Hawaiian Holdings, Inc.
Q4 2018 Earnings Call Transcript

Published: 30 Jan 2019

[Operator:]

Greetings and welcome to Hawaiian Holdings Inc. Fourth Quarter and Full Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Daniel Wong, Senior Director, Investor Relations. Thank you. You may begin.

[Daniel Wong:]

Thank you, Sherri. Mahalo everyone and welcome to Hawaiian Holdings Fourth Quarter and Full Year 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. 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 cost performance and outlook. We will 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 o'clock 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 in our press release or 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. This includes the most recent annual report filed on Form 10-K as well as subsequent reports filed on Forms 10-Q and 8-K. And with that, I will turn the call over to Peter.

[Peter Ingram:]

Hello, Daniel. Aloha, everyone, happy new year and thank you for joining us today. We had quite an eventful year in 2018. Through it all, our team has done an incredible job taking care of our guests and as we total up the financial results for the year, adjusted net income of $275 million, adjusted earnings per share of $5.44, and adjusted pre-tax margin of 12.6% and more than $126 million returned to shareholders standout as highlights. Given the increased competitive capacity we faced entering 2018 and higher fuel prices through much of the year, I am not sure many expected us to be able to deliver results like this and remain in the top tier of the industry from a profit margin perspective. Thanks for this goes to the 7,200 people with whom I have the honor of working everyday at Hawaiian. Their tireless effort, selfless dedication and passion for this company, is truly inspiring. I could not be prouder of what they continue to achieve everyday. I spent time on each of earnings calls in 2018 speaking to the headlines of the moment. The competitive capacity growth, weather events and aircraft delivery delays were top of mind at various points throughout the year, but we shouldn’t lose sight of the fact that our team once again delivered in spite of the obstacles that came their way. We also produced strong operational results. We carried a record 11.8 million passengers in 2018, our 14th straight year of passenger growth and we did this while leading all U.S. carriers and on-time performance through October 2018, the period most recently reported by the DoT. We expect to remain on top when the full year’s tally is complete, which will mark our 15th straight year of leading all U.S. carriers and punctuality. On top of this, we delivered on our key priorities for 2018. In early January 2019, we flew our final 767 flight. With 11 A321neos now in our fleet and 7 more to come, we are well underway on a multiyear fleet transition that unlocks new opportunities for our route network. Back in March, we selected the Boeing 787-9 as a flagship to aircraft for our future and the preparations for its arrival in early 2021 are right on track. We extended our partnership with Barclays, Bank of Hawaii and MasterCard for our co-brand credit card and enhance the customer value proposition for this product. Finally, we launched successful partnership with Japan Airlines, which we will build upon even further once we receive approval for our anti-trust immunized joint venture from U.S. and Japanese authorities. On our second quarter 2018 earnings call, I remarked how the year was shaping up like a road with more curves than straightaways. And while that certainly remained the case throughout the year, the fact is over the past several years, we have developed great resilience here at Hawaiian to see us through these kinds of challenges. Let me expand on that for a bit. We knew that 2018 would arrive with more competition, but we also know the competition makes us stronger and that our formula is a winning one. In 2018, we generated 52% of our passenger revenue between North America and Hawaii. In this geography, industry capacity increased nearly 11%. Unsurprisingly, this created a difficult environment to generate revenue growth. Nonetheless, for the time periods that we have competitive data from the DoT, we have not only held on to our revenue premium, but we have grown it. And as we sit here today, we are still talking about posting the second highest pre-tax margin in the industry for the full year. People ask me why I remain steadfast in my confidence about our prospects in the face of potential future competition. We have become the carrier of choice to, from and between the islands of Hawaii by relentlessly focusing on delivering authentic Hawaiian hospitality to our guests and executing our specific network missions better than any of our competitors. This is what we will continue to do and we expect to continue to be successful. As we look at our business in 2019, we are focused on a number of priorities that we believe will bring value to our customers, our employees and our shareholders. The first is building on our successful history of delivering products that our guests value. In 2019, this will include introducing new service to Boston starting in April and introducing main cabin basic to expand the range of options available to our guests later in the year. Second is making it easier for our guests to navigate the complexities of modern air travel. Most visibly, this will include investments in airport facilities and digital interaction channels, areas where we know we have room for improvement. Behind the scenes, it also includes investments in tools and practices that will improve our ability to deliver more efficiently the authentic Hawaiian hospitality that has become synonymous with Hawaiian Airlines. Third is improving our cost structure. Strong cost discipline and high productivity is critical to our long-term success. It’s an important part of delivering value to our guests as well as our shareholders while ensuring we maintain our competitive edge. Fourth and finally is building a foundation for the future. This pulls together the priorities I listed in a way that ensures the improvements we are making in the business are sustainable for the long-term. This also means ensuring we position ourselves to grow more efficiently going forward, so we can continue to deliver value to our guests, our employees and our shareholders. Our success in 2018 reinforces my confidence that the Hawaiian Airlines team is positioned for even greater things in 2019 and beyond. Our employees will continue to deliver authentic Hawaiian hospitality unmatched by any of our competitors. Our fleet is better positioned than ever with fuel-efficient aircraft ideally suited to our network missions. This in turn opens up new network opportunities in North America just as our partnership with JAL will open new opportunities in Japan. Our team is ready for 2019 and I am sure they will continue to deliver results. And now, I will turn the call over to Brent to talk about our revenue in more detail.

