Hawaiian Holdings, Inc.
Q1 2018 Earnings Call Transcript

Published: 25 Apr 2018

[Operator:]

Greetings, and welcome to the Hawaiian Holdings, Inc. First Quarter Fiscal Year 2018 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Daniel Wong, Senior Director of Investor Relations.

[Daniel Wong:]

Thank you, operator. Hello, everyone, and welcome to Hawaiian Holdings First Quarter 2018 Earnings Call. Here with me in Honolulu are Peter Ingram, President and Chief Executive Officer; Shannon Okinaka, Chief Financial Officer; and Brent Overbeek, Senior Vice President of Revenue Management and Network Planning. Also in the room with us are members of our senior management team to participate in the Q&A as needed. Peter will open the call with an overview of the business; next, Brent will share an update on our revenue performance and outlook; Shannon will then discuss our costs performance and outlook; and we'll then open the call up for questions; and Peter will end with some closing remarks. By now, everyone should have access to the press release that went out at about 4

[Peter Ingram:]

Thank you, Daniel, and aloha, everyone. I'm honored to be leading this earnings call, my first since taking over the reins as CEO of Hawaiian Airlines. I am blessed to have a wonderful group of colleagues throughout the business who have helped to make our leadership transition as seamless as possible. They deliver unparalleled hospitality to our guests and are the heart and soul of our business, which translates into outstanding results for our investors. We have a lot going on in the business right now and tremendous opportunities for the future. There is nowhere I would rather be. 2018 is off to a great start. Our operating revenue and adjusted earnings per share results were records for the March quarter. Total passengers carried was also a record. Higher industry capacity on several of our routes this year has been met by strong demand, particularly for the Premium Cabin, allowing us to continue to post strong revenue performance. At our Investor Day last December, we highlighted how we've succeeded in the face of aggressive competition over time, and how we're better equipped to compete today than ever before. Our first quarter results reflect that competitive strength and just as importantly, they reflect how far we've come as a company. We're more resilient today, both operationally and financially than we were just a few short years ago. Consequently, we're better able to take advantage of opportunities in the marketplace and overcome any challenges that arise. And indeed, there were challenges in the first quarter. Most notably, double-digit competitive capacity growth between North America and Hawaii, additional competitive challenges on some of our international routes, higher fuel prices and delivery delays affecting our A321neo fleet plans. Let me put the resilience I'm talking about in perspective. The first quarter is traditionally our seasonal trough. In many of the years between 2000 and 2013, we generated pretax losses in the first quarter and relied on the summer peak to work our way back into the black. This year, despite well-chronicled competitive incursions, we posted an adjusted pretax margin of 11% for the first quarter, which sets us up nicely for a successful 2018. And as good a year as we expect it to be, we are frustrated that it could be even better, were it not for the A321neo delivery delays. At the beginning of 2018, we had 2 of these aircraft in the fleet and expected 9 more to be delivered throughout the year. The delivery schedule was frontloaded in the year such that we expected 7 of these deliveries to be available for our summer peak. We still expect 9 deliveries this year, but the first 7 are delayed. In most cases, by about 3 months compared to what we had planned for at the beginning of the year. As a result, even though we built some buffer into our fleet and network plans, we've had to adjust our schedule on shorter notice than our customers deserve. We won't be able to add as much seasonal flying as we had planned to take advantage of the summer peak period demand. We've delayed the start of some new year-round services. We're incurring expenses to return the 767s to a service that we had planned to retire in the first quarter; and we're making less efficient use of pilots trained for the A321neo than we should be. A decade ago, this could have been a catastrophe for us. Today, it's a regrettable setback. What remains unchanged is that the A321neo is the optimal aircraft for midsized West Coast to Hawaii routes. The 2 we have in service are performing in line with our very high expectations. And as we build out our fleet over the next couple of years, we have no doubt that it will be the competitive asset we envisioned. We look forward to further demonstrating that as deliveries resume next month. In other fleet news, we announced in March the signing of a letter of intent to acquire 10 Boeing 787-9 aircraft starting in 2021, with purchase rights for a further 10. The 787's size and operational efficiency will allow us to upgauge our largest markets and take advantage of other long haul opportunities well into the next decade. And as A330-200s approach lease expiration dates over the next decade, we'll have the opportunity to calibrate our growth optimally for whatever economic conditions exist. We're thrilled by these prospects and our team is already hard at work thinking about how we will equip our flagship aircraft for the future. Another milestone this quarter was the official start of our comprehensive partnership with Japan Airlines. Late last month, we initiated codeshare flights between the 2 airlines. This agreement extends our reach in Japan, our largest international market and the largest source of international travelers to Hawaii, and will help growth both our network and distribution capabilities. In addition to Japan to Hawaii flights, our guests will now have access to 36 domestic and 11 international destinations within the Japan Airlines network. Our flights are also now offered alongside Japan Airlines in JALPAK tour packages, capping a distribution channel that has thus far been the exclusive domain of Japan Airlines. In addition to codeshare flights kicking off, we remain on schedule to submit our application for antitrust immunity in the second quarter. It's very early days but the partnership with JAL is off to a strong start. Our entire team is eager to capitalize on the opportunities that will open up for both parties and to deliver the significant benefits that we'll provide to consumers in the years ahead. Japan Airlines shares our guest-centric view, and this alignment of interest gives me enormous confidence in the future of the partnership. Finally, this quarter, we signed a new agreement with Barclaycard U.S., our co-brand credit card partner since 2014. Our partnership with Barclaycard U.S., Bank of Hawaii and MasterCard has been extremely successful since we launched the current card in 2014. New accounts opened during the 4 years of the program were nearly twice what we recorded in the preceding 4-year period. And total cardholder spend in 2017 was more than 50% higher than our previous program yielded in 2013. The new agreement brings improved economics and importantly, it also opens up the door to enhancements to our co-brand card offering that we are certain will further grow our cardholder base and customer spend and even better engage our loyal guests with the Hawaiian Miles program. We'll have more to share on this in the periods ahead. All in all, we have a lot to be optimistic about as we look ahead. As we look into the next quarter and those beyond, we'll continue to focus squarely on execution. We're confident that the same execution that led us to deliver industry-leading unit revenue growth, robust profit margins and a stronger balance sheet over the last 2 years will carry us through any challenges we face in 2018. We're growing our franchise, we're growing long-term value for our shareholders, and we're connecting more guests to Hawaii than ever before. And with that, I'm happy to welcome Brent to the rare pleasure of participating in the quarterly earnings call. Brent and his team has been one of the cornerstones of our commercial success over the past few years, and it was a pleasure to promote him to Senior Officer and expand his organizational responsibilities earlier this year as we reorganized the commercial team coincident with my move into the CEO role. Over to you, Brent.

