HAWAIIAN Earningcall Transcript Of Q2 of 2024
Peter R. Ingram -- President, Chief Executive Officer, and Director Mahalo, Jay. Aloha, everyone, and thank you, all, for joining us today. I want to start with a sincere Mahalo to our team for making enormous progress on our key areas of focus for 2024. Delivering for our guests, realizing returns from our recent investments, and caring for the people and places we serve. Even as we work toward regulatory clearance of our combination with Alaska Airlines, we are securing a bright, sustainable future for Hawaiian Airlines. We also took important steps in recent weeks to raise working capital and provide ample liquidity should the regulatory process be extended. First, we raised around $400 million by financing 10 A321neo aircraft. Second, we exchanged our $1.2 billion loyalty bonds due 2026 for 985 million of new bonds due in 2029 and a partial cash repayment. While we are optimistic that the merger will achieve regulatory clearance in due course, these steps provide a meaningful liquidity runway into 2029. Shannon will discuss this in more detail. I want to make a brief statement on where we are with the merger. On May 7th, 2024, along with Alaska Airlines, we certified substantial compliance with the DOJ's second request. The certification of substantial compliance triggered the start of a 90-day review period, which was set to expire less than a week from now on August 5th, 2024. Yesterday, the two airlines agreed with the DOJ to extend the review period until 12:01 a.m. Eastern Time on August 15th. We and Alaska have been working cooperatively with the DOJ and expect to continue to do so. Once we have more to share, we will do so in a timely manner. Brent will talk about our commercial performance in more detail, but I'll highlight a few things across our network. Our performance for the second quarter reflects steady demand for travel to Hawaii on the majority of our routes. On the domestic side, there were some challenging comps to start the quarter due to Easter shifting into March of this year. But we had a strong close over the last two months with good demand late in the booking window. Across our international routes, most notably in Japan, where the yen remains historically weak against the U.S. dollar, international point of sale remains below traditional levels. We've backfilled some of this missing Japan point of sale demand by proactively intensifying our focus on U.S. and other international points of sale. With respect to our neighbor island business, we continue to move in a positive direction with improvement in average fares and load factors that demonstrate unambiguously that we are the carrier of choice in the state of Hawaii. While Japan has considerable room for improvement, and Maui demand has not yet fully recovered following last year's tragic wildfires. The overall demand we are seeing across our portfolio of routes is encouraging. In particular, I'd note that the three recently added routes, Salt Lake City to Honolulu, and between Sacramento and both Kona and Lihue, have performed very well. The availability of our fleet is critical, and we've been challenged over much of the past year and a half with well-chronicled shortages of A321neo engines. I am very pleased to share that our A321 fleet has been at full strength since the Memorial Day weekend with a full complement of engines. We expect this to remain the case through the rest of the year and into 2025. As mentioned on the last call, we now have two 787s in service. Guest response to our new flagship product has been tremendous, including accolades for our new Leihoku suite. Our third A330 freighter has also commenced revenue flying. We've had incredibly strong operational performance on the freighter fleet, which we know is important to our customers. We will continue to ramp up operations in the months ahead. The plan is to receive four freighters during the remainder of this year and three in the first quarter of 2025 to arrive at the initial fleet of 10. Getting the freighter fleet up to critical mass is an essential step to allow us to move beyond the investment phase of this line of business and into steady state. We have now installed Starlink inflight connectivity on all 18 of our Airbus A321neos and received FAA certification for the A330. With this approval in hand, we are now underway with the process of deploying Starlink across our entire A330 fleet with 25% equipped, as of the end of last week. Our target is to complete A330 installations by the end of the third quarter. We're continuing to see incredible guest response to having fast, free Wi-Fi that just works and expect this to be a driver of customer choice as awareness grows. Beyond all these major investments, we never lose sight of the fact that what our guests expect most for us is to deliver safe, reliable, and efficient operations. With this in mind, returning to our long-standing position as the industry leader in on-time performance is a key goal. Now that some of the external headwinds