[Brent Overbeek:]

Thanks, Peter and aloha, everyone. Total revenues for the fourth quarter grew more than 2% year-over-year to a record $697 million. Fourth quarter RASM was down 3.3% year-over-year on capacity growth of 5.6%. These results reflect about 130 basis points of benefit from fuel surcharges and foreign currency in the quarter. Our results came in a bit better than the midpoint of our final guidance revision as yields came in a bit stronger on international routes as did holiday traffic in North America. Turning to each geography, domestic PRASM was down 7.6% year-over-year in the fourth quarter with challenges for both North America and Neighbor Island routes. An increase in domestic stage length also impacted the overall decline as a result of each of the North America and Neighbor Island entities was more than a point better than the collective total. The fourth quarter represented the high point of our capacity growth in North America with Hawaiian capacity increasing nearly 11% year-over-year due to the timing of our A320neo deliveries. For the full year, our fleet transition enabled us to grow North American capacity by more than 9% year-over-year and launch year round service to 4 new markets. As we have previously discussed, the competitive pricing environment in the North American market remained challenging on a year-over-year basis as we worked our way through the latter half of the year. Not surprisingly, declines in main cabin average fares had the most material impact on this entity’s results. On our Neighbor Island network, we continue to see demand softness, most notably for Hawaii Island and in response we have trimmed capacity on our Neighbor Island network and now forecast first quarter 2019 Neighbor Island year-over-year capacity to be down roughly 6%. We have also been increasing our marketing and promotional activities to support the weaker conditions. And overall, we will continue to evaluate the market and respond accordingly. Our international routes continued their strong performance. International PRASM was up 3.3% year-over-year in the fourth quarter. This was the 10th consecutive quarter of year-over-year PRASM improvement for this geography. Business class PRASM continued to perform well, especially in Japan and Korea, where we saw year-over-year business class PRASM increases in the high-teens. However, currency and softer market conditions in Australia pulled the entity results down a bit. Shifting to our value-added products, fourth quarter was another record setting period for Extra Comfort product, which produced $23 million in revenue, up 31% year-over-year. Revenue from sales of miles was also strong reflecting our new Barclays agreement, improving nearly 40% year-over-year. Finally, our cargo team capped a record year eclipsing $100 million in annual revenue for the first time. Consistent with the industry trends, our cargo revenue growth slowed sequentially and was down a bit more than 2% year-over-year in the fourth quarter and a slight reduction in freight volume. The replacement of some of our wide-body flying with A321neos, the suspension of our Beijing route, and slightly softer volume from our international business led to the slight decline. Despite the softer fourth quarter, we closed the year with revenue up nearly 10%. Reflecting back on our performance for the full year, system revenue came in at $2.8 billion, up 6% year-over-year. 2018 system RASM was flat year-over-year, matching a record-setting performance in 2017. We accomplished this despite significant industry capacity increases, most notably in North America, Osaka and New Zealand as well as the other challenges Peter referenced in his opening remarks. Our investments in the Front Cabin and Extra Comfort continue to reap dividends. Full year front cabin PRASM outperformed the Main Cabin by roughly 7 points and Extra Comfort had another great year, growing revenue by 33% year-over-year. With 2018 in the books, our attention is squarely on 2019. I will start with capacity. We expect our capacity to be up between 1.5% and 3% year-over-year in the first quarter and between 1.5% and 4.5% year-over-year for the full year 2019. As I mentioned at our Investor Day last month, our 2019 capacity growth is more in line with our historical average over the latter part of the decade. From a product perspective, the large majority of our 2019 capacity growth will come from Extra Comfort as product inventory grows with each A321 delivery. We expect first quarter RASM to be down 3% to 6% year-over-year, which includes a couple of notable headwinds. First, we have a difficult comparison with the first quarter of 2018 that benefited from strong performance, a favorable Easter calendar and a profit-sharing payment from our co-branded credit card. Second, industry pricing pressure on our North America routes that I mentioned earlier will continue to pressure yields in the quarter that has traditionally been our seasonal trough period. That said we are still quite positive about 2019 and ready to compete and win regardless of the environment. Underlying demand for the Hawaii vacation remains solid, our product investments are paying off and our fleet and network optimization efforts are positioning us well for the future. Later in 2019, we expect to start realizing the benefits of our JAL joint venture, pending regulatory approval and we will also add Main Cabin Basic to our product portfolio. Overall, there is a lot to be optimistic about. And with that, I will now turn the call over to Shannon.