[Brent Overbeek:]

Thanks, Peter. Aloha, everyone. I'm pleased to be joining the call for the first time. Let me start by thanking the entire Hawaiian Airlines team in delivering our award-winning authentic Hawaiian hospitality to our guests every day, to driving strong commercial execution that once again did a fantastic job in the first quarter. I've met many of you on the call at our Investor Day events over the past several years but for those of you whom I haven't met, I'll briefly introduce myself. I joined Hawaiian in 2014 to oversee our Revenue Management and Network Planning functions. And a couple of months ago, I added our growing Cargo division to my responsibilities. I began my career at American Airlines where I spent nearly 20 years in a variety of revenue management-related roles. From there, I spent some time in the Middle East at Etihad Airways, leading their revenue management team and then found my way here to Hawaiian. We've got a great team here at Hawaiian and I'm proud of what they've accomplished over the past several years. I'll now walk through our revenue performance and outlook. In the first quarter, our system RASM increased 4.9% year-over-year. Strong passenger revenue performance across all geographies, nearly double-digit growth in our value-added revenue per guest, a record first quarter for cargo and an unforecasted profit sharing tailwind from our co-branded credit card punctuated the quarter. PRASM for the period was up 3.7% year-over-year. The earlier Easter holiday benefited first quarter unit revenue by about 1 percentage point. Fuel surcharges in the international markets where they exist increased during the quarter, driving approximately 1 point of system unit revenue growth. Domestic PRASM, which includes our North America and Neighbor Island services, was essentially flat year-over-year, a solid outcome considering this comparison is to a very strong first quarter 2017 that's had double digit gains over the same period in 2016. North America to Hawaii PRASM was down slightly in the quarter. Both yield and load factor performed well in light of the 14% increase in industry capacity in our markets. Neighbor Island PRASM was up in the mid-single-digit range, mostly on load factor gains for the first full quarter following Island Air shut down. This momentum is expected to continue as a year-over-year industry capacity stabilizes over the balance of the year and is more in line with 2016 levels. International PRASM was up 11.9% in the first quarter on strong demand, higher fuel surcharges and nominally more favorable exchange rates. We saw gains in both load factor and average fares despite increased industry capacity in South Korea and select Japan routes. We're also seeing strong demand for our premium cabin product on our international routes with double-digit year-over-year PRASM gains since we introduced the new lie-flat product in the fourth quarter of 2016. As a matter of fact, our first quarter 2018 international front cabin PRASM was nearly 40% higher than the same quarter just two years ago. Excluding a profit-sharing gain from our Barclays partnership, we had another record quarter, with value-add revenue per guest up [indiscernible] percent year-over-year. Our Extra Comfort product continues to perform exceptionally well with our first $7 million month in March, and revenue from our front cabin upgrade products increased significantly, driven by our product optimization efforts. Cargo had an exceptional quarter, delivering record first quarter revenue of $24 million on strong yields and robust demand across all markets, especially from Japan. Overall, a very strong first quarter performance across all lines of the business. Looking ahead to the second quarter, we expect our capacity to be up 5% to 7%. And for the full year, we now expect our capacity to be up between 5% and 8%. This includes some upgauging of what were intended to be A321neo flights to wide bodies, offset by some delays in starting new routes due to later than expected A321 deliveries. Despite tougher year-over-year comparisons and continued elevated industry capacity on our North America routes, we expect year-over-year system RASM to be between flat to up 3% in the second quarter. For our part, we remain focused on realizing the full potential of our revenue initiatives. By mid-May, we'll have completed our final premium cabin modification on the A330s. Once this is done, we'll be able to further monetize this investment. By the end of May, we'll launch another A321neo route where we connect Long Beach with Honolulu. Southern California travelers are showing a strong interest in this convenient alternative to LAX, and we're encouraged by the early booking trends we're seeing. By June, we'll complete the first full quarter under our new partnership with Japan Airlines. While it's still early, codeshare and JALPAK booking trends have been quite strong. Needless to say, we're excited about the potential of this deepening relationship. As Peter said, we've had a lot going on in the business right now. No other airline can boast the service, product, fleet or network tailored for the Hawaii traveler like we can. We're the carrier of choice to Hawaii for a reason, and it underscores the confidence we have going forward. And with that, I'll turn the call over to Shannon.

