Hawaiian Holdings Inc (HA) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Hawaiian Holdings 2017 Second Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Daniel Wong, Senior Director of Investor Relations.

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 4:00 Eastern Time today. If you have not received the release, it is available on the Investor Relations page of our website, hawaiianairlines.com.

During the course of 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.

Before we begin, we'd like to remind everyone that the following prepared remarks contain forward-looking statements, including statements about our future plans and potential future financial and operating performance, and management may 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.

For a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statement, we refer you to Hawaiian Holdings' recent filings with the SEC, including the most recent annual report filed on Form 10-K as well as reports filed on Forms 10-Q and 8-K.

And with that, I'd like to turn the call over to Mark.

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 has been with Hawaiian in various positions for the past 3 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 (sic) [$85.3 million] or $1.58 per share. Adjusted pretax 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-month basis, our adjusted pretax margin was 19.1%, another record margin result.

These results have come courtesy of strong demand for the Hawaii 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 traveler 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've invested in our product 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 sporting 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 airports, 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 a 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're truly excited that before long, our employees in these areas will have a better environment 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 in the markets now receiving them. Before the summer hiatus, 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 scheduled for the early part of 2018, so I thought I'd share our perspective on this.

First, no airline is better positioned to serve Hawaii than Hawaiian. We are singly 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 studiously diversified our business precisely 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 scheduled for next year, while higher than we have seen for the last 18 months, is not in fact unprecedented. We can't predict the macro environment 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 would also note that it's been a feature in all of the geographies in which we operate that 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 the media prospects, I'm turning the call over to Peter.

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 an 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 had 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 in unit revenue growth extending to 6 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 onto these routes. And were 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 Lihue into a permanent daily flight to capitalize on consistently strong demand for our service from Southern California. In addition, we brought back nonstop daily flights from Oakland to Lihue 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 a 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 wide-bodies today and other smaller O&Ds that we don't currently have in the network.

Starting in January 2018, we'll be introducing new nonstop service between Portland and Maui, taking advantage of the arrival of our first A321neo. We will extend seasonal service between L.A. and Kona to year-round nonstop service beginning in March, with our -- with the first of 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 nonstop service in April 2018. This route will be flown with the A321neo as will Oakland to Maui, which will switch over from its existing wide-body 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 Lihue. 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 that 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 6 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 of fuel surcharges in Japan added modestly to international PRASM gains.

Japan and Australia, our 2 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 flights between Beijing and Honolulu, and are pleased with the resulting revenue performance and 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 $1.09 over the prior year period. As in recent quarters, the primary drivers of value-added revenue growth were strong sales of HawaiianMiles and 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 will decelerate in the immediate period ahead, with no 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 balance network and optimal fleet for each of our missions and the award-winning 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're 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.

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 3 Boeing 767 aircraft during the quarter as part of our planned exit from the 767 fleet. The difference between aircraft rent and the offset in depreciation savings added roughly 1 more percentage point to our year-over-year CASM ex-fuel and special items growth. The transaction also resulted in a noncash 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 investment. This positions us favorably for continued investments that we expect will lower our long-term unit cost 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 postretirement medical benefit liability for active pilots with a onetime cash payment of $102 million in the third quarter of 2017.

We will also be terminating our IAM and salary pension plans with a 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: increases in wages and benefits totaling about 3.5 percentage points, more than 2/3 of which is related to the new pilot contract; timing of incentive compensation totaling 1 percentage point; crew training for A321neos, totaling about 0.5 percentage point; and airport space rental and landing fee increases, including increases for a portion of our new maintenance hangar, totaling about 0.5 percentage point.

In addition, the timing of certain credits received in 2016 is driving 2.5 percentage points of headwind.

Altogether, we expect CASM ex-fuel and special items to increase 7% to 10% year-over-year in the next period.

Despite this uncharacteristic unit cost growth in the third quarter, we expect our full year CASM ex-fuel growth to come in between 4.5% to 7.5%, which excludes special items and any assumptions related to the amendable flight attendants contract.