[Shannon Okinaka:]

Thanks, Brent. Happy New Year everyone and thank you for joining us today. As Peter noted, we delivered a 12.6% adjusted pre-tax margin and an adjusted EPS of $5.44 in the face of significant competitive capacity increases, aircraft delivery delays and numerous weather events. Some of these were expected at the beginning of the year, but many were not. In the fourth quarter, we rounded out our year with adjusted net income of $49 million or $1 per share and adjusted pre-tax margin of 9.3%. In addition to generating profit margins in the top tier of the industry, since 2015, we have bought back more than 7.4 million shares of our common stock and including the 10.9 million shares we avoided issuing through the buyback of our convertible note, we have reduced our shares outstanding by about 27%. And as Peter mentioned earlier, we returned more than $126 million to shareholders in 2018 through $102 million in share repurchases and $24 million in dividends. Our announcement of a new $100 million share repurchase program authorized through December 2020 underscores the confidence that we have in our business and our people and reaffirms our commitment to growing long-term shareholder value. As discussed at Investor Day, cost control is at top of mind. Technology, labor productivity and process efficiency are the key levers we will utilize to bend the cost curve and we will always focus on ensuring we get good returns on our investments in the business. Our fourth quarter and full year 2018 CASM ex-fuel and special items were in line with the guidance that we provided earlier in the month. Fourth quarter CASM ex-fuel declined 1.9% year-over-year and for the full year was up 1.8%, which is consistent with the expectations we laid out in April after adjusting our plans for A321neo delivery delays. We delivered on the expectation we laid out in early 2018 that the back half of the year would show improved cost performance. Similar to 2018, our 2019 non-fuel unit cost story will have a number of moving parts. Compared to 2018, we expect full year 2019 CASM ex-fuel and special items to be in the range of flat to up 3% and we expect the first quarter to be up 1% to 4% year-over-year. Note that the year-over-year changes in 2019 CASM ex-fuel and special items will not be steady throughout the year due to the timing of ASM growth, the impact of our fleet transition and the differing maintenance costs for each fleet type, the timing of non-recurring A321neo maintenance-related credits received in 2018, and the timing of cost savings initiatives that we expect to realize during the year. Consistent with how we have previously guided CASM ex-fuel, these ranges exclude any assumptions relating to the amendable contract with our Flight Attendants Union. Notable cost headwinds for the first quarter as compared to 2018 include maintenance costs, which drive 0.5 point of the year-over-year increase; wages and benefits, which drive about 1 point due to contractual rate increases for various labor groups as well as labor costs related to our investments in technology; and about 0.5 point due to our freighter business, which has contributed to our cargo success, but does not generate related ASMs. Our non-fuel unit cost trajectory is moving in the right direction. At the midpoint of the range, our full year 2019 guidance is the lowest year-over-year cost growth we will have delivered in the last 5 years. As we focus on cost control, we are continuing to invest in the business. Our investments include technology to support revenue generating initiatives, such as Main Cabin Basic as well as initiatives to enhance the guest experience, which simultaneously allow us to improve our efficiency. For example, facilities improvements at our airports and enhancing our self-service capabilities will increase labor productivity while providing a better experience for our guests. Our new Mainland Technology Center and our JAL partnership are other examples of 2019 investments that we are confident will deliver long-term value to our guests, employees and our shareholders. We have a track record of delivering returns on invested capital that far exceed our cost of capital and we expect 2019’s investments to continue that success. While we normally focus on CASM ex-fuel, this particular metric ignores the benefit we expect to see in what has historically been the first or second largest expense line on our income statement, aircraft fuel. Holding 2019 fuel rate steady with what we saw in 2018, nearly all of our 2019 unit cost pressures are offset by fuel efficiency gains we will see from transitioning from 767s to A321neos. Now, turning to other notable points in our 2019 outlook, we expect our full year 2019 CapEx to be in the range of $380 million to $430 million. This includes taking delivery of 6 new A321neos in 2019, which will bring our A321neo fleet to 17 aircraft. And it also includes 787-9 pre-delivery payments as well as non-aircraft investments, mainly in facilities and technology. The current forward fuel curve shows a year-over-year decline in 2019. At current rates, we expect our 2019 fuel hedges to settle at a loss of just under $7 million using the curve as of January 18. This compares to 2018 gain of nearly $26 million. Consistent with past practice, we have hedged about 45% of our projected fuel consumption for 2019. Lastly, we expect our effective tax rate in 2019 to be between 25% and 27%. In closing, I am encouraged with our performance in 2018. We returned record amounts of cash to our shareholders. We are continuing to invest in the business and expect our track record of generating strong returns to continue unabated. We have a management team committed to improving our cost competitiveness and we are building a foundation that will allow us to grow more efficiently in the future. This concludes our prepared remarks. And I will now turn the call back over to Daniel.

[Daniel Wong:]

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

[Operator:]

Thank you. [Operator Instructions] Our first question is from Hunter Keay with Wolfe Research. Please proceed with your question.

[Hunter Keay:]

Hi, everybody. Thanks for getting me on. Peter, what is your long-term philosophy on the importance of market share?

[Peter Ingram:]

Market share is not one of the metrics that we use as a guiding principle for the business. We certainly are aware of what our market share is and it can be a reference point for relevance in the market. But I look at market share in some ways as more of an outcome than something that you need a philosophy for. And if you are positioned as a strong competitor, you are superior at generating revenue, you have a more competitive cost structure then inherently you will be more successful and that will tend to equate to being able to grow your market share over time.

