Hawaiian Holdings Inc (HA) 2018 Q3 法說會逐字稿

Greetings, and welcome to Hawaiian Holdings, Inc. Third Quarter Fiscal Year 2018 Earnings 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, Investor Relations. Please go ahead.

Thank you, Hector. Hello, everyone, and welcome to Hawaiian Holdings Third Quarter 2018 Earnings Call. Here with me in Honolulu are Peter Ingram, President and Chief Executive Officer; Shannon Okinaka, Chief Financial Officer; and Brent Overbeek, Senior Vice President of Revenue Management and Network Planning.

Peter will open the call with an overview of the business. Next, Brett will share an update on our revenue performance and outlook. Shannon will then discuss our cost performance and outlook. We'll then open the call up for questions, and Peter will end with some closing remarks.

By now, everyone should have access to the press release that went out at about 4:00 Eastern Time today. If you have not received the release, it is available on the Investor Relations page of our website, hawaiianairlines.com.

During our call today, we will refer to times -- at times to adjusted or non-GAAP numbers and metrics. A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found in our press release or on the Investor Relations page of our website.

As a reminder, the following prepared remarks contain forward-looking statements, including statements about our future plans and potential future financial and operating performance. 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 on 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'll now turn the call over to Peter.

Mahalo, Daniel. Aloha, everyone, and thank you for joining us today. We had a very eventful summer and what is proving to be an eventful year. Our third quarter financial performance was solid but fell short of the expectations we shared on our last earnings call as a series of severe weather events in the latter part of the quarter affected our business in the period.

Second quarter flooding in Kauai and volcanic activity at Kilauea gave way to hurricane and typhoon-related disruptions in Hawaii and Japan in the latter part of the third quarter. Each of these affected our financial performance and specifically our revenue to varying degrees. Brent will walk you through the specific third quarter impacts later in the call.

Through it all, our team once again rose to the challenge and remain focused on delivering outstanding customer service to our guests and supporting our communities in times of need. Their continued commitment and dedication is an inspiration to all of us and gives me great confidence for the future.

As we enter the home stretch of 2018, it's worth taking a moment to reflect on our progress against the key objectives we had laid out for the company entering the year and frame how this progress positions us for 2019 and beyond.

At the top of the agenda for the year was transitioning A321neos into our fleet and phasing out our 767s. Though delivery delays in the first half of the year forced adjustments in our network deployments in the second and third quarter, we're now substantially back on track and expect to end the year with the 11 A321s we expected when we started the year. As we've noted previously, the A321s unlock important new opportunities for our route network, allowing us to tap into midsize city pairs between the Western U.S. and Hawaii that were not economically feasible with a wide-body-only fleet.

In addition, the continued deployment of these aircraft will afford us the opportunity to redeploy A330s to the large market and long-haul routes that utilize the aircraft's full potential. Our announcement in September that we will launch nonstop service between Boston and Honolulu starting in April of 2019 is one example of this.

Shortly after the Christmas and New Year peak season, we'll retire the last of our 767s. This event will leave Hawaiian mainline with a simplified fleet of just 3 aircraft types: 717s serving short-haul Neighbor Island routes, A321s serving mid-haul; and A330s, flying a more optimal mix of long-haul routes and high-demand mid-haul routes. Every one of our cabins will have been reconfigured or new within the last 5 years. And each of these 3 types will have a single configuration, optimized to their mission, providing a superior revenue-generating capability, operational efficiency and flexibility. Including investments in lie-flat and Extra Comfort seating, our fleet is better positioned now that it has been at any time in the past decade.

Also, at the beginning of the year, we laid out plans to move quickly on our partnership with Japan Airlines. With our mutual codesharing distribution through JALPAK and Frequent Flier reciprocity now in place, we have turned our attention fully to preparing our organization for the joint venture, which our application is in front of regulators here in the U.S. and Japan. The timing of regulatory approvals remains uncertain, but our working expectation is that we will complete the process by the early part of 2019, which would allow us to implement the joint venture a bit later in the year. We're eager to get started, and our teams continue to engage in planning within the JAL teams to the extent permitted prior to antitrust immunity being granted.