Excluding the impact of the new pilot contract, our full year CASM ex-fuel and special items growth will be about 2 percentage points lower, which is slightly better than the mid-single-digit unit cost growth expectation for 2017 that we described at our Investor Day last December in New York.

In addition to achieving the cost-saving targets we set up for ourselves, we're also benefiting from the movement of certain maintenance costs into 2018.

Shifting to other components of our full year 2017 outlook. Increased international flying and higher passenger and cargo load will increase fuel consumption by 3% to 5% for the third quarter and 4.5% to 7.5% for the full year. Based on the fuel curve as of July 14, we expect our economic fuel cost per gallon for the third quarter to be between $1.55 and $1.65, an expected increase of $11.4 million in fuel costs from last year.

For the full year, we're lowering our economic fuel costs per gallon range to be between $1.55 and $1.65 as fuel prices have tracked lower than our previous expectations.

We are lowering our full year 2017 CapEx range to be between $380 million and $400 million, primarily due to the delay of our third A321neo aircraft.

Our strong second quarter results exceeded our initial expectations and give us reason to be confident in our outlook for the remainder of 2017.

Our positive free cash flow and investments in the growth and long-term sustainability of our business reinforce our strong competitive position and underscore the resilience Mark and Peter described earlier, that Hawaiian has become known for.

We look forward to the second half of the year and beyond.

This concludes our prepared remarks, and I will now turn the call back to Daniel.

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're now ready for questions from the analysts first, and then the media if time permits. (Operator Instructions)

(Operator Instructions) Our first question is from Hunter Keay of Wolfe Research.

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 implore you to give us a sense of whatever you're seeing now and whatever you can quantify or even call qualitatively on sort of how to think about your revenue, either on a unit basis or not, through the next 6 to 9 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?

Yes. So Hunter, we're not surprised to hear the question. As you know, the capacity that I think you're talking about is really coming at 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 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.

Yes, and I would add, Hunter, that we have 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.

Right. Exactly, Mark. So my follow-up is when you think about the 330 lie-flats and you think about the down-gazing of the 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 to the upside a little bit in terms of sort of pricing resiliency that people traditionally expect when they see this type of competitive capacity growth, to maybe like, I don't know, keep RASM positive or like -- 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?

I think they're 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 don't anticipate seeing that in 2018. I would also bring some attention to the fact that North America isn't all of our business. We've got other geographies that we operate in. And there's reason for some optimism in some of those.

And Hunter, one more thing I would just add to what Mark just said is I think there's 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.

Our next question is from Helane Becker of Cowen and Company.

I just have 2 questions. One, and then you just alluded to this, either Mark or Peter, was about international opportunities. Can you just talk about some of those international opportunities that might exist to offset some of the pressure that you theoretically may see in North America in the first half of next year?

Sure. I mean we've insourced a lot of our sales activity, and it's having a pretty dramatic effect in our ability to sell in these markets. We're deepening relationships in most of the markets that we serve. And we've seen some really impressive uptick in performance. And you've just heard Peter talk about a 17% PRASM improvement with essentially no -- none of that impact coming -- none of that result being impacted by FX. And we think there's more to be had there. But Peter, do you want to add to that?

Yes. I would say one of the things that we've talked about previously and really focused on it at Investor Day is we've built a network portfolio that really mirrors where visitors come from to Hawaii, 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've built a strong presence, or whether it is in emerging markets that are relatively newer to traveling 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.

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

Well, there isn't excess capacity coming out of China to Hawaii. In fact, our China capacity to Hawaii is essentially flat and, in fact, slightly down, I believe. But we are just 3 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 tourism authorities here in Hawaii.

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 costs?

It's Shannon. 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 [OPEV] terminations and things like that. 2018 -- 2017 also, we have a larger bubble for our 321 induction cost. That will continue a bit into 2018 and that -- for 2018, that will get exacerbated a bit by the delay of our 321neos. So in 2017, we're obviously still incurring some of those training costs. But 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 '17, especially in the third quarter as we discussed on the call -- in the prepared remarks, and go into '18 a bit, we'll see a lot of long-term value from these investments.