[Shannon Okinaka:]

Thanks, Brent. To briefly recap our financial performance this quarter, adjusted net income grew to $55.8 million or $1.09 per share, and our adjusted pretax margin was 11%. We also returned more than $26 million to shareholders in the first quarter through $20 million in share repurchases and $6 million in dividends. As I mentioned in our Investor Day in December, growing long-term shareholder value remains a priority. Our record first quarter adjusted EPS reflects our strong revenue performance. In addition, we're focused on improving our cost structure with direct benefits to the bottom line. CASM, excluding fuel and onetime charges, was up 4.3% year-over-year in the first quarter, which was at the better end of our guidance range. A timing shift of planned investments and reductions in maintenance expense stemming from A321neo's fair engine delivery delays as well as savings from negotiated maintenance contracts more than offset higher selling cost associated with our strong revenue performance. We had 2 onetime charges this quarter related to the fleet plans that Peter highlighted earlier. The first was related to the purchase of 3 Boeing 767 aircraft, previously on long-term leases. This acquisition and a related agreement to sell these aircraft later this year are an important component of our plan to retire this fleet as we enter 2019. The second charge was related to the cancellation of our Airbus A330-800 order. Together, the two charges totaled $35.3 million. Our first quarter results also reflect a $4.6 million year-over-year benefit in nonoperating expense from the settlement of our IAM and salaries merged pension plans and partial settlement of our pilot postretirement medical plan, which creates a new runway going forward. Looking ahead, we expect second quarter CASM, excluding fuel and onetime charges, to increase between 4% to 7% from last year. This includes expected headwinds from the following, increased maintenance costs, primarily due to more A330 heavy checks, totaling 2 percentage points; pilot wage and related 401k burden tied to A321neo delays and training that account for a little more than 1.5 percentage points; increased airport rent and landing fees of a little less than 1 percentage point; and increased benefit costs representing about 0.5. We expected a number of moving parts to our cost story of this year. However, this year will be a tale of 2 halves. We expect unit cost in the second half of 2018 to be about flat compared to 2017, and there are a few reasons for this. First, we'll have lapped the increase in pilot hiring associated with our A321neo deliveries preparation and seasonal summer needs. We'll also have fewer heavy maintenance events in the back half of 2018 compared to 2017. And finally, we'll benefit from increased productivity as we deploy the new A321neos. Looking ahead, we'll continue to apply the same level of rigor and diligence to managing our business and driving down controllable costs. We expect our full year CASM excluding fuel and onetime charges to be up 0.5% to 3.5%, which is down slightly from our prior full year guidance, due primarily to the reduction in maintenance expense I mentioned earlier. Keep in mind, second quarter and full year non-fuel unit cost guidance excludes assumptions relating to the amendable contracts with our flight attendants union. And as a reminder, the next of our CDAs to become amendable occurs in 2021. Lastly, our 2018 CapEx remains on target to be between $375 million to $425 million, which is unchanged from our previous guidance. In closing, our outstanding first quarter results underscore our position as a carrier of choice to Hawaii. We're excited for the year ahead. And as Peter mentioned, even though 2018 would be even better were it not for the A321neo deliveries setbacks, we've built a durable business that is primed for success across any competitive landscape. This concludes our prepared remarks and I'll now turn the call back over to Daniel.

[Daniel Wong:]

Thank you, Peter, Shannon and Brent. I'd also like to thank all of you for joining us today and for your continued interest in Hawaiian Holdings. We're now ready questions from the analysts first, and then the media if time permits. As a reminder, please limit yourself to 1 question and if needed, one follow-up question. Operator, please open the line for questions.

[Operator:]

[Operator Instructions]. Our first question comes from Hunter Keay, Wolfe Research.

[Hunter Keay:]

You guys obviously deserve a ton of credit for what you do on the RASM side. There's really no ifs, ands or buts about that. But the CASM performance has really not been good. And I know there's a lot of reasons to why that is, which you laid out. And I realize, Shannon, the back half is going to look better than the front half. But can you give us some line of sight on how you're thinking about CASM beyond this year? The 67s are going to be gone, you should be through the woods largely on neo, you have these productivity things. Can you give us some qualitative sense for how you're thinking about CASM next year and beyond?

