Hawaiian Holdings, Inc. (NASDAQ:HA) Q1 2024 Earnings Call Transcript

Hawaiian Holdings, Inc. (NASDAQ:HA) Q1 2024 Earnings Call Transcript April 23, 2024

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Operator: Greetings and welcome to the Hawaiian Holdings, Inc. First Quarter 2024 Financial Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. It my now my pleasure to introduce your host, Jay Schaefer, Vice President and Treasurer. Thank you. You may begin.

Jay Schaefer: Thank you, Camila. Hello everyone and welcome to Hawaiian Holdings’ first quarter 2024 results conference call. Here with me in Honolulu are Peter Ingram, President and Chief Executive Officer; Brent Overbeek, Chief Revenue Officer; and Shannon Okinaka, Chief Financial Officer. Peter will provide an overview of our performance. Brent will discuss revenue, and Shannon will discuss costs and the balance sheet. At the end of the prepared remarks, we will open the call up for questions. By now, everyone should have access to the press release that went out at about 4 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 at the end of today’s press release posted on the Investor Relations’ page of our website. As a reminder, the following prepared remarks contain forward-looking statements, including statements about our future plans and potential future financial and operating performance. Management may also make additional forward-looking statements in response to your questions. These statements are subject to risks and uncertainties and do not guarantee future performance, and therefore, undue reliance should not be placed upon them. We refer you to Hawaiian Holdings’ recent filings with the SEC for a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements.

These include the most recent annual report filed on Form 10-K. I will now turn the call over to Peter.

Peter Ingram: Mahalo Jay. Aloha everyone and thank you all for joining us today. As always, I want to thank our team for an incredible job in the first quarter. In a quarter that featured some operational and commercial challenges, we made great progress on major initiatives and saw important improvement in some key operational metrics. Early this year, a number of very important investments, ones like Starlink, our work for Amazon and the 787 that we’ve been talking about on these calls for some time began to come to fruition. I’ll talk more about these in a moment. While I’m sure the pending merger with Alaska Airlines is a topic of great interest, we don’t have anything material to share today beyond what we have already publicly disclosed.

We received shareholder approval for the combination in February and are working diligently to respond to the Department of Justice’s second request, which we received in early February. Our aim is to comply with that request as soon as possible and we are making steady progress to that goal. On March 27th, Hawaiian and Alaska disclosed a timing agreement with the DoJ in which we agreed not to consummate the merger until 90 days after the date on which both parties have certified substantial compliance with the second request. More information about this and other recent merger-related events can be found in our SEC filings. The early part of this year has featured some major milestones in the development of our fleet. As of this month, we have two 787s in service, and we flew our first 787 revenue flight between Honolulu and San Francisco on April 15th.

Our second A330 freighter was also delivered and has commenced revenue operation. Greater flying is going well and we look forward to continued expansion of the fleet and network over the course of the year. We completed installing Starlink in-flight connectivity on all 18 of our Airbus A321neos and are working towards certification for the A330 so that we can complete installations on that fleet later this year. As promised, the Starlink product sets a completely new standard for in-flight connectivity and the response from our guests has been incredibly positive. On another positive note, we expect our full A321neo fleet to be available for service within the next couple of weeks, based on current engine availability, including the return of some engines from overhaul visits.

Brent will talk about our commercial performance in more detail, but I’ll hit a couple of highlights. Overall, the topping of our revenue guidance in the first quarter reflects generally strong demand for travel to Hawaii in the majority of our markets. While some core parts of our network, notably Maui and Japan have room to improve, the aggregate demand we’re seeing across our portfolio of roots is encouraging. With the additions to our fleet, we are launching some new service in May and the initial customer response to our flights between Salt Lake City and Honolulu as well as between Sacramento and both Kona and Lihue has been very encouraging. We’re also seeing good demand for additional seasonal frequencies that we’ve added to existing routes like Austin, Boston, Las Vegas, LAX, and American Samoa.