[Hunter Keay:]

Got it. Thank you for that. And then what’s been the response to the Main Cabin Basic announcement from the travel agency community and how are you planning on selling that through JAL pack? Thank you.

[Peter Ingram:]

So I think that our focus with Main Cabin Basic is North America initially as we announced that, that’s where we are initially going to roll it out. And in North America, of course, more of our focus is on direct channels, one. And two, I would say there is a familiarity with the concept of Main Cabin Basic, because most of our – all of our competitors to Hawaii have it and most of the competitors within the U.S. are using it. So it is something that people are familiar with. We haven’t at this point envisioned we have thought internally, but we haven’t really gone forward with thinking about where that product would sit internationally or in the Neighbor Island geography. That is something that we will certainly look at over the long-term, but we understand that both of those places are a little bit different. And the way we apply the principles of Main Cabin Basic to those are likely going to be different than how we apply it in North America where the ground is largely tilled already by others.

[Hunter Keay:]

Okay. Thanks, everybody. Appreciate it.

[Operator:]

Our next question is from Susan Donofrio with Macquarie. Please proceed with your question.

[Susan Donofrio:]

Hi, everyone. So the question I have is related to Japan. Could you just expand on what is going on in that market? It does look like you have had little bit of a pull down by Air Asia, Asiana, but it does look like some other competitors are increasing. So could you just talk a little bit about what’s going on there from a competitive standpoint?

[Peter Ingram:]

Yes. There are some moving pieces. Maybe I will let Brent go ahead and walk you through some of those.

[Brent Overbeek:]

Yes, Susan. I think you appropriately characterized there is a lot of moving pieces within Japan. So, on the kind of puts and takes, Osaka from a market perspective has had a fair amount of capacity added over the course of 2018 based on forward-looking schedules that increase that stays in place until kind of the end of 1Q. As we get through 2Q that moderates a bit year-over-year as the second frequency that JAL had in the market comes out. And then as we get in to the latter part of the quarter, Scoot has announced that they will be exiting the market. So you will see a fair amount of capacity come out of that. There is some gauge movement around in Tokyo to Honolulu. Specifically, probably the most noticeable is ANA’s addition of the A380s beginning in late May of 2019 and then ramping that up over the course of the summer. But if you look at kind of overall puts and takes across many of our Japan markets, in 1Q, they are generally down a little bit with the exception of Osaka like I mentioned and then Tokyo has a little bit of growth in 2Q, but not a whole lot. Osaka remains relatively flat and then visibility into 3Q has Osaka capacity moderating a bit more.

[Susan Donofrio:]

Great. And then just as a follow-up unrelated, but with the government shutdown before, did you notice any softness just because the national parks were closed? I am just wondering if you saw anything intra-island?

[Shannon Okinaka:]

Yes, we didn’t…

[Brent Overbeek:]

Yes. There wasn’t a discernible impact in terms of any of the traffic that we saw as a result of the government shutdown.

[Susan Donofrio:]

Okay. Alright, great. Thank you.

[Operator:]

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

[Michael Linenberg:]

Yes. Hey, good afternoon or good morning everyone. Brent, I guess two questions to you. The Neighbor Island softness and I know you indicated I think in the March quarter, you are taking capacity down 6%, what’s driving that? Is that the Hawaiian economy or is it the fact that now you are flying non-stop from some of the other islands rather than Honolulu to the mainland? Is it all of the above, what’s behind that?

[Brent Overbeek:]

Yes. Michael, it’s predominantly a local story. So, we have seen a nominal decline as we anticipated between our own – with food traffic from North America going to the Neighbor Islands. That was largely forecasted and we knew that was coming with the addition of our own ads with the 321s as well as OA capacity ads into that market. So that’s probably impacted, I would say about a quarter or so of the overall decline, but that is explainable clearly by capacity. Frankly that the more frustrating piece for us or disappointing piece for us as we pore through the data is the local traffic decline there. And as we peel back the onion, we are seeing no real impact for our top tier and Hawaiian Miles guests. It is really guests who we have the least amount of information on and a lesser relationship with that we have seen the decline and again most notably to the big island. In response to that as you mentioned, we cut capacity 6% in the first quarter, we’ll continue to monitor the situation and adjust capacity as needed we have also stepped up some of our marketing efforts here within the state in terms of creating ensuring proper awareness of attractive price points that we’ve got in the market for discretionary leisure travel to get some of that back in further out-booking periods.

[Michael Linenberg:]

Okay, great. And just my second question when you look at March Q RASM, you listed it was a litany of headwinds that you’re dealing with and you called out Easter, you called out the profit-sharing piece to the credit card company from a year ago can you just can you break down those impacts, like that Easter impact? Is that like 1, 1.5 points of RASM, just walk through? It sounded like there were three or four different pieces that are impacting the March quarter just so we can kind of discern what?

[Shannon Okinaka:]

Yes well, the benefit would be in the June quarter with the Easter bounce back up.