[Shannon Okinaka:]

Yes. And yes, thanks for recognizing that the second half is quite different than the first half. We've got a lot of initiatives. We've spent a number of years, quite focused on revenue. And if you could look at some of the investments we've made in systems and people, a lot of it at the beginning part of the decade, was focused on the commercial team and commercial initiatives. And we've got a really good line of sight on costs now. Our cost initiatives are mainly focused in the operations and back-office area, but we're focused on a lot of technology projects that focus on productivity. We're making a lot of investment in continuous improvement resources. So that's where we're looking at for both those changes. Unfortunately, those kind of initiatives take time to implement, time for change management. We're getting some -- what you're seeing maybe a last year or this year, we're getting some benefits from some large contracts that we've been able to renegotiate. But you can't do that if -- you don't get a new contract to renegotiate at every quarter. But those are really the areas that we're focused, is labor, productivity through automation and process change and some of these big contract negotiations.

[Peter Ingram:]

And Hunter, I'd just emphasize that it is a real point of emphasis for us, and it's really part of delivering value to our guests is making sure that we can continue to deliver our product at a competitive price and keeping our costs down. We will get some important benefits as we get to the deliveries of the 321neos in. It's a lower fuel cost, more efficient airplane to operate. And also, the simplicity of getting the 767s retired will be an important benefit that will really be a tailwind for us as we go into 2019.

[Hunter Keay:]

And I put the question the way I did because I'm really just paraphrasing your own words. I believe from your Analyst Day, you guys cited a dissatisfaction with the cost performance. So it's good to see that, but as we think about 2019 CASM, and this is my last question, is it fair to assume that it's going to look similar or better to what it looks like in the back half of '18, holding capacity growth sort of neutral? Is that fair? Is there anything on the horizon? You mentioned labor contracts are done through '21, basically. Was there anything that we should be aware of the terms of modeling '19 so that exit rate of '18 should not look similar?

[Shannon Okinaka:]

Hunter, we get our CASM swings quite heavily with just heavy maintenance checks. So I'd have to look to see the heavy check schedule predictor before I could answer that. But on a -- just running the business, just normal everyday cost perspective, we are working hard and we've had a bunch of investment-type costs this year as well as last year with a lot of the 321 inductions that we wouldn't necessarily see so much -- as much next year. Plus, we have the ASM from actually flying the 321neos. But before I could actually give you anything quantitative, I'd need to check the heavy check schedule.

[Peter Ingram:]

And Hunter, just to clarify one thing in your question, you mentioned the labor contracts. We do have the one that is currently amendable with our flight attendants. The other ones, as you noted, are all buttoned up until 2020.

[Operator:]

Our next question comes from Michael Linenberg, Deutsche Bank.

[Catherine O'Brien:]

It's actually Catie O'Brien filling in for Mike. So first, could you just update us on the competitive capacity outlook for mainline U.S. to Hawaii for the next couple of quarters? I believe on last quarter's call, you called out that that's going to bend down to high single digits from mid-teens in the back half of this year, does that still stand?

[Brent Overbeek:]

Catie, I don't have the numbers right in front of me. I think 2Q is around 12% and it tapers off a little bit more in 3Q, down to kind of high single digits, and then kind of mid- to high single digits published right now in 4Q.

[Catherine O'Brien:]

All right, got it. And then, can you guys give us a little bit more color on how the Neighbor Island market has evolved since the exit of Island Air just maybe in terms of forward bookings for next quarter? Should we expect to see a ramp there in RASM? And then also, any chance you could give us in terms of the delta on margins from the period when Island Air was ramping up to what you're seeing now that they've exited or maybe before they entered the market be better comp?

[Peter Ingram:]

Yes. Maybe I'll start on that one and then turn it over to Brent for a little bit more detail. First of all, I would say, the long-term booking trends are a little bit different to glean because this is the part of our network that does have a tighter end booking profile, so we really don't have a lot on the books beyond the quarter that we're in right now. That said, I think the market from our perspective in the Neighbor Islands, looks a little bit more like 2016 than it does 2017. We've increased some of our capacity to replace what Island Air no longer has in the market, but we've been able to absorb that capacity with higher load factors year-over-year while keeping our prices in the local market relatively stable and producing, therefore, a better, more positive result in terms of RASM. We don't comment on the profitability of any of our parts of the network. Our view over time is that each of the parts of the network will have different competitive situations and environments, and they all need to produce on their own merit. And maybe Brent, if you want to add anything to that.

[Brent Overbeek:]

No. I think Peter hit the nail on the head. I think we're encouraged with the performance in 1Q. The comps year-over-year move around a little bit as we move from quarter-to-quarter, and I think there was a bit more industry capacity in the second quarter of last year, so the comps will change a little bit more favorably in that. But again, we're managing this for the long-term and we're encouraged with how performance looks.

[Peter Ingram:]

And just one other thing I would say in terms of how we're managing the market is, we've been careful about adding capacity to make sure we are properly serving peak periods, particularly around holidays. We've got Memorial day coming up, we've got some extra flights scheduled for Memorial day. We did similar things around Easter. So making sure that we are adequately serving the market and appropriately serving the market throughout the year as demand ebbs and flows with certain seasonality.

[Operator:]

Our next question comes from Adam Hackel, Imperial Capital.