that plagued us in 2023 are in the rearview mirror. Year to date through June, we are over 80% for on-time performance, including ranking atop the DOT listing for March. We ended 2Q with a solid 84% for June, which should similarly rank us near the top of the industry when the DOT stats are released. In addition, our baggage performance has shown some nice gains this year thanks to the focus of our team. And understanding that we live in a world where perfection is elusive, we've also been continuing to work on initiatives to manage operational disruptions better, improve our call center experience, and introducing new self-service options for guests. All of these initiatives are intended to advance our return to profitability and financial sustainability. And beyond the accomplishments I've discussed, there are other important steps we are taking to improve bottom-line performance. These include driving additional revenue premium through the optimization of ancillary products, especially with respect to extra comfort and preferred seating, enhancing our premium offerings in the air and on the ground, improving employee efficiency, which goes hand in hand with running an industry-leading operation, getting the freighter fleet up to critical mass to both grow and diversify our revenue and where necessary, adjusting our network and competitive profile. Again, I want to express how proud I am of the Hawaiian Airlines team. As we navigate through one of the most unique chapters in our 95-year history, this group remains unrelentingly focused on delivering outstanding guest experience, achieving industry-leading operational performance, and continuing to adapt our business to a changing economic and competitive environment. With that, I will turn the call over to Brent to go over our commercial performance and outlook in more detail. Brent Overbeek -- Executive Vice President, Chief Revenue Officer Thank you, Peter, and aloha, everyone. As Peter mentioned, demand remained steady across most of our network in the second quarter. Total revenue was up 3.5% as we flew just over 4% more capacity versus the same period in 2023. System RASM for the second quarter was about 1% lower compared to the same year period, which was in range with our guidance. Diving into our second quarter performance by geography, North America continued to demonstrate solid performance with good close in demand in the last two months of the quarter. Average fares were down slightly compared to the same period in the prior year due largely to a weakened Maui market which continues to recover. Demand for routes excluding Maui provides stability to our North American entity during the second quarter. As Peter mentioned, during the quarter, we added service from Salt Lake City to Honolulu and Sacramento to Kona and Lihue, and are encouraged with their performance out of the blocks. Looking ahead to the third quarter, for markets excluding Maui, we are seeing solid demand that is not quite keeping up with industry capacity increases primarily in Honolulu. For the Maui market, we see advanced bookings down slightly at lower fares than during previous years. For the Japan market, Japan point-of-sale demand remains unchanged from what we shared last call, with weakness driven by a weaker Japanese yen and high lodging costs in Hawaii. However, we continue to see success in diversifying our traffic by focusing on U.S. point of sale, which is expected to remain strong going into the third quarter, and by competing effectively for flow traffic to and from other cities in Asia. The yen exchange rate remains the biggest headwind in this market, though we continue to see strong affinity among Japanese consumers for Hawaii and for our brand. The rest of our international markets are seeing similar though less pronounced dynamics, with similarly stronger U.S. point-of-sale demand. Overall, international RASM continues to be impacted going into the third quarter, with lower overall yields and a modest load factor decline. While we can't control the currency environment, we have taken decisive measures to pivot our sales and distribution efforts to address the marketplace challenges. Continuing the positive movement, last quarter, Neighbor Island has shown improving yields and solid demand, which are driving year-over-year unit revenue improvement. We're seeing positive sequential RASM improvement from the start of the year through the third quarter, reflecting the strong performance for the product that we offer. In fact, the second quarter had the strongest unit revenue improvement on a year-over-year basis since the second quarter of 2022. We continue to perform exceptionally well against the competition, with a 30-point load factor differential and a prism that was roughly twice that of our competitor in the first quarter of the year. Looking at our ancillary performance, our extra comfort and preferred seat revenue has remained strong and was up 18% year over year, driven by continued demand and ongoing price optimization. For the third quarter, we