So you're basically saying first quarter may be elevated and then more normalized growth in the last 3 quarters?

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 specifics. But I would expect to see more of the 321 induction costs in '18. But we'll get more specific as we get closer to the end of the year.

Our next question is from Joseph DeNardi of Stifel.

Mark, I think you've mentioned a couple of times the fact that you guys are kind of diversified away from just West Coast. I guess, Peter, if I look at the revenue and cost data as you guys reported to the DOT, I know that there are some issues with looking at it that way and computing margins. But 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 2 entities kind of internally?

Yes, Joe. I mean, we've said in the past that 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 are 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 may be some competitive issues in the Neighbor Islands. 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 a cycle.

Yes. And Joe, I would just add that in the last 5 years, each of our main geographies, that's Neighbor Island, West Coast and -- sorry, North America and international, over the last 5 years, there have been periods where each one of those geographies has been the profit leader.

Okay. Okay. That's helpful. 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 2 -- your 2 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 own capacity growth? Or are you happy with, I guess, current plans?

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 intention to change them.

And Joe, just to underscore that. We've grown a little slower than we would have preferred the last couple of years, really, and it has been in anticipation of the A321neos coming. We would love to have those airplanes at the beginning of this year in the robust environment that we're competing in now and would 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 we'll continue to compete very well.

Our next question is from Michael Linenberg of Deutsche Bank.

Just 2 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? Is that...

They've outperformed the main cabin on those same routes. So we've looked at where we've deployed if it would be -- Sydney, Brisbane, Auckland, 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.

Yes. And just on the front cabin, the number of lie-flat seats, how does that compare to just the number of seats that it replaced?

So we had 18 front cabin seats on the old -- the prior configuration, and we have 18 front cabin seats now. So it's 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've got a premium lie-flat seat. We've got 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.

Okay, great. That's helpful. And then one question back to on international. And just some of the new competitors. You have AirAsia X taking advantage of fifth freedoms. And you have GenAir coming out of Korea. And some of these companies, they're somewhat disruptive. They're kind of a different type of animal. And I'm just curious. I mean, I 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 up on your radar. Because I know some of their published fares are low, but it may be 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.

Yes, sure. We -- they're 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 a given level of demand when we've seen some of those entries.

Yes. I'd 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. I mean, the fact is, they're 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.

Our next question is from Andrew Didora of Bank of America.

Shannon, just a quick question on the CASM for the full year. If we assume that the 3Q comes in at the midpoint, it implies 4Q CASM ex-guide 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?

Andrew, I'd have to go back and check your math and see. I think we have something a bit different for what we saw for 4Q. In actuality, 4Q turns out to be lower than our 3Q. 3Q has just got some unusual things going on. We continue -- but generally, we continue the pilot -- the increase from the alpha contract. We've still got some 321 training costs. But I believe our 4Q number is different than the 8% that you quoted.

No, no. We're certainly not 8%. Our estimates of our 4Q CASM is not in the range of 8 percentage points. At this stage, we're sticking to a fiscal year spread of that was 2.5, 3 -- 3 percentage points. There'll come a time when we narrow that. But rest assured that it's not what you think. I don't have an idea about 4Q expenses within an 8-point spread.

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

Yes, sure. I mean, I think the -- let's 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 we're -- 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 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 just because of aircraft availability. But North America is performing well. The one difference relative to the second quarter is that 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 difference 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 on in the marketplace.

Our next question is from Kevin Crissey of Citigroup.

You guys have done a great job of building a plan that was a multi-year plan and sticking to it and delivering excellent results. I don't think many in the call would dispute that. So the question becomes, 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 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.

Okay. Thanks for that. I think we're optimistic 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 define 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 a business cycle.

And maybe we can talk then about what is it 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 a combination of those? And to what extent do you believe all of this has a foundation of excellent kind of wealth generation and economic prosperity on the West Coast?

Okay. I can't really answer exactly why other carriers are making the decisions that they are making. And to a degree, you've been very kind saying that we've had a plan and 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 per se going to 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 product, is around getting smarter in a market that will grow but not grow dramatically.