We have talked previously about some of the challenges we faced with operations in 2023, mostly rooted in factors outside of our control. A key theme for us this year was ensuring that we get back to industry-leading on-time performance and baggage delivery, things we know we excel at when not facing external headwinds. We saw some tangible results from these efforts in Q1 as reliability improved month by month through the quarter, including hitting 87% on-time arrivals in March, which should rank us near the top of the industry for the month. We’re also working on initiatives to handle disruptions better, improve our call center experience, and introduce new self-service options for guests. I’m excited about the progress we’re making on this work.

First, because it matters to our guests; and second, because running a smooth, reliable operation has a positive impact on costs. Shannon will speak more about our costs, but I want to underscore that we continue to focus on returning to profitability. The investments that we are making and the initiatives that we are pursuing lay a strong foundation for financial resilience. There is a lot going on in 2024 with exciting new projects in addition to the pending merger. My focus is on making sure that we don’t lose sight of the fundamentals; safety, running a great operation, and sharing aloha with our guests, while we execute against a lot of initiatives. I’m grateful to my leadership team and to all of the employees of Hawaiian for keeping a daily unrelenting focus on those fundamentals, especially safety during such a busy time.

With that, I’ll turn the call over to Brent to go over our commercial performance and outlook in more detail.

Brent Overbeek: Thank you, Peter, and aloha everyone. As Peter mentioned, demand remains strong across most of our network in the first quarter. Total revenue was up 5.4% as we flew 2.7% more capacity versus the same period in 2023. We saw a good close-in demand and strong fares driven by continued strength in our premium cabinet. System RASM was up 2.6% year-over-year for the first quarter, which, as Peter mentioned, was above our guidance. Digging into our first quarter performance by geography. North America continues to perform well, and the overall healthy demand was augmented by two factors; first, accommodating other airlines passengers impacted by the MAX 9 grounding; and second, by the timing of Easter, which on a year-over-year basis, pushed more traffic into the first quarter.

Turning to Japan, after seeing demand ramp up through the third quarter of 2023, we have seen the Japan point-of-sale demand recovery flat, driven by the challenges of a weekend compounded by high lodging rates in Hawaii. Somewhat offsetting that weakness, we have been pleased with U.S. point-of-sale demand, which has backfilled some of the gap in Japan originating demand. We expect that U.S. point-of-sale strength to remain robust while the exchange rate environment persists. The rest of our international markets are seeing similarly strong U.S. point-of-sale demand. However, international RASM is down year-over-year as lower yields offset improved load factors compared to a very strong first quarter of 2023. Neighbor Island saw a strong close-in demand and improving yields, which are driving unit revenue improvement.

We are seeing the strongest unit revenue improvement since the second quarter of 2022 when the state of Hawaii reopened travel without COVID-19 restrictions. We continue to perform exceptionally well against the competition with a 28-point load factor differential and a PRASM that was roughly twice that of our competitor in the fourth quarter of 2023. Looking at our ancillary revenue performance. Revenue generated from our Extra Comfort and preferred seat products remained strong and was up 16% year-over-year driven by strong demand and price optimization. We continue to make good progress on our NDC distribution initiative and are now processing roughly 60% of eligible U.S. indirect transactions through NDC. Overall, the feedback from our distribution partners who have implemented this more modern distribution technology is positive and we are pleased with the pace at which we are able to bring on new partners and expand NDC adoption.

Looking forward, we anticipate our NDC penetration will continue to grow as we begin to offer NDC content through the Sabre GDS in the back half of this year. Looking forward to the second quarter. In North America, we are seeing a little bit of year-over-year revenue pressure in the front part of the quarter, mostly attributable to the Easter shift. And our expectations for the summer peak remained strong. As Peter mentioned, our new markets, including Salt Lake City and Sacramento, to Kona and Lihue are building well into the summer. Specifically for Maui, we are seeing continued improvement in advanced bookings, narrowing the demand gap relative to Honolulu. And building off positive year-over-year PRASM improvement in the first quarter, we expect continued improvement in Neighbor Island performance.