[Adam Hackel:]

Obviously, even with the results you guys are putting up, we obviously have a competitive dynamic on the West Coast industry and particularly in California. And obviously, a lot of that kind of revolves around frequent flyers and mileage programs and things like that. I'm wondering, what does your frequent flyer look like? What are the sort of demographics behind your typical frequent flyer and how does that compare to some of the other guys in the industry?

[Peter Ingram:]

Yes. I'd say that one of the things that's interesting about our loyalty program, the Hawaiian Miles program, is that we've actually got more members on the U.S. mainland than we do in Hawaii, which some people find surprising. But obviously, we are a smaller share of a much, much larger population base on the West Coast mainland in particular than Hawaii, where we have very, very deep penetration of a smaller population. I think our members are more infrequent travelers, particularly the mainland members are more infrequent travelers than you would think of as loyalty members of some of the bigger airlines. But typically, they have a very strong affinity for Hawaii and travel to Hawaii and that's why things like our credit card program are really, really important for us because the credit card program gives people the opportunity to earn miles even when they're traveling infrequently and use those miles as an alternative form of currency to buy their travel to Hawaii. So we've got great engagement and the credit card program is an absolutely integral part of our overall offering to consumers.

[Adam Hackel:]

Great. And just the last one, a quick one for me. Just you talked about Long Beach and it sounds like it's off to a pretty good start. Is there sort of a deeper long-term potential that obviously, you guys are tied in pretty well with JetBlue and they have a -- they sort of named that as one of their focus cities. I mean, what's sort of the potential there? Is there much more you can do and is there anything you can do with JetBlue? Or would you have to even start thinking about like an antitrust immunity type of thing for that even sort of growth beyond what you guys can do organically?

[Peter Ingram:]

Yes. With regards to Long Beach in particular, most of our focus and the timing of our flight is suited to the local markets. So there may be some limited connectivity opportunities and we certainly will pursue them as they exist. But most of our focus is going to be attracting the local market to the south of the Los Angeles airport. Longer-term, we have a great relationship with JetBlue. It's been very helpful and in particular, for our New York service. And I think we would look -- we're always looking for opportunities to work more closely with them to the benefit of all of our customers.

[Operator:]

Our next question comes from Andrew Didora, Bank of America Merrill Lynch.

[Andrew Didora:]

I guess, Peter, Brent, very impressive RASM results here. And particularly, I thought on the international side, 12% growth, very solid. I understand the FX perspective. What else is really driving this? Maybe you can give us a sense of how much the fuel surcharges helped and how maybe we should think about them going forward in terms of future impact on RASM.

[Peter Ingram:]

So fuel surcharges at the system-level were about 1 point -- just under 1 point of benefit. They will continue to fluctuate. Kind of as we go forward, I think you've got to base, particularly in Japan, that moved around a bit in 2017 and so, those comps will oscillate as we work our way through the year. But in terms of overall performance, I mean, that was a small portion of it. Like I mentioned though, Premium Cabin performance was very, very strong. We continued to execute very well in Australia and New Zealand, and our traffic from Japan did very well. And frankly, we had some markets that had inflated or had increases in year-over-year competition and we performed very well in those markets as well. So a really kind of strength across the business driving that.

[Andrew Didora:]

Got it. And maybe sticking on the fuel topic. Shannon, with the move in crude since January, it looks like your full year fuel hedge gain went from $13.5 million to $19 million on sort of a $3 moving crude based on your disclosures. Is there any guidance you can give us kind of on your hedge book per, I don't know, for each $1 move in crude or is it not as linear as that?

[Shannon Okinaka:]

Let me think. I think you might have a sensitivity but I don't have it at the top of my head. But our program remains the same, Andrew. We are buying out of the money call options. About 1 year out, we buy about 15% more each quarter as we head in. So as we go into any quarter, we're about 60% hedged. I don't have in hand, the detailed numbers in front of me to be able to give you an idea, but we really haven't changed the program. I mean, for us, we consider the hedging program more of an insurance policy. We're not doing it to actively trade or try and make assumptions about the market. So I'll follow-up with you when I have some numbers in front of me. I'm sorry, I don't have anything quantitative right now.

[Andrew Didora:]

Okay, that's fine. We can follow up off-line. And then just one last more of a housekeeping question. But your other non-op line came in positive in 1Q but I thought pension costs were running through there at about $4 million to $5 million a quarter. Is 1Q a good run rate for that or was there something one-off in that line?

[Shannon Okinaka:]

Yes. That line also includes the translation of our foreign currency balance sheet account, so our cash accounts in foreign currencies. So that line includes the pension fees but also some other things. So that foreign translation of the balance sheet piece moves up and down every quarter.

[Operator:]

Our next question comes from Helane Becker, Cowen and Company.

[Helane Becker:]

Can I ask that FX question differently? Can you say the 12% increase, I guess, in international, what percent is attributable to FX? And then what percent in the guidance for the second quarter would be attributable to FX gains or losses?

[Peter Ingram:]

Yes, Helane, I think we were looking at the fuel surcharge and forex impact on a system RASM basis. So we'll have to go get that one, but I think if you think about it, international runs about 25% of our overall passenger revenue.