Finally, when we started the year, investor focus was at least as much on changes our -- in our competitive environment as on the things we were doing to position ourselves for the future. With 3 full quarters of elevated competitive capacity growth behind us, we are continuing to deliver margins in the industry's top tier and have maintained our revenue premium. In the just-completed quarter, we were on track for a modest year-over-year gain above last year's best-ever RASM performance. Alas, multiple weather events pushed the third quarter year-over-year RASM into negative territory, so that particular record will stand for the time being.

Looking back over the last few years, you'll see that we consistently produce solid operational and financial results while competing against the industry's largest domestic and international airlines. Over the better part of the last decade, we've grown from a successful niche airline into a durable carrier that is built to compete. We're executing our plan for disciplined profitable growth built on a combination of superior hospitality and operational focus.

Irrespective of the competitive environment, no airline is better positioned to serve the needs of gas traveling to, from and within Hawaii. As we continue to build on our strengths, we will continue to thrive as the carrier of choice for Hawaii.

Now let me turn it over to Brent to take you through our revenue performance and near-term outlook.

Thanks, Peter, and aloha, everyone. Top line growth in each of our geographies, strong performance in our value-added products and another record quarter for our cargo business led revenue growth to 6% year-over-year to $759 million.

Despite setting a record for third quarter revenue, mother nature had her presence known during the quarter with 2 hurricanes in Hawaii, a typhoon in Japan and lingering impacts from volcanic [book away], all of which pressured RASM, which declined 2% year-over-year. Adjusting for these unforeseeable events that occurred in the quarter, system RASM would have been essentially flat, which was in line with our original guidance range given in July.

The RASM performance is inclusive of 1.25 points benefit from fuel surcharges and foreign exchange gains. Domestic PRASM, which includes our North America and neighbor island services, was down 6% year-over-year. Roughly 1/3 of the decline was due to entity mix as longer-stage length North America capacity grew high single digits and neighbor island capacity was down slightly year-over-year. Our North America services were impacted the most from Hurricanes Lane and Olivia where PRASM was down more than the system average year-over-year. Despite the storm disruptions, North America yields were solid while facing industry capacity growth of 8% year-over-year.

Neighbor island PRASM, which was up in the mid-single-digit range again this quarter, but below expectations given the impacts of the storms and some residual impacts of the volcano earlier in the booking curve. We've seen booking trajectories generally improve in North America and Neighbor Island markets following both hurricanes, though some revenue softness is expected to carry forward into the fourth quarter.

As several analysts have noted, the industry pricing environment to Hawaii has weakened a bit over the past 7 weeks. Our international markets showed their resilience once again this quarter. International PRASM was up nearly 4% year-over-year driven by strong demand, especially in Japan, that led to solid load factors and higher average fares in the quarter.

Strength in the region helped to offset the effects of Typhoon Jebi that closed Osaka's Kansai Airport for 10 days. Our operations have returned to normal, but we do anticipate a nominal impact on traffic, particularly in the front half of the quarter.

When we spoke back in July, we noted the tough comp we were facing this quarter against our highest-ever absolute RASM performance in the third quarter of 2017. Looking beyond year-over-year comparisons, though, our revenue performance remains encouraging from a historical perspective. The double-digit industry capacity growth we faced in 2018 on our North America services, which accounts for, on average, about half of our total revenues, has been met with strong demand for the Hawaii vacation. Notably, overall North American traffic was up 5% against our own capacity growth of more than 8% in the quarter.

The midsize U.S. West Coast markets we're entering with our A321neos are trending positively. We're operating 9 routes exclusively with A321neos today. And by year's end, that number will increase to 11.

Our Premium Cabin continues to perform well with front cabin PRASM growth outperforming the Main Cabin. The Extra Comfort product investments we've made on the A330 and A321 fleets continue to reap benefits. Extra Comfort and Preferred Seats revenue increased by 35% year-over-year in the third quarter.

Our seat upgrades and HawaiianMiles sales continue to drive strong value-added revenue growth as well. In the third quarter, value-added revenue per passenger was up 23% year-over-year.