We have a lot to look forward to in the second quarter with the recent introduction of the 787 into revenue service, the return to service of our entire A321 fleet, further rollout of Starlink and strong performance on our new routes. All of that combined with our authentic Hawaiian hospitality, and we continue to give travelers to Hawaii lots of compelling reasons to choose us over the competition. For the second quarter, we expect RASM to be about flat year-over-year on capacity growth of about 5%. Looking out over the full year, ASMs are now expected to be up about 6% as the full impact of our previously announced Japan schedule reductions are incorporated into the forecast. With that, I’ll turn the call over to Shannon.

Shannon Okinaka: Thanks, Brent. Aloha everyone and thank you for joining us today. We ended first quarter of the year with an adjusted EBITDA loss of $116 million, equating to an adjusted loss of $2.77 per share, which includes the impact of $0.32 per share due to a change in our effective tax rate that I’ll discuss in a moment. Our CASMex results for the first quarter were better than our expectations, even considering the slight reduction in ASMs, primarily due to the shift in timing of heavy maintenance events, which will be incurred later this year. As we mentioned on our last call, our year-over-year CASM change reflects the preparation for and ramp-up of our capacity throughout the year. Thus, the year-over-year change in CASM starts off larger in the first quarter and improves throughout the year.

Pilot training and other fleet induction costs are being incurred now, but will be offset by the capacity and revenue generated as we begin operating the new additions to our fleet. Significantly affecting our first quarter results and likely the remainder of 2024 is the reduction in our effective tax rate from 21% to 10%. Since 2020, we’ve generated significant federal and state net operating losses, which will be used to reduce future cash tax obligations. Our analysis of the net operating losses under GAAP required us to increase the valuation allowance, lowering the effective tax rate and decreasing our book tax benefit for the quarter. For the second quarter, we expect our unit costs, excluding fuel and special items, to be about 6.5% higher than the same period in 2023.

About 3 points are due to the timing of heavy maintenance events and about 1 point related to Amazon operations and another point related to increased labor costs. For the full year, we expect our unit costs, excluding fuel and special items, to be up about 2.5%. The change from our prior guidance of up 1.5% is primarily due to the lowering of our capacity forecast. Turning to the balance sheet, Peter mentioned that we took delivery of our first two 787s, both of which we have financed, one in the first quarter and one in April. We continue to receive competitive offers from financing companies for our future 787 deliveries as well, and we will make a decision whether and how best to finance them closer to their deliveries. We’re also evaluating the best path forward for our 2026 loyalty program bond maturity.

While the closing of the merger with Alaska Airlines may render this moot, we’re building a solid plan for our balance sheet. While we are not satisfied with our current financial performance, we believe that we are taking the right actions and are starting to see some of the major investments we put in motion several years ago start to materialize. I want to reiterate our gratitude to all of the employees of Hawaiian who have persevered as we work our way back to sustainable profitability. And with that, we can open up the call for questions.

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Q&A Session

Operator: Thank you. We will now begin conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Conor Cunningham with Melius Research. Please proceed with your question.

Conor Cunningham: Everyone, thank you. Just I wanted to see if you would impact the RASM forecast a little bit. Just trying to understand how the competitive landscape is changing in the interisland market and off the West Coast? And then I know you mentioned that the issues with Japan. Just curious on how the international entity is kind of playing out right now? Thank you.

Peter Ingram: Thanks Conor. I think as we look at kind of sequentially coming out of 1Q into 2Q, you have a little more international capacity coming online, which, as we talked about, with Japan, in particular, puts a little bit more of a challenging environment, some more difficult comps in 2Q. From a North America perspective, if you look at kind of the whole period and adjust for the Easter shift, I think we feel — and for the benefit we had in 1Q at MAX, we feel a pretty kind of similar trend rate as we come out of 1Q and into 2Q and the good progress that we saw in Neighbor Island in 1Q, we continue to see that into the second quarter and maybe even improving a little bit as we get to the back half of the quarter.

