Hawaiian Holdings, Inc.
Q2 2017 Earnings Call Transcript

Published: 26 Jul 2017

[Operator:]

Greetings and welcome to the Hawaiian Holdings 2017 Second Quarter Earnings Conference 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 of Investor Relations.

[Daniel Wong:]

Thank you, operator. Welcome, everyone and thank you for joining us today to discuss Hawaiian Holdings financial results for the second quarter of 2017. On the call with me today are Mark Dunkerley, President and Chief Executive Officer; Peter Ingram, Chief Commercial Officer; and Shannon Okinaka, Chief Financial Officer. Mark will begin with some overview comments. Next, Peter will take us through revenue performance. Shannon will follow with a discussion on costs and the balance sheet. We will then open the call up for questions and Mark will end with some closing remarks. By now, everyone should have access to the press release that went out at about 4

[Mark Dunkerley:]

Aloha, everyone and thank you for joining us today. Before we start, I’d like to introduce Daniel Wong, our new Senior Director of Investor Relations. Daniel, who has been with Hawaiian in various positions for the past three years and we welcome him to his new role. Our string of outstanding results continued in the second quarter. Adjusted net income grew to $85.2 million or $1.58 per share. Adjusted pre-tax margin for the quarter grew 2.6 points to 20.3%. Both the income and the margin results are records for a second quarter. On a trailing 12 months basis, our adjusted pretax margin was 19.1%, another record margin result. These results have come courtesy of strong demand for the Hawai’i vacation, low fuel prices, moderate industry capacity, and an excellent job being done by my colleagues in finding new ways to strengthen our performance. From the frontlines where my colleagues are peerless in their commitment to the guest travel experience to the back office, where they continue to find new ways of running a smarter business, the team is doing an outstanding job of competing in this tough industry. My colleagues have made my job easier and they have my heartfelt thanks. Over the past several years, we have invested in our products and in our organizational capabilities. The introduction of our lie flat seats and additional Extra Comfort seats, improvements in our range of ancillary products and investments in gaining a better understanding of our guests have all begun to pay off. The year-over-year comparisons will get more challenging as we lap the introduction of many of these improvements, we anticipate further gains. In May we unveiled a fresh logo and livery that are a bolder, more modern expression of our distinctive and much loved brand. Our aircraft supporting an update to Pualani, our iconic Flower of the Sky will continue to stand out from our competitors and represent our unique brand of authentic Hawaiian hospitality. The new identity will roll out across airport advertising and digital over the next few months with the fleet transitioning over several years. Our entire fleet of A321neos will be delivered in the new livery. Also in May, at Los Angeles International Airport, we relocated from Terminal 2 to Terminal 5, providing an improved guest experience and simplified connections. A lot has to happen in the months ahead. In October and November, we are due to receive the first and second of our 18 A321neo aircraft. This is exciting, as it allows us to begin our plans to transform our service between Hawaii and the U.S. West Coast. Yesterday, we announced the first route expansion associated with the arrival of our first neos, Peter will touch on this later in the call. While delays to the delivery of the first units of this type have been extremely disappointing, we remain committed to the A321neo, as it is the aircraft optimally configured for service between Hawaii and the Mainland. Having recently taken over the construction of our new maintenance hangar and cargo facility at Honolulu International Airport, we are now just a few months away from completion. The projects are badly overdue. So, we are truly excited that before long, our employees in these areas will have better environments in which to work. The new facilities will unlock productivity gains, partially offsetting their increased costs. After the summer, work resumes on the modification of our A330 fleet to install lie flat seats in the front cabin and additional Extra Comfort seats in the main cabin. Both products have been selling extremely well and the market’s now receiving them. Before the summer high access, we modified 16 aircraft; by year end that number will be 21 of our 24 A330s. The entire fleet will feature the new configuration by the middle of the subsequent first quarter. Much analyst coverage in recent weeks has been devoted to the impact of rising industry capacity between North America and Hawaii schedule for the early part of 2018. So, I thought I share our perspective on this. First, no airline is better positioned to serve Hawaii than Hawaiian. We are simply focused on Hawaii. And as our results in good market conditions and bad have shown, our formula is superior to those of our competitors. In addition, we have judiciously diversified our business perspective to make sure that short-term conditions in one of our geographies do not overwhelm our overall performance. Turning to North America, total industry capacity to Hawaii has ebbed and flowed over the 15 years that I have led Hawaiian. The North America to Hawaii capacity growth schedule for next year, while higher than we’ve seen for the last 18 months, is not in fact unprecedented. We can’t predict the macro environments of fuel prices and demand which will prevail, but we do believe that we have a number of capabilities which will mitigate the impact of rising industry capacity. Aircraft better suited to the markets we serve, product improvements already delivered and on the way and the organizational strengthening, I mentioned earlier will all help. None of these were at hand the last time industry capacity increased markedly a few years ago. I’d also note that it’s been a feature in all of the geographies in which we operate, but during periods of more intense competition, Hawaiian’s position in the market has ultimately improved. This has been proven over and over again on our North America routes, in the Neighbor Islands and in our Asian expansion. So, we remain confident that whatever short-term changes in the competitive landscape occur, over the long-term, we have more to gain than we have to lose. In the meantime, the remainder of this year looks strong. And to give you a window into our revenue performance and immediate prospects, I’m turning the call over to Peter.