[Helane Becker:]

Okay, so that's helpful. And then my other question is, on the credit card extension, did that come with -- maybe that's the wrong way to phrase it, with additional revenue associated there that we should think about?

[Brent Overbeek:]

Yes, there are improvements in the economics. On a steady-state basis, if we ran like we were doing, we would see something probably mid-double digits improvement in our revenue associated with the new deal. And we've also, as I said, we've rolled some of the economics into some enhancements that we have to the consumer offering, which we'll be rolling out in the periods ahead. Those revenue benefits we have will actually give us a bit of a boost, a bigger boost in terms of the overall profitability of the program because it sort of flows more directly to the bottom line. And then I would say, the impact of that was relatively limited in the first quarter. I think we signed the deal on the 9th of March and so, it's only for the last few weeks of the quarter that we recognize the benefits in this period. So you will see improvements in the economics going forward, and that's built-in to our overall revenue guidance.

[Helane Becker:]

Okay. Can I just ask, what do you mean by mid-double digits? So are you saying like 50%?

[Peter Ingram:]

Yes. Plus or minus 15%. Yes.

[Helane Becker:]

1.5 or 5.0?

[Peter Ingram:]

1 5. No, sorry. No I don't want to be confusing. Now we're excited about it, we're not that excited about it, Helane.

[Helane Becker:]

Well, that's right. That's why I wanted to clarify that number. And then my other question is on cargo. Brent, you are in charge of cargo. Are you seeing -- is cargo revenues meeting your expectations on the new aircraft? And how is that going?

[Brent Overbeek:]

Yes. So cargo had a -- this is an interesting year for cargo. We got off to a great start in 1Q. Like I said, really strong demand, particularly international point of origin and especially out of Japan, so kind of exceeding our initial expectations there. Well, it's an interesting transition year. We'll bring on the cargo freighters later this year and we're excited about that business as well as done a lot of planning for the transition of the 767s out of the fleet and how do we make best use of the limited belly space for cargo on the A321 fleet. So an exciting year for transition and opportunity for the business.

[Operator:]

Our next question comes from Dan McKenzie, Buckingham Research Group.

[Daniel McKenzie:]

And Brent, don't go anywhere. Leave it to me to pick on the new guy, so apologies here, your first time up to bat with the questions. But thanks for the detailed breakout of the revenue performance. I'm wondering if you can recast it slightly differently and just more simply. I'm wondering, just ballpark here, what percent of the volume was RASM positive versus the percent that was RASM negative in the first quarter. And I guess, what I'm trying to understand, is the breakout sort of 25 RASM negative, 75 RASM positive or is it perhaps more balanced?

[Brent Overbeek:]

Yes. I don't have it at my fingertips, Dan. But I would say, it was probably 50-50. Yes. Probably a little better, I would say. Yes, actually probably in the 60-40 range was positive. Yes, 60-65.

[Daniel McKenzie:]

Okay. And then just given the fleet changes, how did the growth in premium seats pace throughout the year? So growth in premium seats versus this summer versus last summer and how does that growth compare versus the first quarter?

[Brent Overbeek:]

It'll generally be in line with our overall capacity growth throughout the year. It might be slightly higher as we take on the 321s, they have a slightly higher proportion of premium seats. And so we've guided the capacity growth for the year in the 5% to 8% range. I would say, our front cabin is going to be slightly higher than that in terms of capacity growth.

[Peter Ingram:]

And Brent cast that in terms of the front cabin. I would also say that in terms of our Extra Comfort seating with the 321s rolling on, we'll have a greater proportion of those. The 767s that are retiring don't have the Extra Comfort products. So that'll -- we'll be dialing up our seating in that part of the airplane as well.

[Daniel McKenzie:]

Yes, that's actually where I was trying to get at. Is Extra Comfort and then the lie-flat together, does that change the growth trajectory?

[Brent Overbeek:]

It does. I mean, yes. I mean, Extra Comfort really accelerates as we continue to work our way through the year. Having 44 Extra Comfort seats on the 321 will accelerate a fair amount into 2Q and then we'll really see the growth rates for that in 3Q and 4Q be even greater.

[Daniel McKenzie:]

Okay, good. That was what I was trying to clarify. And then I guess, Brent, one last one here if I could squeeze it in. Just with respect to the JALPAK, what kind of revenue benefit have you embedded into the second quarter outlook? And on the one hand, the fact that it's is being called out suggests that it could be material. And on the other hand, it seems though it's just hard to know if you're factoring in anything at all at this point. I'm just wondering what kind of perspective you can share here.

[Brent Overbeek:]

Yes. We haven't been explicit in including any specified amount. We are encouraged with the volumes that we've got going, given that the product is really in their -- is in its infancy, and it's the first time that JALPAK has gone out and done this with a partner. So we've included in our base forecast in terms of how we look at 2Q and our optimism around the international side of the business continuing into 2Q, but we haven't called out a specific number.

[Operator:]

Our next question comes from Steve O'Hara, Sidoti.