And finally, our cargo performance continues to benefit from a strong global economy. Cargo revenue was up nearly 13% this quarter to more than $27 million, a new quarterly record.

This quarter, we launched All-Cargo neighbor island freighter service. While it represents a small part of our overall cargo business, it complements our existing 717 operation and adds the ability to seamlessly connect containerized cargo with our long-haul network. It was fitting to inaugurate this service by shipping construction and household supplies to Kauai and Hawaii Island to support disaster relief efforts for those communities.

Now looking ahead to the fourth quarter. Following 2018's peak capacity growth in the third quarter, we expect fourth quarter capacity to moderate and grow between 4.5% to 6.5% year-over-year. This puts us on track for full year 2018 capacity growth between 5.5% and 6.5%, which we've narrowed a bit since our last guidance. And while it's too early to share formal 2019 guidance, as Peter and I have said in prior quarterly calls, we expect 2019 capacity growth to be less than 2018's year-over-year capacity growth.

We expect RASM to be down 2.5% to up 0.5% in the fourth quarter, which includes some lingering effects from August and September storms and reflects the current pricing environment. While we're never satisfied reporting lower year-over-year RASM, our performance in the third quarter was creditable given the capacity environment and everything mother nature threw our way.

As Peter mentioned, we're built to compete. We built a durable airline, and our performance this quarter reinforces our confidence and our ability to deliver solid results regardless of the competitive environment. We're excited about our opportunities ahead and look forward to sharing more details with you at our Investor Day in December.

And now I'll turn the call over to Shannon.

Thanks, Brent, and thank you to everyone for joining us today on the call.

To briefly recap the quarter, adjusted net income was about $97 million or $1.91 per share. We delivered what we expect will be among the industry's highest adjusted pretax margins of about 16% despite competitive pressures and rising fuel prices, which increased over 38% over the same period last year.

Total operating expenses were up about 18% year-over-year this quarter, driven mostly by the increase in fuel costs.

With fuel rates continuing an upward trajectory, it's worth taking a moment to mention our fuel hedging program and how it offsets some of the pressure of rising fuel costs. Given the unpredictable nature of the fuel market, we used our hedging program to give a short-term protection on rising fuel rates to ease us into changing market conditions. Our focus on call options allows us to fully participate in the benefits of a decreasing fuel rate environment and provides some relief as the industry adjusts to rising fuel costs.

In the third quarter, we realized fuel hedging gains of $8 million net of premium. And for the full year, we expect our fuel hedges to settle at a gain of more than $31 million net of premiums.

Underscoring how much fuel has risen this year, this expected gain is nearly 2.5x what we expected it to be at the beginning of the year. A gain on the fuel hedge line, however, indicates an increase to our overall fuel costs. In the third quarter, our economic fuel cost per gallon increased nearly 30% over the prior year. And in the fourth quarter, we expect our economic fuel cost per gallon to increase between 20% to 25% over the prior year.

Now switching to our nonfuel unit costs. CASM ex-fuel and special items increased 1.2% year-over-year in the third quarter. This included about 2 percentage points of headwinds from contractual increases in maintenance rates, increased benefits costs and costs related to the start-up of our neighbor island cargo business.

In the fourth quarter, we expect nonfuel unit costs to be in the range of down 2% and up 1% year-over-year. This includes about 1 percentage point of the same headwinds we saw in the third quarter. This puts us in line with our prior full year CASM ex-fuel guidance about 2% at the midpoint.

Both fourth quarter and full year CASM ex-fuel guidance ranges exclude any assumptions relating to the amendable contract with our Flight Attendant Union.

During the past quarter, we jointly filed for mediation with the National Mediation Board with the Association of Flight Attendants, which is scheduled to begin next month. We hope that the commencement of mediation will lead to a prompt resolution of our negotiations.

Overall, our 2018 cost story is playing out as anticipated. The CASM ex-fuel and special item growth we saw on the first half of the year has given way to flattish year-over-year growth in the back half of the year. We've lapsed the increases that we saw on the first half of the year, the most notable of which was from wages and benefits. And we're benefiting in the back half of the year from increased productivity from our A321neo deployments and 767 retirements.