[Peter Ingram:]

Thanks, Mark and aloha everyone. Second quarter operating revenue was up $80.7 million on a 4.1% increase in capacity with RASM and PRASM growth once again leading the industry with improvement of 9.2% and 9.9% respectively. Both of these are the highest year-over-year improvements in our recent run of success. We’re pleased with our results closing the quarter above the midpoint of the guidance that we have previously revised upwards. Strong demand, particularly in North America, continued sequential improvement in our international service and robust cargo results highlight our performance this quarter. With our string of surpassing all U.S. carriers and unit revenue growth extending to six consecutive quarters, my thanks go out to everyone on our commercial team for yet another period of solid execution and to all of our frontline employees for delivering Hawaiian’s trademark hospitality. Domestic PRASM which includes North America and Neighbor Island services grew 11.9%. North America PRASM was up in the mid teens this quarter, despite the fact that we are lapping tougher prior year comparisons. Capacity was down slightly as more of our A330 aircraft with lie flat seats made their way on to these routes and we are a little tighter on aircraft availability in general. Competitive capacity meanwhile remained basically flat and we did benefit this year from Easter shifting into the second quarter which proved to be a stronger tailwind than we initially forecasted. In May, we turned our seasonal service between Los Angeles and Lihu’e into a permanent daily flight to capitalize on consistently strong demand for our service from Southern California. In addition, we brought back non-stop daily flights from Oakland to Lihu’e and thrice weekly flights from Los Angeles to Kona as part of our summer schedule that started in late May and will run through early September. While we’re discussing route expansion, let me take a moment to add some specificity to the A321neo plans Mark referred to earlier. As we’ve outlined previously, the A321neos will provide us with the combination of growth and replacement, enabling the retirement of the remainder of our 767 fleet by the end of 2018 and capitalizing on our industry-leading unit revenue performance between the Western U.S. and Hawaii. The smaller gauge and next generation economics of these aircraft, make them ideal for some of the routes we fly with widebodies today and other smaller O&Ds that we don’t currently have in the network. Starting in January 2018, we’ll be introducing new non-stop service between Portland and Maui, taking advantage of the arrival of our first A321neo. We will extend seasonal service between LA and Kona to year round non-stop service beginning in March with our -- first with our 767s and later with the A321neos. And in the Bay Area, our seasonal Oakland to Kauai service will also transition to year-round non-stop service in April 2018. This route will be flown with the A321neo as well Oakland to Maui, which will switch over from its existing widebody aircraft in January. Returning to the numbers, as we noted in our first quarter earnings call, Neighbor Island industry capacity increased 14% in the second quarter as our principal competitor expanded its schedule between Honolulu and Maui, Kona and Lihu’e. This unsurprisingly pressured Neighbor Island PRASM, which clocked in with a mid-single-digit reduction. Despite the competitive capacity increase, our own passenger totals increased 5%, validating the resilience of our competitive offering in this geography. While we expect higher industry capacity to continue to exert a degree of pressure on unit revenue in the period ahead, our Neighbor Island competitive position remains extremely strong. We have unwavering confidence in the depth and breadth of our schedule, industry-leading on-time performance, and the unparalleled hospitality of frontline teams have position us for success in any competitive environment. International PRASM was up a remarkable 17% this quarter from the same time last year, running our string of sequential improvements to six quarters. The vast majority of this was driven by underlying market performance as foreign exchange impacts year-over-year were negligible, while the return for now on fuel surcharges in Japan added modestly to international PRASM gains. Japan and Australia, our two largest international markets were both areas of notably strong performance. We continue to roll out new lie flat premium cabin with an initial emphasis on international routes, most recently introducing the product to our flight between Beijing and Honolulu, and our pleased with the resulting revenue performance in guest feedback. Notably, while our sample size remains limited at this point, front cabin PRASM gains on our lie flat routes have outpaced main cabin PRASM gains virtually across the board where the new product has been deployed. Value-added revenue per passenger grew to $24.34 in the second quarter, an increase of a $1.09 over the prior year period. As in recent quarters, the primary drivers of value-added revenue growth were strong sales of HawaiianMiles number our Extra Comfort seat product. Looking ahead, we expect continued growth in the value-added revenue per passenger, especially as we expand the number of Extra Comfort seats in concert with our continuing A330 modification program, and later with the introduction of the A321neo. Momentum in our cargo business continued in the second quarter with revenue growing $5.7 million or 33% over the prior year. Looking ahead, we expect to see continuing benefits from an environment of strong cargo demand and later this year, we look to launch our Neighbor Island cargo freighters. Now, let me turn attention to the third quarter outlook. While still growing, our expected capacity growth with decelerate in the immediate period ahead with now fleet additions until our 24th A330 in October and the beginning of A321neo service in early 2018. So, capacity growth in the third quarter will be between 0.5% and 2.5%, while for the full year we remain on track for ASM growth in the 2% to 5% range. We look forward to another quarter of strong RASM growth in the range of 4.5% to 7.5% year-over-year, driven by steadily improving passenger revenue with both our domestic and international geographies contributing to the year-over-year improvements. During this quarter, we will lap the introduction of our Narita to Honolulu service and face more challenging year-over-year comparisons. So, while this represents a sequential tick down from our stellar second quarter, the third quarter is shaping up very nicely with demand remaining robust throughout our network. Our balanced network and optimal fleet for each of our missions and the award-wining hospitality delivered by our frontline colleagues continue to set us apart from our competitors. Completing our A330 modifications and introducing the A321neos among many other initiatives will help us to build on this success. We are pleased with our performance this quarter and remain absolutely confident about the future. Now, let me turn the call over to Shannon to discuss our costs and the balance sheet.