[Brent Overbeek:]

Yes Easter, right now, we’ve our analysis has Easter at about a point shifting from 1Q to 2Q and, yes, disproportionately in March where Easter was early last year on the profit-sharing piece, that’s roughly a 0.5 point of headwinds that we want there.

[Michael Linenberg:]

Okay.

[Operator:]

And our next question is from Joseph DeNardi with Stifel. Please proceed with your question.

[Joseph DeNardi:]

Good morning. Brent, normally, you break down North America between, I guess, the U.S. piece and the Neighbor Island piece are you willing to do that now for fourth quarter?

[Brent Overbeek:]

I don’t have that right in front me, I can dig it up real quick but in 4Q, I think Neighbor Island PRASM was down. Looking real quick in our binder, I think Neighbor Island was down.

[Peter Ingram:]

I think they were in similar ranges in this period and as Brent mentioned in the in his comments, there was also a stage length impact in there as we’ve grown North America more, which is much longer length of haul lower stage length, so that stage length impact served to drag the overall domestic total down as well.

[Joseph DeNardi:]

Got it. And then, Peter, I’m just wondering if you could kind of clarify something on how you think about the JAL JV? Do you see kind of the bigger opportunity as allowing you guys to grow more in Japan or to enhance the profitability of your current business there?

[Peter Ingram:]

Well, I think they’re related and actually ties a little bit into what I said about in response to Hunter’s initial question to the extent, we have a better customer proposition broadly, and we think the combination of the longstanding Japanese carrier and Hawaiian carrier really is the best of both worlds on either side of the Pacific will be that much more that will enhance our profitability and that will create opportunities for growth so services that may not have made sense before will make sense in that environment, and we think that will manifest itself in the ability to grow over time and add service and add benefits to guests traveling between Japan and Hawaii.

[Brent Overbeek:]

Joe, to get to your first question, Neighbor Island was down in the mid 5%, North America was mid-6s and the total was mid-7s.

[Joseph DeNardi:]

Got it. Thank you very much.

[Operator:]

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

[Helane Becker:]

Thanks, operator. Hi, everybody. Thanks for the time. Just a couple of questions here. Is there a way from a technology perspective, you could introduce basic economy quicker than towards the latter half of the year?

[Peter Ingram:]

Helane, that’s something I ask people every day and you know we’re working on a pace to get it out in the latter half of the year, as you noted we do want to make sure that we roll it out well and don’t stumble into it and so it’s important to make sure that we’ve got the process and the technology, and we’re not confusing people as we roll it out so, I would part of me wants to tell the team to go faster, faster, faster all the time the other thing I always say is, but we’ve got to get it right.

[Helane Becker:]

Okay that’s a fair thing. And then on government shutdown, I think you or Brent mentioned that you haven’t really seen any impact, but there were some reports last week that TSA agents in some of the Hawaiian airports were actually handing in their resignations and I was just kind of wondering if security issues hampered your operations at all and if we should be mindful of that and if that’s included in the first quarter RASM guidance?

[Peter Ingram:]

To be honest, Helane, I didn’t see those reports in the context of Hawaii we did not see any disruptions here we were obviously concerned that if the government shutdown had continued, that some of the effects we were hearing about elsewhere in the country would have manifested themselves in the places we fly but it really wasn’t something that hit our day-to-day operations there were a couple of things administratively that we couldn’t accomplish because the people at the FAA that do those approvals weren’t there to do those approvals but there was no moment where I felt the safety or security of the system was in danger, and obviously, that would have been a much more serious problem than the administrative burdens we had to deal with.

[Helane Becker:]

Okay, got it, okay. Well, thanks very much.

[Peter Ingram:]

Sure.

[Operator:]

Our next question is from Rajeev Lalwani with Morgan Stanley. Please proceed.

[Rajeev Lalwani:]

Brent, just wanted to follow up with the some of the comments you made earlier on demand softness I think previously you noted that you saw it on the North America side as well and not just on the Neighbor Island side how is that looking now? Has it stabilized on that part of your network?

[Brent Overbeek:]

Sorry, Rajeev can you repeat the question?

[Rajeev Lalwani:]

I think previously, you said that demand was a bit soft, not just on the Neighbor Island side but also going to North America how is that demand looking now? Has that softness dissipated?

[Brent Overbeek:]

When we look at kind of overall traffic levels in North America, they remain, I would say, pretty good load factors are generally still relatively high the industry pricing environment that we’ve seen to get to those levels has really been the bigger strain in terms of generating demand, Rajeev.

[Rajeev Lalwani:]

Okay. And Peter, a question for you there is obviously some concern out there about the environment getting tougher and to the extent that it does, what are some of the levers that you can pull to sort of keep your health and margins and maybe stabilize top line trends? Is it margin is it capacity, is it maybe buybacks, cost cuts, what are sort of things that are at your disposal, if you will?