Our next question is from Steve O'Hara of Sidoti.

I'm just curious on the competitive capacity picture. Maybe you could just tell us if there's a range of capacity growth for next year that you're maybe currently projecting. And then I'm just curious about maybe your feeling about, I know you guys have done a good job of expanding the premium you get from your market. (inaudible) continue to expand that even if the overall level of RASM growth may be just given the competitive dynamic?

Peter, do you want?

Yes, let me go ahead on that. It's still a little bit early because there's 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 in the last 10 or 15 years that there will be periods where we see capacity growing that 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 markets. Particularly Lihue 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 supply and demand come back into balance. And that is certainly what we expect if for some reason they become unbalanced, which we really don't know yet. Maybe the demand will rise up nicely to meet this. And certainly, we've 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.

Okay. And then just -- I don't know if Shannon maybe you 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?

Right, it was about 2.5 percentage points year-over-year. They were just some credits that we received in the third quarter. And over the full year 2016, the full impact of the cost with the credits netted out to 0. So it doesn't have a full year impact. But just when you look at the third quarter alone, it was about 2.5 percentage points of impact.

Our next question is from Rajeev Lalwani of Morgan Stanley.

Mark, I wanted to come back to a couple of questions for you. But first I want 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.

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 the things -- we didn't have a number of things that we are going to have going into '18 working for us. One of them is we've got a -- we will have an aircraft that is suited to most of the markets in which we operate, the A321neo. The second is that we've made changes to the configuration of our aircraft. Those are very sort of physical things. Behind the scenes, we've invested very heavily in the capabilities of our management team. We've 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 the last 2 years, that should give you an indication of how we've been building -- strengthen, just running a smarter business in which we believe will have us in a position better able to deal with good market conditions and bad.

Got it. It makes sense. And then another one for you. Obviously, you've made some announcements to put the NEOs to work along the West Coast. Can you talk a bit about your comfort with the technology there just given some of the issues we've been hearing about in recent months?

Yes. I mean, first of all, we have comfort that our 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 for the mission, have blessed it, and they have at this stage. So I think we're very comfortable with the technology. An interesting thing about the technology is that the bits that have caused 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 kinds of new technology bits are actually working fine. It's some of the older bits of technology that have caused some of the problems.

Our next question is from Dan Mckenzie of Buckingham Research.

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 seating 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 of 2018 or I guess, 2018 or -- and then remind us how do the benefits pool up? Are they lumpy or do these revenue benefits phase out pretty evenly?

Dan, thanks for asking that question because to the extent that you're sort of harboring that view, it's a great opportunity for us to address it. I mentioned in my prepared remarks that at this stage, 16 of our A330s have had the modification to the seat. That is not the same thing -- that's roughly 2/3 of our fleet. That is not the same thing as saying that 2/3 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 that sort of positive uptick that Peter talked about. I mean, essentially it's most of our international services but not all. It's New York and its 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 date. And we are not selling the virtues and benefits of, for example, a 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 the 68 Extra Comfort seats, wishing -- for those wishing to take that product until the first quarter of next year. So the -- most of that benefit is actually a 2018 year-over-year story, not a 2017 one.

Very good, okay. And then I guess I just have 2 more clarifying questions here. You talked about competitive capacity and sorry to beat the dead horse here. But you talked about competitive capacity from Los Angeles in 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'm wondering if you could just share what percent of the ASMs does this really impact Hawaiian in a direct way?

Yes, hey, Dan. This is Peter again. I don't have that percentage at my fingertips right now. What I would say is, we do have some -- obviously, L.A.-Lihue, we've extended 2-year round now. That was one of the routes that saw some incremental capacity. We have L.A.-Kona starting next year, one of our announcements from yesterday. We don't decide from seasonal service today have a lot of Kona and Lihue 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 Maui. 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 some tangential effect on those but maybe less direct.

Understood. And if I can 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 -- reasonably, the demand trends are inflecting one way or the other? Or is the sense that things just look pretty steady as we look into the back half of the year at this point.

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

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

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 of the year continue to 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.

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