[Shannon Okinaka:]

Thanks, Peter. We turned in another solid performance in the second quarter that gives us good reason to be confident about the future while growing long-term value for our shareholders. CASM ex-fuel and special items increased 5.6% over the second quarter last year which was at the better end of our guidance. Higher wages and benefits accounted for 3.5 percentage points of that increase, more than 80% of which was related to the new pilot contract. In addition, 1 percentage point was driven by the timing of incentive compensation. As we mentioned in our May traffic release, we completed a sale-leaseback transaction of three Boeing 767 aircraft during the quarter as part of our planned exit from the 767 fleet. The difference between aircraft rents and the offsetting depreciation savings added roughly 1 more percentage point to our year-over-year CASM ex-fuel and special items. The transaction also resulted in a non-cash loss of $4.7 million which had no impact on CASM ex-fuel and special items. Beyond these items, lower than expected fuel costs helped offset the ongoing investments in people and organizational capabilities that Mark mentioned earlier. Moving to the balance sheet, our cash position remains strong with $844 million in cash, cash equivalents and short-term investments. This positions us favorably for continued investments that we expect will lower our long-term unit costs and strengthen our competitive position. This also affords us flexibility in how we opt to fund our planned fleet transition. Our strong cash position also allows us to continue strengthening our balance sheet. For example, as part of the new pilot contract, we will be settling a portion of the post-retirement medical benefit liabilities for active pilot with the one-time cash payments of $102 million in the third quarter of 2017. We will also be terminating our IAM and salary pension plans with the onetime cash outlay of approximately $17 million to $22 million. Both options will significantly reduce long-term liabilities on our balance sheet and give us important cost savings. In the second quarter, we repurchased $4.3 million under our share repurchase program. We remain opportunistic buyers of our stock. Now, looking ahead to the third quarter and full year. Similar themes from the second quarter will drive higher than normal unit cost growth in the third quarter. We expect headwinds totaling about 5.5 percentage points to come from the following

[Daniel Wong:]

Thank you, Mark, Peter and Shannon. Also thanks to 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. Operator, please open the line for questions.

[Operator:]

[Operator Instructions] Our first question is from Hunter Keay of Wolfe Research. Please state your question.

[Hunter Keay:]

So, Peter, I know you’re not in the business of giving long-term RASM guidance. But, given the sort of longer booking curve you have and a lot of investor fears around competitive capacity, which clearly you’re addressing head on here which I appreciate. I would infer you to give us a sense of whatever you’re seeing now and whenever you can quantify or even talk qualitatively on sort of how to think about your revenue, either on a unit basis or not through the next six to nine months, given the really dynamic situation that we have with competitive capacity all over the place in your network. Can you help us model this out to the extent that you can for the next foreseeable period here?