[Peter Ingram:]

Well, I think that our focus is really on making sure that we continue to execute very well at the things we’re doing I went through some of the priorities for the year and the things that we know that we can get better at and improve our own effectiveness at and if we do that, it will position us even better I would say, again, I’d go back to where we’re coming into right now, the competitive environment is very similar to what we saw throughout 2018, first of all I should say that we are aware of the prospect of changes in the competitive environment going forward, but we’re coming into 2019 from a position of strength we are a leading competitor in all of the geographies we serve we have got a great product that people love interacting with, our employees do a terrific job taking care of people, and all of those things are strengths that we think position us to be very competitive going forward.

[Rajeev Lalwani:]

Thank you.

[Operator:]

Our next question is from Adam Hackel with Imperial Capital. Please proceed with your question.

[Adam Hackel:]

Hi, team. Thanks for sneaking me in here. Just a couple of quick questions for me. First of all, just on fuel surcharges, just curious where those have those gone back to zero? I know those had obviously been at zero for a while since maybe last year and with fuel moving up, that was a bit of a tailwind for you guys I’m just curious where those are now and sort of how the comps are for that as you get throughout the year?

[Brent Overbeek:]

Yes, I mean, Adam, I will talk a little bit about kind of where we are at in 1Q and then it gets a little choppy on that as you’ve got things moving around last year and uncertainty around this year’s base in 1Q, it will actually be a bit of a tailwind the primary market where we collect fuel surcharges is Japan and the mechanism is lagged and so with the look back mechanism, fuel surcharges are going to be at ¥11,000 effective February 1. Certainly, what’s happened to fuel in the last little while, we anticipate that those will those are likely to moderate as we get further out.

[Adam Hackel:]

Got it. And I guess it’s still sort of a secondary question on sort of the RASM as you get past 1Q obviously, you guys have a lot in terms of comps from this past year, as you guys mentioned, between the weather and then the volcano and some of the delays and all that but just looking at it compared to where The Street has you guys for ‘19, which is basically dime a dollar in earnings year-over-year and just sort of based on what you gave out today in terms of the guidance sort of implying estimates anticipating this sort of level of decline between the fourth quarter and what you got for the first quarter as you get throughout the year so I’m just curious just how we should think about from a modeling perspective? So, the comps as you get past were in the first quarter and you started to last some of these sort of one-time events from the past year?

[Peter Ingram:]

It’s difficult to give guidance going out I think certainly, there are a couple of things about 1Q that are uniquely challenging one is it was as Brent said, it was our toughest comp of the year generally it was a period where the pricing environment in North America remained stronger than it did throughout certainly the back half of the year and we’ve got the Easter shift and the unique aspect of the credit card payment that we received that went to revenue so all of that is sort of unique about 1Q and suggests that other parts of the year will be better and certainly, we feel that way, there is a wild card in there and that is we don’t have a crystal ball about what changes there may be in terms of industry capacity as you go through 2Q to the end of the year and so it’s hard for us to put a precise number to that, and certainly, it’s hasn’t been our practice in any event to give guidance beyond the quarter we’re in from revenue because of those factors that are out there so we feel optimistic about our ability to compete, but it’s a little too early for us to be putting a precise number to it.

[Adam Hackel:]

Okay, I appreciate that. Thanks, everybody.

[Peter Ingram:]

Sure.

[Operator:]

Our next question is from Dan McKenzie with Buckingham Research Group. Please proceed with your question.

[Dan McKenzie:]

Thanks, guys. Couple of questions here. One on costs, one on revenue but on when I look at the sort of capacity dashboard, if you will, for the first quarter, I’ve seen you know 2% more ASM’s on 1% fewer departures, essentially 2% fewer seats and when I kind of look at that sort of a dashboard, I would have guessed that maybe the non-fuel costs would have been a little bit less for the first quarter so it seems like there is some pressure maybe unique to the first quarter I guess I got the pressures for the full year, I didn’t really understand sort of how what’s really unique to the first quarter. I’m just wondering if you can elaborate maybe a little bit more on that?

[Shannon Okinaka:]

Hi, Dan. Yes, for cost for the first quarter, we have we just have a bunch of moving pieces throughout the whole year we have got some our maintenance costs this year are have a lot of moving pieces because some of the shuffling that we had to do last year with the 321neo delays and then with the credits, the maintenance credits that we got, which were scattered throughout the year, they weren’t necessarily consistent throughout the year. So, the maintenance piece for the first quarter drives half a point and that just changes throughout the year. The – some of the other pieces are probably a little bit more consistent throughout the year, but we also have differences in throughout the year of our ASM growth that I had mentioned. So, yes, unfortunately, the year-over-year changes throughout the year, looking at quarter – at the different quarters is pretty lumpy and there is no one underlying message, it’s just kind of a mixture of all different things moving in and out.