[Stephen O'Hara:]

Just if you could kind of talk about what relative to your expectations maybe at the beginning of the quarter, what came in kind of in line and maybe what was better, what was worse? And then I was just curious about the JAL agreement, where that stands. I mean, I don't think there is a real firm time line but has there been any changes in the time line that maybe was articulated or wasn't.

[Peter Ingram:]

Yes. So on performance during the quarter, I would say, international stood out as performing ahead of the expectations we had at the beginning of the year. Cargo was also strong relative to the beginning of the year. I would say, nothing really performed worse. So there weren't really in offsets and those were probably the two biggest pieces on the upside. And then we did have, as Brent mentioned in the prepared remarks, the unforecasted benefit of a payment for profit sharing from our co-brand card program that was another boost to revenue as the quarter came to a close. In terms of the timing of the JAL deal, we're right on track where we intended to be. I'm really impressed candidly that we got the codeshare up and running and that we have completed and signed a joint venture agreement that is subject to all the regulatory approvals. It took an incredible effort from a lot of people on our team and a lot of people on JAL's team. And we really thought that, that was a very ambitious goal to get that done on the timeline that we set out. And we hit absolutely every deadline along the way, so real credit all around for that. We intend to pursue the next step which is filing for antitrust immunity in the second quarter and I expect that to -- I expect that when we're talking to you at the end of the quarter, we'll tell you that that's already done and we'll be waiting to hear some feedback from regulators on both sides of the Pacific.

[Stephen O'Hara:]

Okay. And then just to follow up the guidance. Just on the ex-fuel unit cost for 2Q. Could you just -- what's the actual metric that we should be comping to for 2Q? And I assume total RASM's the same just because there's kind of movement within the revenue categories but not revenue overall, does that make sense?

[Shannon Okinaka:]

Let me take you to RASM first. As I flip through my binder to find the 2Q '17 comp. RASM -- first of all, Steve, are you referring to all of the restatements because of the accounting for rev rec?

[Stephen O'Hara:]

Yes.

[Shannon Okinaka:]

Okay. So RASM does have a change because, yes, there are some reclassification and that's just movement on the income statement. But the revenue recognition changed the way we account for the frequent flyer earned miles and that did take revenue out.

[Peter Ingram:]

Shifted to different time periods.

[Shannon Okinaka:]

Yes. And shifted it to different time periods and that's why you saw a big change in equity as well as of 1-1 '18. And I'm waiting for Daniel to put something in front of me with the restated numbers. Okay. So the first quarter of 2017 restated, the CASM, excluding aircraft fuel and special items was $0.0933.

[Stephen O'Hara:]

Okay, 1Q?

[Shannon Okinaka:]

Yes that's -- oh I'm sorry, yes, that was 1Q. Second CASM ex-fuel and special items was $0.0899 for 2017. And second quarter 2017 RASM was $0.1415 for the second quarter restated.

[Peter Ingram:]

And we recognize all of you guys are having to swing around your models in conjunction with the changes in GAAP that Hawaiian and other carriers have implemented this year. We've tried to provide a lot of detail on how those restatements flow out through the year and they're in some filings that we've made in terms of 8Ks and we've put it in our press release. But certainly, don't hesitate to reach out to the team offline if there's some confusion about any of the numbers we've got out there.

[Operator:]

Our next question comes from Joseph DeNardi, Stifel.

[Joseph DeNardi:]

Peter, just on the new card agreement. I was wondering if you could just provide a little bit more specificity in terms of what that's contributing. Can you just give us what the incremental revenue you're expecting in '18 is, or 15% on top of what? Just so we have a better sense of kind of what that's meaning for you guys this year. And then just on top of that, what gave you guys confidence that you could get optimal economics without going through the RFP that -- just doing an extension was the right way to do it?

[Peter Ingram:]

Yes. Let me start with the second part and then maybe come back to the first part. We went through a very rigorous RFP process that led to our agreement with Barclaycard and MasterCard and Bank of Hawaii in 2014. And I think that gave us some confidence that while the market has continued to move since then, we didn't feel that we were way off market. We worked closely in areas like this with people who are in the industry and in and around the deals in the industry all the time, and made sure we got as much insight as we could from them as we did this. One of the things that shaped that decision is on the one hand, you may be able to squeeze a little bit more in terms of economics by going to market. On the other hand, as we learned in the transition from 2013 to 2014, you have to weigh that against the cost of shifting to a different partnership which we did at that period of time. And that was -- that led a 2013 that candidly saw us not aggressively marketing the card us much as we would have liked. Our relationship with the team at Barclaycard has been great. We've seen good growth and we have a lot of confidence that this is the right team to go forward with. And I think we have confidence that we have achieved appropriate economics for what is available in the marketplace on this deal overall. In terms of how that revenue translates, sort of what a number is, I think, Joe, I'll give you a bit of a range, but I would say something in the $30 million to $40 million of revenue in terms of cash to us is what you would get. I would point out that Frequent Flyer accounting remains even with the new rules, one of the most complicated parts of revenue recognition. And so $30 million to $40 million of cash flow does not equate to $30 million to $40 million necessarily flowing through the income statement in this particular year.