[Peter Ingram:]

Yes. So, Hunter, we’re not surprised here, the question. As you know, the capacity that I think you’re talking about is really coming, the very tail end of December and into the first quarter and second quarter of next year. And even though, we do have a longer booking curve, it’s really not that long. So, we’ve got some bookings on the books going forward further out. We really haven’t seen any changes in the pricing environment. We are optimistic about the third quarter and the fourth quarter, and candidly we’re optimistic about next year, but it’s really too early to give you any specifics about 2018, because we’re just too early in the booking curve.

[Mark Dunkerley:]

Yes. And I would add Hunter that we’ve got a number of positive things that are moving in our direction that I think will be very helpful offsets to whatever the impact of the increased capacity on North America is.

[Hunter Keay:]

Right. Exactly, Mark. So, my follow-up is when you think about 330 lie flat and think about the downgrading of 321s. I mean, are these going to be enough sort of idiosyncratic initiatives to maybe help you guys fight through this period as supply demand finds its natural balance. Maybe to surprise the upside a little bit in terms of sort of pricing resilience people traditionally expect when they see this type of competitive capacity growth to maybe like keep RASM positive or anything of that nature. I mean, I guess, the question is how much of that idiosyncratic initiatives will actually help to offset more customary competitive pricing pressure?

[Mark Dunkerley:]

I think they are going to be reasonably significant. I don’t think we’re going to be in a position to be able to give you much guidance on that just yet. Because as Peter has said, at the moment, we see no impact into the first quarter, but it’s a long way off now. But, we do think, I mean, we have invested heavily in a number of things that we think make us far better able to manage our business regardless of the competitive environment. And while year-on-year comparisons get tougher, because as we mentioned, we are lapping some of the things that we’ve done. As I said in my prepared remarks, we still think that there is more to be had to the good and we’d anticipate seeing that in 2018. I would also bring some attention to the fact that North America isn’t all of our business; we have got other geographies that we operate in and there’s reason for some optimism in some of those.

[Peter Ingram:]

Hunter, one more thing I would just add to what Mark has said is I think there has been a lot of focus on the capacity environment looking back over the last 12 months or so, being relatively stable in North America. Our revenue performance has been improving, not just on an absolute basis but also relative to our competition. And we just saw the first quarter numbers come out from the DOT last week and we continue to increase our revenue premium. So, I think there are a number of things going on that are unique to Hawaiian and unique to our performance that we think we can continue to build on in the periods ahead.

[Operator:]

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

[Helane Becker:]

Thanks, operator. Hi, everybody. Thank you so much for the time. I just have two questions. One, you just alluded to this, either Mark or Peter, was about international opportunities. Can you just talk about some of these international opportunities that might exist to offset some of the pressure that you would theoretically may see in North America and first half of next year?

[Mark Dunkerley:]

Sure. I mean, we’ve in sourced a lot of our sales activity and it’s having a pretty dramatic effect in our ability to sell in these markets. We have deepened relationships in most of the markets that we serve and we have seen some really impressive uptick in performance and we just Peter talked about the 17% PRASM improvement with essentially no -- none of that result being impacted by FX, and we think there is more to be had that, but Peter do you want to add to that?

[Peter Ingram:]

Yes. I would say one of the things that we’ve talked about previously and really focused on Investor Day is we’ve built a network portfolio that really mirrors where visitors come from to Hawaiian. And I think that positions us to be able to respond to opportunities wherever they are, whether they are in existing markets like Australia and Japan where we have built a strong presence or whether it is in emerging markets that are relatively newer to travelling to Hawaii. So, we think we’ve got a good platform to build and take advantage of opportunities throughout all the places where demand is for travel to Hawaii.

[Helane Becker:]

Okay. I just have one follow-up to that and then another question that’s completely unrelated. Does that include your new China route? One of your competitors has been complaining about all this excess capacity coming out of China. And I am just kind of wondering if you’re seeing that or it’s just a small there, it’s not really relevant yet?

[Peter Ingram:]

There isn’t excess capacity coming out of China to Hawaii. In fact, China capacity to Hawaii is essentially flat and that’s slightly down I believe. But we are just three flights a week. I think the biggest task for us in China is to encourage the selling of the destination as a destination and that’s something that we raise whenever we can with the that tourism authorities here in Hawaii.

[Helane Becker:]

Okay. And then my completely unrelated question is, as you think about 2018 and you think about your plans for the new capacity that is coming on, how should we think about the costs associated with that? I mean, I think some of your onetime costs like the pension catch-up and some of those other things go away this year, but how are you thinking about 2018 cost?