[Dan McKenzie:]

Okay. This seems a little bit conservative. That’s – I guess that’s my only point. And then on the revenue side, if I could just circle back for a second, obviously, I caught the 1.5 point headwind from the things you guys have already mentioned. But when I look at capacity from the West Coast to Hawaii, it’s flat. When I look at competitive capacity, I’ve got 55% of the capacity shrinking 4% to 6% United, American and Delta. So, your toughest competitor shrinking between the West Coast and Hawaii, when I look at competitive capacity in the international side, it’s essentially flat. So, again, on the revenue side, it just sort of seems like a conservative revenue guide. So, maybe I can approach this a little bit differently than just saying it’s conservative. And I guess maybe, Brent, what are – what’s the average up-sell that you’re seeing in the marketplace, the place from your competitors that you’re missing out on? And so I guess, just ask this a little differently, when you analyze the revenue landscape, you’ve obviously concluded you’re missing out on some up-sell revenue that your peer set is able to collect. Is that just simply $25 per passenger or is that something closer to $50 or $75? What’s that revenue opportunity that you’re missing out on today that you’re going to be able to potentially capture later this year?

[Brent Overbeek:]

Yes. Well, Dan, I wouldn’t – I’m not going to specifically answer because I don’t know what our individual competitors are reaping in terms of kind of percentages of a buyout from basic economy if that’s what specifically you’re asking for. We haven’t guided in terms of a basic economy number and we’ll do that later in terms of – later in the year around our expectations around that. In terms of the benign capacity environment in 1Q, as Peter mentioned, the – last year we saw a similar thing with RASM performance being a bit lagged relative to changes in capacity, and we saw a big spike in industry capacity in 1Q. The pricing environment was generally a bit slower to react to that and we saw positive RASM – pretty strong RASM results in Q1. And so there is a bit of a lagged impact and I think we’re seeing some of that now as well.

[Dan McKenzie:]

Yes. If I could just follow-up one last one here. Are you – does the revenue guide factor into Southwest entry into Hawaii sometime in the first quarter?

[Peter Ingram:]

The revenue guide really doesn’t. We don’t see that in the market right now and it’d probably be the very tail-end of the quarter to the extent that anything could get in. So, no, that’s not really something that’s factoring in our revenue guide.

[Dan McKenzie:]

I see. Okay. Thank you.

[Operator:]

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

[Andrew Didora:]

Hi. Good afternoon, everyone, and thanks for getting me in here at the end. Most of my questions have been asked and answered, but had one for Shannon. The effective tax rate for 2019, 25% to 27% seems a bit above kind of the – certainly, the run rate this year much higher than what we were expecting in our model. What’s the reason for that?

[Shannon Okinaka:]

Yes. Hi, Andrew. The 2018 effective tax rate includes the benefit that we got from a $50 million pension contribution that we are applying to our 2017 tax return. So, we’re getting that higher deduction rate for that, which is why 2018 is unusually low for the current tax regime or the current environment. I think we’re generally a little closer to – without that, we’d be a little closer to that normal 25% range. So – and at this point, we’re still trying to work through the 2017 tax return, so – sorry, 2018 tax return and we’ll do that throughout this year. So, I don’t think we have anything unusual going on in our taxes in 2019. It’s just – it’s a little higher than 2018s because 2018 was a little unusual with that contribution.

[Andrew Didora:]

Okay. So, the 25% to 27% is just a good run rate over the next couple of years as things stand right now?

[Shannon Okinaka:]

As far as I can see, but of course, we’re still going through a bunch of the changes, the tax policy changes going through, our tax policy changes on areas like revenue recognition, we had some big book changes there, which drives some tax changes. So, there are still some moving pieces in how we’re looking at taxes and we can probably give an update throughout the year on that.

[Peter Ingram:]

And I’d say even going back in the way-back machine when I was CFO was sort of a – the rule of thumb I used to use was the federal statutory rate and generally plus about five for state and local taxes, which is right in line with the guidance that Shannon’s using for this year.

[Andrew Didora:]

Okay. That’s helpful. Thank you.

[Operator:]

Our next question is from Steve O’Hara with Sidoti and Company. Please proceed with your question.

[Steve O’Hara:]

Yes. Hi, good afternoon.

[Peter Ingram:]

Hi, Steve.

[Steve O’Hara:]

Hi. Just on the – can you just talk about competitive capacity growth in your markets, maybe by quarter this year, what you’re expecting right now?

[Brent Overbeek:]

So, in terms of North America based on kind of published schedules right now, Steve, kind of flattish in 1Q, slightly down, up a little bit in 2Q, obviously subject to change based on what happens with industry dynamics. And published schedules are up kind of mid-single digits as we get out into 3Q in terms of – sorry, 2.5 in 2Q and 3.5 for the industry as we get out into 3Q. The international side, a bit lumpier. We talked a little bit earlier about some of the puts and takes in Japan, inch-on capacity is down a little bit sporadically in 1Q and 3Q, as well as Auckland being down a bit as we lap some of the competitive changes in that environment.

[Steve O’Hara:]

Okay. And does that include Southwest or North America?

[Brent Overbeek:]

That’s only published schedules.

[Steve O’Hara:]

Okay. And then can you just remind me what the revenue benefit was in the first quarter that you talked about from the credit card or what the impact on RASM was?

[Brent Overbeek:]

About 0.5 point.

[Steve O’Hara:]

0.5 point, okay. And then just from a, I’d see here, the – sorry, you said the fuel surcharges kind of a tailwind in 1Q and then that will kind of trail off as that trails off throughout the year. And when do you expect to have a more firm timeline on the JV and when that’s good to go when you can start talking about the benefits?

