very strong. I think there's a real willingness to travel, as we've seen domestically as the carriers flying between Europe and the U.S. mainland have experienced. I think we're going to see a really robust recovery as people have the ability to get out and stretch their legs and travel and do the things they've been missing for a while.

Dan McKenzie (Senior Equity Analyst)

Understood. Second question here, you know, 8.5 points of incremental CASM ex-fuel pressure per the March update. You know, I know you guys aren't guiding to full year CASM ex-fuel at this point, but, you know, how much of that 8.5 points is in the second quarter, in the third quarter? You know, what I'm really after is just what the CASM ex-fuel drop could look like once, you know, international is ultimately restored here.

Shannon Okinaka (CFO)

Yeah. Thanks, Dan. I don't have those numbers, you know, broken out by quarter in front of me. I can't answer that piece. You know, adding back the Japan will have a large impact on our CASM. I think as I spoke in the prepared remarks, you know, we're looking at expecting double digit decreases in CASM ex-fuel once Japan is in a steady state. I think you should expect CASM ex-fuel to have good improvements once the capacity comes up.

Dan McKenzie (Senior Equity Analyst)

Very good. Thanks for the time, you guys.

Operator (participant)

Our final question is from Catherine O'Brien with Goldman Sachs. Please proceed.

Catherine O'Brien (VP and Equity Research Analyst)

Hey, everyone. Thanks for the time, and, apologies in advance. One more Japan one. I just wanna make sure I've got this right. I just wanna confirm. There's currently no quarantine required for Japanese citizens returning to Japan from vacation Hawaii as of April 10th. I guess, is that right? If so, you know, what are the remaining government restrictions that are behind, you know, your decision to, you know, suspend full year guidance due to uncertainty around that, you know, full international relaunch? Or is it just that even with the quarantine drop, there's still some hesitancy to travel? Or is it the U.S. entry requirements? I know that's kind of a bundled question there, but just trying to get a sense.

Peter Ingram (President and CEO)

Yeah.

Catherine O'Brien (VP and Equity Research Analyst)

Yeah, thanks.

Peter Ingram (President and CEO)

Yeah. Let me try to explain what the most significant restriction is, and I'll let Brent or others chime in if they have more. So the removal of the quarantine is very helpful. What is most constraining for us right now is over the past couple of years, the Japanese government has had a policy of doing post-arrival testing for people coming back from international trips. There have been limits at various points in time that are placed on the carriers in terms of the amount of traffic they can carry on their airplanes, basically because of the constraints in doing those arrival testing.

The ability to do that testing at scale is limited, and what they have done is imposed either weekly or per flight caps on the number of people that each carrier can bring into the country. Currently, those caps are at about 10,000 arrivals per day that are allocated across all of the carriers operating in the market. If you look back pre-pandemic, typical demand would be more like 140,000 or 150,000 passengers a day. There is this artificial hard constraint on the number of people that can come into Japan, even if there is sufficient demand to fill an awful lot more seats.

Brent Overbeek (CRO)

Yeah.

Catherine O'Brien (VP and Equity Research Analyst)

Okay.

Brent Overbeek (CRO)

I think as Peter mentioned, until we've seen some sequential progress in that cap coming up, but it's still, you know, our allocation is still quite small. You know, that's gonna need to grow material or get removed to get things kind of back at scale, I think is the critical impediment at this point.

Catherine O'Brien (VP and Equity Research Analyst)

Got it. I guess from your government affairs folks, just a quick follow-up on that one before my second one. From your government affairs folks, is there any, you know, read-through on, you know, that's a pretty, I don't know, it's what, like 7% of 2019 demand that's allowed right now. Any timeline on when that gets raised, or it's just really gonna, you know, kind of depend day to day here?

Peter Ingram (President and CEO)

Yeah. We've been hesitant to try and speculate on that because every time we've done that up till now, we've been wrong. I feel confident that it will come back. We're seeing you know, most of the world, even in some of the places that had the biggest restrictions, not just in our network with places like New Zealand, but if you look at Singapore and some other places in Southeast Asia, these restrictions are being removed. Last year, there was a lot of speculation that after the Olympics, there would be a loosening of restrictions in Japan. There was a question of, well, maybe it'll be after the elections that were last fall.

I think the hope of those being the catalyst for removal of restrictions was dashed a little bit by the first Delta wave and then the Omicron wave of cases at the end of the year. It's our understanding that, you know, problematically for us, some of these restrictions remain politically popular in Japan, which is in contrast to the attitude we see in this country around restrictions associated with COVID at this point. There are some elections that are coming up, I believe it's in July of this year. We don't expect a material move in policy before July.

We may see some more of these increments where the cap went, you know, from 5,000-7,000-10,000, but I don't know that we'll see a full liberalization before those elections in July. I don't wanna speculate because I don't have enough insight into what the catalyst is gonna be that really opens it up more comprehensively.

Catherine O'Brien (VP and Equity Research Analyst)

Totally understand. A complex issue. Then maybe just, you know, I realize it's hard to compare across the airlines just given the varying states of network recovery, but at the midpoint of your guidance, I'm getting a RASM that's gonna be up, like, 3%-4%, which is a bit lower than some of your peers. I would think having, you know, your historically significant exposure to long-haul flying in your international network currently be smaller than normal would just be a RASM boost mathematically. But maybe there's something else you wanna highlight as an offsetting drag, like maybe they're just, you know, the less inter-island or higher percentage of capacity in new markets. Or maybe I'm just wrong on that international impact. Would just love any color. Thanks so much for the time.

Brent Overbeek (CRO)

Yeah. I think, Catie, probably the biggest impact is that we talked about in our prepared remarks is really the amount of capacity that's in the market right now. While that continues to abate, if you look at our market, we've got you know 117% of North America capacity compared to 2019 in the second quarter. I think that's going to look a little bit worse than what it is largely on the mainland. It's headed in the right direction in the short term. I think we're doing all the right things and performing really well in a difficult competitive environment.

I think we still are at a unique position in terms of our domestic business, in terms of the amount of competitive capacity relative to the comp period people are looking at.

Catherine O'Brien (VP and Equity Research Analyst)

Totally fair. Thanks so much for that.

Operator (participant)

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Peter Ingram (President and CEO)

Mahalo again for joining us today. The strong demand improvement as we move through the first quarter gives us confidence in the periods ahead. I'm extremely proud of our wonderful team, who are committed to connecting people with aloha. We appreciate your interest and look forward to updating you on our progress again in a few months. Aloha.

Operator (participant)

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.