[Shannon Okinaka:]

So, 2017, when we talked about 2017 costs last year, we had indicated that 2017 was going to be a bit more of an investment year, and that’s what we’re seeing with pilots and yes, definitely some of the upcoming pension and OPEB terminations and things like that. 2018 -- 2017 also, we have a larger bubble for 321 induction costs; that will continue a bit into 2018 and that’s -- for 2018, that will get exacerbated a bit by the delay of our 321neos. So, in 2017, we’re obviously still incurring some training cuts. We’ll also continue to see some of that in 2017 -- 2018, but all of these things provide us really good long-term benefit. So, I think while the costs are a bit inflated in 2017 especially in the third quarter as we’ve discussed in the call and the prepared remarks and go into 2018 a bit, we’ll see a lot of long-term value from these investments.

[Helane Becker:]

So, you’re basically saying first quarter maybe elevated and then more normalized growth in the last three quarters?

[Shannon Okinaka:]

I’m not really prepared to give exact guidance yet, more towards the end of the year, probably December Investor Day we could probably give you a bit more specific. But, I would expect to see more of the 321 induction cost in 2018. So, we’ll get more specific as we get closer to the end of the year.

[Operator:]

Our next question is from Joseph DeNardi of Stifel. Please state your question.

[Joseph DeNardi:]

Yes. Thank you. Mark, I think you’ve mentioned a couple of times the fact that you guys are diversified away from just West Coast. I guess, Peter, if I look at the revenue and cost data, as you guys are reported to the DOT, I know that there is some issue with looking at that way and computing margins. But, it would -- I mean based on that, it says that the domestic is very profitable and the international side is kind of breakeven. So, can you just talk about whether that’s not a fair way to look at it or how you guys view the margin between the two entities is internally?

[Mark Dunkerley:]

Joe, I mean, we’ve said in the past, we don’t talk about profitability in one specific geography. Over -- what I would say is that the economic performance of different parts of our network can vary from time-to-time and period-to-period, and this is something that we’re focused on all the time that there will be periods when certain pockets of international are very strong. Domestic may have a little bit of challenge or there maybe some competitive -- the neighbor island. Over the long term, we expect each of the regions to perform profitably and to earn their cost of capital and to justify their continued existence. And we certainly expect them to do so. From period-to-period, you may see some idiosyncratic differences between those. But, we really look to generate profitability throughout the network over the course of cycle.

[Peter Ingram:]

Yes. And Joe, I would just add that in the last five years, each of our main geographies that’s Neighbor Island, West Coast and -- sorry, North America and International. Over the last five years have been periods where each one of those geographies has been the profit leader.

[Joseph DeNardi:]

And then, Peter, I guess kind of as it relates to the competitive capacity ramping up. I mean, you’ve got -- outside of you guys, the two -- your two largest competitors increasing their capacity, pretty substantially next year. Are you guys actively looking at ways to increase your own capacity to kind of maintain your relevance in the market and we should think of, I guess upside pressure to your owned capacity growth or are you happy with, I guess current plan?

[Mark Dunkerley:]

I think we’re happy with our current plans. Again, we believe we understand the market better than our competitors do which at one level sounds very boastful. But, it is after all a market that we have a very great focus on. And so, our plans are unchanged. We’ve got the A321neos coming in and we’ve got -- those plans have been set and we really don’t have much intension to changing.

[Peter Ingram:]

And Joe, just to underscore that, we’ve grown a little slower than we would have preferred last couple of years really and it has been in anticipation of the A321neo is coming. We would have loved to have those airplanes that at the beginning of this year in the robust environment that we’re competing in now, I’d have loved to have them in the market. That’s not the case they were originally scheduled to come late this year, now it will be early next year. But we’re keen to deploy them. And I agree with Mark that we really haven’t changed our plans and think that as a company that’s executing well, and the RASM leader in this geography that will continue to compete very well.

[Operator:]

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

[Michael Linenberg:]

Just two questions. Peter, I want to go back to the comment that you made earlier. I think you said that the unit revenue gains in the front cabin that had the new product. I think you said had outperformed, what was it, your system, PRASM or RASM?

[Peter Ingram:]

They’ve outperformed the main cabin on those same routes. So we’ve looked at where we’ve deployed, there would be Sydney, Brisbane, Oakland, all saw that airplane starting in December of last year. And if we look at our revenue performance over that same period on those routes, you’ll see that the front cabin PRASM improved more than the main cabin PRASM. Both of them were actually up in those cases.

[Michael Linenberg:]

On the front cabin, the number of lie flat seats, how does that compare to just the number of seats that it replaced?