[Peter Ingram:]

So the JV, Steve, is in front of the regulatory authorities on both sides right now. Like a number of things over the past month, the good people at the DOT had a little bit of unplanned downtime over the last month and are now getting back in. We don’t know exactly what the specific timing of our approval will be, but we’re hopeful that we’ll be hearing something – hopefully, we’ll hear something in terms of a feedback in the first half of this year, but it is not something that we can put a specific date on yet because they’ve got to go through their process.

[Steve O’Hara:]

Okay. Alright, thank you very much.

[Operator:]

Our next question is from Catherine O’Brien with Goldman Sachs. Please proceed with your question.

[Catherine O’Brien:]

Hi, everyone. Thanks for the time. Can you give us an update on how much of your $100 million targeted annual cost cuts are built into your 2019 CASM ex-guide?

[Shannon Okinaka:]

Hi, Katie, it’s Shannon. Yes, we – I don’t have a number for you because that plan goes out about 2 or 3 years. And so I don’t know off the top of my head exactly how much of that was built into ‘19 versus just over the 2 years. So ‘19 has a mixture of cost initiatives that we started in ‘18 that will then finish up in ‘19, and we’ll get some of those benefits. But again, two, we’re continuing to put some of those – some of that money back into the business with initiatives such as Mainland Technology Center, which will get us a lot of benefits from a technology delivery perspective at a more efficient rate. As well, we have a lot of operations and process type initiatives for labor productivity. So, we do eat through a bunch of the $100 million. I don’t think it’s half, because we have a bunch of initiatives that we’re working on this year that we won’t get the full year benefit from. So, in 2020, you’d see a lot more of that full year benefit on those initiatives.

[Catherine O’Brien:]

Okay. So, just one quick follow-up on that one and then maybe one on revenue, so you are saying, Shannon, that something less than half of the $100 million would find its way into this year’s cost guide?

[Shannon Okinaka:]

Yes.

[Catherine O’Brien:]

Is that – okay, okay, got it. And then can you guys – can you give us some color on the performance of Extra Comfort PRASM versus the system maybe in the December quarter over the course of 2018? Thank you.

[Peter Ingram:]

We don’t – Katie, we don’t calculate Extra Comfort PRASM as we don’t treat it as a standalone product – we don’t treat it as a standalone cabin. In terms of revenue growth, it was in terms of kind of revenue growth per Extra Comfort seat, it was consistent with our capacity growth. So, if you want to back into that way, it was kind of flattish in terms of per unit production with production growing in the neighborhood of about 30%.

[Catherine O’Brien:]

Okay, understood. And maybe just one quick follow-up to that, it sounds like a lot of your capacity this year is driven by growth in that cabin. So, do you think you’ll be able to maintain about a flattish-type RASM again or do you think given growth there that could put some downward pressure on that number?

[Peter Ingram:]

No. I mean, I think we’ve got every intention of maintaining and growing it. I think there’s – we’ve got some initiatives that we believe we can grow it where you got to – we’ll be introducing the product in some markets that haven’t had it traditionally, where we’ve had 7 6s [ph], and we need to drive some awareness there. But we don’t see any reason that we shouldn’t be able to maintain that.

[Catherine O’Brien:]

Thank you very much.

[Operator:]

Our next question is from Joseph DeNardi with Stifel. Please proceed with your question.

[Joseph DeNardi:]

Hello. Peter, you mentioned that kind of one of the wildcards for 2019 is what maybe other airlines do with capacity. So, I feel like that’s opening the door to my question a little bit. Kind of based on your experience seeing capacity come and go from the U.S. to Hawaii, are the returns that you’re seeing on the market still good enough to attract more capacity or are we at a point where you think some of the non-strategic capacity should start to come out just based on the returns that you’re starting to see there?

[Peter Ingram:]

Yes. We don’t talk about returns in specific geographies. What I will say is – my best view is of our returns and obviously, our pre-tax margins were, as we’ve said, in the top tier of the industry, not the absolute highest, but very much qualifying in the top tier. So, we’re still doing very well. It is also the case that we know we generate a revenue premium in North America. So by definition, that means that our competitors have a lower revenue input and we don’t think that our competitors have particular cost advantages that mean they should be generating higher returns. But I don’t know exactly what their returns are, what their decision criteria. I do know that it’s a big competitive market. Water does find its level over time. There can be periods where capacity environment is very nice from the company perspective and you can generate really good returns, but typically, that’ll attract incapacity. And there were other periods when capacity growth exceeds some demand growth over time and it may take a little bit of time, there is a bit of a lag before carriers react to that environment. But we fully expect that over time, things find a balance. And the important thing for us is making sure that we are extremely competitive. And so to the extent we hit a point where capacity needs to be rationalized, we would look forward to that not being ours, because ours is the most competitive and continues to generate good returns.

[Operator:]

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

[Peter Ingram:]

Alright. Mahalo again for joining us today. We are optimistic about 2019 and look forward to speaking to you again on next quarter’s call. Aloha.

[Operator:]

Thank you. This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.