expect overall system RASM to be down about 3% year over year on capacity growth of about 7%. We are seeing discounting as well, we're seeing more discounting of supply outstrips demand in both North America and in Japan. Looking at the full year, we are revising our capacity guidance downwards and we now expect capacity to be up about 5.5% year over year, primarily due to a shift of our third 787 delivery into the front half of 2025. Overall, I'm encouraged that in the third quarter, we expect to have access to our entire A321 fleet, which will help us optimize the deployment of assets on our network and also drive reliability. That, combined with the rollout of new products like the Leihoku suite and Starlink, should allow us to deliver a highly competitive product and guest experience in the second half of the year. With that, I'll turn the call over to Shannon. Shannon L. Okinaka -- Executive Vice President, Chief Financial Officer Thanks, Brent. Aloha everyone and thank you for joining us today. We ended the second quarter of the year with an adjusted EBITDA loss of $21 million. This resulted in an adjusted loss of $1.37 per share, which includes a negative $0.14 impact from the decrease in our effective tax rate to 0% versus the expectation of 10% that we communicated at the beginning of the quarter. Year over year, the 0% effective tax rate impacted adjusted EPS by $0.21 versus last year's tax rate of 14.7%. The results for the quarter also reflect lower fuel costs per gallon than originally expected and a shift in the timing of heavy maintenance costs to the second half of this year, which caused us to achieve better CASM performance than our original expectation. For the third quarter, we expect our unit costs, excluding fuel, and special items, to be flat versus the same period in 2023, which consists of a number of puts and takes. There's about two and a half percentage points of increase from the costs of our larger freighter operation, which does not generate ASMs, and the decrease in maintenance credits recognized in 2023. These increases were offset by about two points of labor and benefits improvement and half a point from the timing of heavy maintenance events. On our financial results call for the third quarter of 2023, I shared that we were carrying about 25% more pilots on our payroll than we did in July 2019 for about the same capacity. By the end of this year, we expect the surplus of pilots per aircraft to be about 14% and decrease to 6% to 7% by the end of 2025, which should reflect a more steady state rate. During the third quarter of last year, we expected the CASM impact of the training bubble and overall pilot productivity to decrease from $0.26 in the fourth quarter of 2023 to $0.14 in the fourth quarter of 2024. Excluding the impact of actual Amazon flying that again does not generate ASMs, we're on track to hit that mark and expect to further reduce the impact on CASM by over half by the end of 2025. For the full year, we are improving our CASM X guidance from a midpoint of up 2.5% to up 2%, despite lower capacity. We're focused on managing costs during this financially challenging period, even while we make important investments in our business to set a strong foundation for the future. As Brent mentioned, we now expect one 787 delivery to shift from late 2024 to early 2025, which decreases our expected full year capex to a range of $350 million to $400 million. As Peter mentioned, we've taken important steps to bolster our liquidity and moderate our debt maturity schedule that will allow us time to return to sustained profitability. The financing of 10 A321s added about $400 million of liquidity. With the two 787 we have financed this year, we ended the quarter with $1.5 billion in liquidity, about twice our pre-pandemic target and approximately 50% of our trailing 12-month revenue. As you know, the $1.2 billion in brand and loyalty program bonds we issued in 2021 were due in January 2026. Just last Friday, we completed the exchange of $1.194 billion, or about 99.5% of the original notes for an issuance of 985 million in new notes with an 11% coupon that will become due in April 2029. And the payment of $205 million in principal to existing note holders, leaving about $6 million in original notes outstanding. While the new notes have a higher interest rate, we feel this is prudent risk management in the event the merger is delayed. While we are confident in the merits of our merger, we're also managing the business and the balance sheet in case the closing is delayed. We're focused on improving labor productivity, adjusting our commercial response to market opportunities, and monetizing the events investments we have made. I want to reiterate our gratitude to all of the employees of Hawaiian who are the best in this business and are continuing to manage and operate our business to provide the best service in the industry. And with that, we can open up the call for questions. Operator Questions & Answers: |
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