[Peter Ingram:]

So, we had 18 front cabin seats on the old -- the prior configuration and we have 18 front cabin seats now. So, it’s a like-for-like in terms of number of front cabin seats. The total capacity on the airplane goes from 296 down to 278. So, you get a premium lie flat seat, we get 68 Extra Comfort seats compared to 40 in the prior configuration and that cost us some main cabin seats in the back of the airplane.

[Michael Linenberg:]

And then just one question back to on international. Just some of the new competitors, you have AirAsia X taking advantage of fifth-freedoms and you have Jin Air coming out of Korea. And some of these companies, they are somewhat disruptive, they’re kind of different type of animal. And I am just curious, I mean realize that AirAsia X is less than daily out of Japan. What are you seeing if anything in the marketplace? And maybe your product is just such a very different product that they don’t even show upon your radar, because I know some of their publish fairs are low but it maybe that you don’t even have to match them. Can you just talk about that? I realize it’s the early innings of some of those new services.

[Peter Ingram:]

Yes, sure. On our radar, we pay attention to all our competitors. I would say that the success of the long haul ULCC business model is still very much open to question. And we think that generally there is a market preference for a more premium experience than what is provided by those. But it does put extra capacity into the market, and that’s the main impact we see is that there is more capacity chasing at given level of demand when we’ve seen some of the entries.

[Mark Dunkerley:]

I would just also share that the way in which people buy tickets in many of these countries is dramatically different from the way in which people in the United States buy tickets. And so, Peter is right that the factors are in the market, we do pay attention to them, but to a large degree, they don’t fish in the same pond as we do just by dent of how they distribute that product.

[Operator:]

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

[Andrew Didora:]

Hi. Good afternoon, everyone. Shannon, just a quick question on the CASM for the full year. If we assume that the 3Q comes up in at the midpoint and implies 4Q CASM, ex that would be in a pretty wide realm, an 8-point range to get to the full year guidance. Why are the costs in 4Q such an unknown right now?

[Shannon Okinaka:]

Drew, I’d have to go back and check in math and see. I think we had something a bit different when we thought for 4Q. In actuality, 4Q turns out to be lower than our 3Q. 3Q has just got some unusual things going on. But generally, we continue the pilot -- they increased from the alpha; we’ve still got some 321 training costs. But I believe our 4Q number is different than the 8% you quoted.

[Mark Dunkerley:]

[Multiple Speaker] Our estimates of our 4Q CASM is not in the range of 8 percentage points, at this stage, we are sticking to a fiscal year spread of 2.5 to 3 percentage points. So there will come a time when we narrow that but rest assured that -- don’t have an idea about 4Q expenses within an 8-point range.

[Andrew Didora:]

Okay. Fair enough, we can take that offline. Second question, Peter, you gave some helpful color on the 2Q geographic breakdown. Can you maybe walk us through each of those three geographies in terms of what your expectations are for 3Q directionally and how you build up to your RASM guide?

[Peter Ingram:]

Yes, sure. I mean, I think the -- start with Neighbor Island, in the second quarter, we saw a fairly full, although not complete impact of the capacity step-up from our competitor. And we expect that to continue in the third quarter we think where for all the reasons I noted our product remains extremely competitive in that market, and we expect to continue against that level of industry capacity. In North America, also I think fairly strong. I think we’ve got a slightly more challenging year-over-year comp that we’re dealing with, in that case. We didn’t have quite as much as seasonal growth in North America and so, we weren’t able to dial that up as much as we would have liked in the summer because of aircraft availability. But North America is performing well. The one difference relative to the second quarter is Easter, as I mentioned, was a pretty good boost to the second quarter, and we don’t get any extra holidays in the third quarter of this year. And then international, again, things are generally progressing on trend. We’ve got -- we will by the end of July anniversary our entry of service into Narita. And so that will -- that has been a year-over-year tailwind and now we’ll be in the base for the back part of the second quarter. So that’s one different on the international side. Australia and New Zealand continue to perform well, Japan continues to perform well, most of the big markets in international. So, generally, that’s what’s going in the marketplace.

[Operator:]

Our next question is from Kevin Crissey with Citigroup. Please proceed with your question.

[Kevin Crissey:]

Hi. Thanks for the time. You guys have done a great job building a plan that was a multiyear plan and sticking to it and delivering excellent results. I don’t think many on the call would dispute that. So, the question becomes is like where are we here today versus what you see is the long-run potential for the Company in terms of margins? Alaska has talked about having their current margins are probably above or returns margins, however, you want to look at it, above kind of the long run normal for the Company. I wanted to get your sense as to how you think about that where we are in the cyclical industry? Thank you.