[Joseph DeNardi:]

Got it. That's helpful. And maybe just a follow-up for Brent. I realize maybe you're kind of shooting off the hip a little bit in response to Dan's question about how much of your RASM is positive versus negative. But 40% being negative sounds like much, much higher than I would have thought it was. Is that a good number or was that kind of your best guess at this point?

[Brent Overbeek:]

That was a bit from the hip. And I would say of the stuff that was negative, I would say we had a bit of it that was kind of slightly negative. And so I'm concluding stuff that's capacity, stuff that was down 1% included in that. So I think overall, yes, probably 2/3, 1/3 is probably the more appropriate.

[Peter Ingram:]

The way I think about it, Joe, is you've got Neighbor Island and international that's about half our revenue, which were sort of broadly positive. Doesn't mean every single route in there was positive, but you're broadly positive on half. And then you have North America, which Brent said was slightly negative, which slightly means just a little bit below flat. So I think that's where you get into those 1% that Brent is referring to.

[Operator:]

Over next question comes from Rajeev Lalwani, Morgan Stanley.

[Rajeev Lalwani:]

Shannon, actually, just a couple of quick questions for you. First, there's obviously been a lot going on with fleet. Can you provide us maybe an updated view on capital expenditures for the next few years and how that's looking versus the prior target?

[Shannon Okinaka:]

Great. So over the next few years, let me think. The only changes, I think from -- I don't think we've guided out very far but the changes that we've had are going to be the 787 PDPs. But other than that, I'm kind of looking around the room, I don't think we had any other really big CapEx -- or changes in our CapEx plan.

[Brent Overbeek:]

We have the 787 PDPs but we also would have the A330-800s that were in our commitment schedule disclosures previously.

[Shannon Okinaka:]

Right, so that would come out. Other than that, we -- for the most part, I think now we've finalized all of our plans for the 767 exits and the transactions you would see is a lease return, I think a retirement and then we have the forward sale of three 767s later in the year. But those are all -- the plans are all baked and contracted and executed. But yes, looking at our CapEx plans, I think the only change is related to 787s and we'll continue all of our IT investments at probably about the same rate that we've been doing for the past couple of years. That's been pretty steady.

[Rajeev Lalwani:]

Maybe the other way to approach is that $400 million or so that you're spending this year, does that hold steady going forward or are we sort of peaking this year and that's coming down as we move ahead, net of everything that you just described?

[Shannon Okinaka:]

It does fluctuate because if you think about just our deliveries, we have 6 321neos planned for 2019 and 1 for 2020. And we haven't finalized a 787 delivery schedule but that's most likely starting around '21. So just from an aircraft delivery perspective, we've got some differences in the next few years.

[Rajeev Lalwani:]

Got it. And then can you just remind me on the CASM side, what the impact is associated with just pushing out some of the A320neos, and then having to have the 767s, et cetera, this year?

[Shannon Okinaka:]

So on the 767 piece, the additional costs that we're incurring because of the NEO delay is an extra heavy check on the 767. We were planning to retire one of our 767s and brought it back to life through a heavy check that we weren't planning. But that's offset by some, I guess, penalty compensation for the spare engine, the unavailability of the spare engine. So that is somewhat offsetting but we also have a bunch of costs and I want to say it's about a 0.5-ish of pilot-related cost. We brought in a lot of pilots. We're in the process of training them and now, they're unable to fly because we don't have the A321neos that we thought we'd have. And the wait part of that was some of the benefits burden related to that. So that's, for the most part, the 321neo and the big cost drivers in the 321neo delays is a lot of it's just people and then that maintenance, that heavy check on the 767s.

[Operator:]

Our next question comes from Kevin Crissey, Citigroup.

[Kevin Crissey:]

When I think about the West Coast to Hawaii as it relates to your competitors, can you talk about the percentage of your Frequent Flyer redemption maybe on board and whether you have any sense that their incremental capacity would have the same or different percentage of frequent flyer redemption?

[Peter Ingram:]

So I'll start and then see if Brent wants to chime in with anything else. We have -- we're obviously not precisely able to see exactly what the frequent flyer redemption percentage is on our competitors. But we can glean some insights from looking into the DOT data and seeing what proportion of tickets on a lag basis have a $0 associated with them. And the last time I reviewed those numbers, it was something in the low- to mid-teens, was about the area where frequent flyer redemptions were for competitors, and there's some variation across them. In terms of whether their incremental capacity is driving that percentage higher or lower, I don't have a firm view. And I think we will see that over time as we look in the data in the DOT. But it's going to be about 1 year before we are able to get enough information to really draw any conclusions on that.

[Kevin Crissey:]

Okay. I'm just trying to assess to the extent to which they're entering the markets is entirely profit-motivated due to those specific routes or they're trying to create a network effect to maybe offset some West Coast competition. If you have any thoughts on that, I'd appreciate it.

[Peter Ingram:]

Yes. That may be a better questions for one of their earnings calls than ours.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Peter Ingram for closing remarks.

[Peter Ingram:]

Mahalo for joining us today. We're off to a great start in 2018 and have great optimism about the remainder of the year. We look forward to speaking to you again on our second quarter call. Aloha.

[Operator:]

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