Conor Cunningham: Okay. Helpful. And then last call, you talked a little bit about slowing hiring, but I think you just mentioned that you’re still hiring and training a fair bit of folks. I’m just curious on where the hiring needs kind of stand today. Do you need to hire more to fulfill the capacity plan? Or do you have enough people on campus at this point to get through 2024 and so on? Thank you.

Brent Overbeek: Yes. Thanks for that, Conor. I’ll take that one. We are continuing to hire, but it is at a slower pace than we’ve seen over the last 18 months to two years. We have — we’ve got more aircraft coming in over the course of the year, another 787 delivery, a few more freighters should be online before the end of the year. We’ve done some of the hiring for that, but we will be doing pilot hiring again at a reduced pace from where we were over 2022 and 2023 as we set up in to next year, frankly. We are always hiring for our airports operation. That’s an area where we see a fair bit of natural turnover, but our staffing is in good shape today, thankfully, and we’re not dealing with some of the deficits we were in other areas.

We’ve been doing some hiring on maintenance, but that’s another area where we’ve made good progress. So, I would characterize it as a more normalized environment of ramping up staffing for a little bit of growth going forward as well as dealing with more normalized attrition and not the sort of hyperkinetic hiring environment that we had coming out of COVID.

Conor Cunningham: Appreciate the thoughts. Thank you.

Brent Overbeek: Thanks Conor.

Operator: Our next question comes from the line of Mike Linenberg with Deutsche Bank. Please proceed with your question.

Mike Linenberg: Hey, good morning everyone. I guess two questions here for Shannon. When we think about unit costs and how you portray it, how are you treating the freighter operation. We’re at two now? Where are we by year-end? And obviously, pilot costs and dispatch costs and aircraft costs associated with those airplanes, but no ASMs. Are you going to carve that out or is that going to be in the Q?

Shannon Okinaka: Yes. Thanks Mike. Yes, I think part of your question, I think, was about how many we’ll have by the end of the year. And I think right now, the current plan is to have seven of the freighters flying by the end of the year. So, right now, we just put it all together into CASM. It’s still pretty small from a system perspective relative to the system to break out. I think as it gets a little larger, we’ll probably verbally break it out, just to give you a sense of how much of the CASM is due to the Amazon costs. For this year, just in general, the Amazon operation and financial results are still pretty much immaterial to the company. So, we don’t plan to do segment reporting this year based on the outlook. So, I think the best we’d be able to do is just split out some of the direct costs.

I think right now, the costs are pretty hard to filter out because a lot of it is pilot training, and that’s just intermingled with our regular passenger business. But when the direct costs become a little larger, we can break that out for you.

Mike Linenberg: Okay, great.

Peter Ingram: And Mike, I’ll just add a little bit to what Shannon said on the Amazon fleet. The number of aircraft and the pace of deliveries has been moving around a little bit driven by the pace at which Amazon has been able to get airplanes delivered from the vendor that is working on reconfiguring the aircraft from passenger configuration to freighter configuration. We had, at one point, expected fewer than the seven by the end of this year than Shannon said. A couple of those have now moved up. So, we think we’re getting more stability on that. I would caution that they may not all be flying by the end of the year because during the peak period, our partner doesn’t necessarily want to introduce new lines of flying into the operation. So, we’ll — that number could move around a little bit. But we do have a fair amount of ramp coming over the course of this year, and that business will become more significant as we go quarter-to-quarter through this year.

Mike Linenberg: Okay, great. And then just a follow-up. Peter, either you and/or Brent, the 787, can you talk about the difference of that premium product versus your A330, your ability to monetize that? It does seem like it is — while the A330 product is a good one, it does feel like that this is a nice step up, and there’s a nice opportunity to generate a lot more premium revenue with the new airplane. Thanks for taking my question.