[Peter Ingram:]

Okay. Thanks for that. I think we’re optimistic that over the course of the cycle that our margin performance over business cycles is set to improve rather than to flatten out or decline. Obviously, there are short-term circumstances that can -- that really tie in the cycle if you like. But the investments that we’re making we believe strongly will improve on our ability to extract revenue from the market and will ultimately also enable us to better control our costs. So, I think we’re bullish about the future margin capability of this business through business cycle.

[Kevin Crissey:]

Thank you. And maybe we can talk then about what it is that you maybe think competitors are seeing, U.S. mainland competitors are seeing. Is it just basically your results coming from the West Coast that would cause them to view this market more attractively or perhaps frequent flyer desirability as well or combination of those? And to what extent do you believe all of this is has a foundation of excellent kind of wealth generation and economic prosperity on the West Coast? Thanks.

[Mark Dunkerley:]

I can’t really answer exactly why other carriers are making the decisions that they are making and to degree you’ve been very kind saying that we’ve had a plan, we’re sticking to it. Our plan is based on the fact that we think that overall, the market from the West Coast is not forsaken, grow by leaps and bounds. But we do believe that there are smarter ways of getting at the existing market, and there is some incremental growth to be had. And our plan with the new fleet coming in, with the number of the other things that we’re doing around our products is around getting smarter in a market that will grow, but not grow dramatically.

[Operator:]

Our next question from Steve O’Hara of Sidoti. Please proceed with your question.

[Steve O’Hara:]

I’m just curious on the competitive capacity picture. Maybe you could just tell us a range of capacity growth for next year that you’re maybe currently addressing? And then I’m just curious about, maybe your feeling about -- I know you guys have done a good job of explaining premium you get from your market [indiscernible] continue to expand that even if the overall level of RASM growth may be just given the competitive dynamic?

[Peter Ingram:]

Let me go ahead on that. It’s still a little bit early, because there is a lot of time for schedules to move around. As we look at what is out there right now published in the schedules for the early part of next year, we see overall North America to Hawaii, some double-digit capacity increases, which as Mark suggested earlier, that’s not unprecedented, if you look back over our history and the last 10 or 15 years, so there will be periods where we see capacity growing not much. It is, as we look at it on a route-by-route level, where competition really happens there are a couple of pockets where it’s more concentrated. Some of it is on routes that don’t compete directly with us but have somewhat of an indirect effect such as hub capacity from the middle of the country or some of the growth that was announced in Denver. In terms of where we operate directly, it is really concentrated for the most part in Los Angeles and in the Bay Area and it’s concentrated a little bit in those cities to the Neighbor Island market, particularly Lihu’e and Kona are seeing a little bit more capacity. One of the things I would say about that is those are big markets. And as you and others have suggested, capacity sometimes settles out over time and supplying demand come back in the balance, and that is certainly what we expect it, if for some reason they become unbalanced which we really don’t know yet, maybe that demand will rise up nicely to meet this and certainly we have seen robust demand for the last couple of years. We compete very well in those big markets and we expect to do so going forward.

[Steve O’Hara:]

Okay, thank you. And then, just I don’t know if Shannon maybe could just confirm, the comment on the timing of the credits last year, I wasn’t sure if I caught the amount that was coming and what impact that had?

[Shannon Okinaka:]

It was about 2.5 percentage points year-over-year. There were just some credits that we received in the third quarter. And over the full year 2016, it’s -- the full impact of the cost with the credits netted out to zero, so it doesn’t have a full year impact but just when you look at the third quarter alone, it would about 2.5 percentage points impact.

[Operator:]

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

[Rajeev Lalwani:]

Mark, I wanted to come back to couple of questions for you, but first I wanted to come back to a comment you made earlier about being able to better manage the capacity this time around. What specifically were you referring to? Is it some of the initiatives, is it something else, just wanted to get some clarity there.

[Mark Dunkerley:]

I think it’s a whole bunch of things. I mean the last time we saw double-digit capacity increases, was probably 2014, 2015. At that time, we had a number of things -- we didn’t have a number of things that we are going to have going into 2018 working for us. One of them is we have got a -- we will have an aircraft better suited to most of the markets in which we operate in the A321neo; the second is that we have made changes to the configuration of our aircraft; those are very sort of physical things. Behind the scenes, we have invested very heavily in the capabilities of our management team; we have invested a lot in IT. And when you look at things like the increase in the unit revenue advantage that we enjoy over our competitors and how it’s grown over last two years, that should give you an indication of how we have been building the strength in just running a smarter business and which we believe will have us in a position better able to deal with good market conditions and bad.

[Rajeev Lalwani:]

Another one for you, obviously you have made some announcements to put the neos to work along the West Coast. Can you talk a bit about your comfort with this technology there, just given some of the issues you’ve even hearing about in recent months?

[Mark Dunkerley:]

Yes. I mean, first of all, we have comfort that aircraft are not going to be delivered to us; they are not going to be eligible to fly at 180-minute ETOPS, until the regulatory agencies themselves who are equipped to assess the appropriateness of this aircraft and the mission, have blessed it and they have at this stage. So, I think we are very comfortable with the technology. And interesting thing about the technology is that the bits that have course delays around the engine are not the new technology bits of the engine. The new technology bits that generate the fuel savings and other grade enhancements, those come at new technology bits are actually working fine. It’s some of the older bits of technology that have caused some of the problems.

[Operator:]

Our next question comes from Dan McKenzie of Buckingham Research. Please proceed with your question.

[Daniel McKenzie:]

Hey, guys. Thanks for the time here. Hopefully you can hear me okay. If I’m not mistaken, there is very little benefit at this point embedded in your results from the premium sitting initiatives and please correct me on that. But my question really is when do the revenue initiatives reach critical mass from your perspective? Meaning, when can they start to move the needle in a material way, so fourth quarter, first quarter 2018 or I guess 2018? And then, remind us how do the benefits pull up, are they lumpy or do these revenue benefits phase out pretty evenly?

[Mark Dunkerley:]

Dan, thanks for asking the question because to the extent that you’re sort of having that view, it’s a great opportunity for us to address it. I mentioned in my prepared remarks, at this stage, 16 of our A330s have had the modifications to the seats. That is not the same thing -- that’s roughly two-thirds of our fleet. That is not the same thing as saying that two-thirds of the flights that we’re operating with these aircraft are being sold as having the premium seat. In fact, a much smaller proportion of our total network operated by 330s today is enjoying the -- that sort of positive uptake that are talked about. I mean essentially, it’s most of our international services but not all; it’s New York and it’s San Francisco. All of our other services are operating with selling a restricted number of seats because we don’t know if we can have the larger or smaller aircraft flying on the day. And we are not selling the virtues and benefits for example of lie flat seat because we don’t know we can guarantee its delivery. We won’t be through that, we won’t be in the place in which we can guarantee lie flat seats for those wishing to buy it and 68 Extra Comfort seats for those wishing to take that product, until the first quarter of next year. So, most of that benefit is actually a 2018 year-over-year story, not a 2017 one.

[Daniel McKenzie:]

Very good. Okay. And then I guess I just have two more clarifying questions here. You talked about competitive capacity and sorry to beat a dead horse here, but you talked about competitive capacity from Los Angeles and the Bay Area to kind of the secondary islands in Hawaii. But if I’m not mistaken, that doesn’t really impact Hawaiian directly. And so, I guess as we think about this competitive capacity, I am wondering if you can just share what percent of the ASMs does this really impact, Hawaiian in a direct way?

[Peter Ingram:]

Yes. Hey, Dan, it’s Peter again. I don’t have that percentage at my finger tips right now. What I would say is, we do have some obviously LA Lihu’e we’ve extended to year-round. Now that was one of the routes, we saw some incremental capacity. We have LA Kona starting next year, one of our announcements from yesterday. We don’t decide from seasonal service today, have a lot of Kona and Lihu’e service from the Bay Area, although we will have a little more next year. But you are correct in saying that really the bulk of our capacity is to Honolulu and Lihu’e that has been and will be the core of our operation. We obviously connect people to all the islands. But there are many O&Ds that aren’t seeing as much capacity growth and there will be tangential effect on those, but maybe less direct.

[Daniel McKenzie:]

Understood. And then just squeeze one last one in here. I am seeing bookings from Japan move around a little bit. So, I’m just wondering how you’re thinking about core underlying demand from Asia just in general? Is there a reason to believe that demand trends are inflecting one way or the other or is a sense that things just look pretty steady as we look into the back half for the year at this point?

[Peter Ingram:]

Yes. We continue to see pretty good trends there. I haven’t seen anything that suggests an inflection in trends out of Japan.

[Operator:]

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

[Mark Dunkerley:]

Okay. Thank you, operator. And thank you all for joining us today. We’re extremely pleased with our second quarter results and our performance year-to-date. The trends for the back half for the year continue look positive. And in the next few months, we have many developments coming up, which will better position Hawaiian for the years ahead. So with that, thank you all very much.

[Operator:]

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