The cost benefits from our fleet transition will continue into 2019 as we retire our last 767 and grow our A321neo fleet by about 50%. The improvements in the fuel burn for ASM for the A321neos versus the 767 is significant and important in this rising fuel environment. Concluding this 2-year transition is key as it helps us set a more stable base for our cost improvement efforts while establishing a solid foundation for our next stage of growth when our 787 deliveries begin in 2021.

We're committed to a culture of continuous improvement and value generation, ensuring that the dollars that we spend and invest positively impact the bottom line.

Finally, last quarter, I mentioned that we were reviewing our expected uses of capital. During the third quarter, we bought back $31 million in share repurchases and issued $6 million in dividends.

We also made a $50 million pension contribution. The timing of which allowed the payment to be a deductible expense against our 2017 taxes. This is particularly notable because this deduction offsets taxes at last year's higher federal tax rates. As a result of this pension contribution, we had a lower-than-usual tax rate for the third quarter of 2018 and now expect our full year 2018 effective tax rate to fall between 21% and 23%.

We're pleased with our financial results this quarter and look forward to a strong closing of 2018. We look forward to seeing you at our Investor Day this December and sharing more about our future plans.

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

Thank you, Peter, Shannon and Brent. I'd also like to thank 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) Hector, please open the line for questions.

(Operator Instructions) Our first question comes from the line of Hunter Keay with Wolfe Research.

So as we're heading into '19, you guys are -- you're kind of limping in the '19 on RASM. And that's obviously a little bit of Island Air benefits still in there that's before anything about the competitive environment changing on its head, potentially. So how do we think about what sort of offsets you guys have in the fleet to offset -- or the network itself to offset or to, say, maybe this was a reverse that trend next year?

Yes. Let me start and then maybe turn it over to Brent to see if he has any comments to add to mine. I think if you look at the last couple of quarters, we've had a fair bit of noise from natural events, particularly affecting the neighbor island, North America networks but also Japan. If you assume that some of that doesn't exist in 2019 or not that we can count on nothing, but I think it's been an unusual year for some of these, there are some opportunity there, some -- a little stability, perhaps, in the neighbor island network. I think we are maturing into some new route additions in the Western U.S. They're not necessarily brand-new markets for us, but I think we will expect to mature and see better performance in some of those. And of course, we've got the joint venture with JAL that we expect to start to more positively impact our results going into 2019. So we think we've got a lot to look forward to. And I think -- I take your comment from a year-over-year basis about "limping" through the back part of the year. I'd say, if you look at where our pretax margin is going to be, we're going to be near the top tier of the industry on a full year basis, stripping out all the seasonality. I think we are coming off very different comps in 2016 and 2017 than many other -- of the other carriers you follow. So I don't think I would characterize it as limping. I think we're executing just fine in a competitive environment. We're focused on managing our costs into next year, which will give us some benefits as well. And we're really excited about the fleet transition.

Okay. I appreciate that, Peter. So let's -- maybe let's talk about the other side of that. Exactly as you mentioned is the CASM ex, is there -- because there's only so much you can do obviously on the RASM side. The market's going to do what it's going to do. But do you feel like you're in a position next year where you can grow your RASM more than your CASM ex? Or your RASM shrinks more slowly than your CASM ex, so you're setting up for like a positive controllable margin year in 2019? Do you feel good about the spread between your RASM and CASM ex moving through the year next year as you see it right now?

Yes. I think it's a little early for us to be talking about specific guidance going into 2019. I think -- and we're in the budget process now, and I'll turn it over to Shannon to talk a little bit more about the cost. We're in the budget process, but we are confident about moving into a period where we'll have better cost performance. Getting through the fleet transition is very helpful in that. I think the entire team here is very focused on the fact that the world has got more competitive in the last couple of years. And you expect that when you're leading the industry and margin that you're going to see more competitive capacity, and we have to sharpen our pencils. So I'm not going to give a sort of a RASM/CASM spread forecast for 2019. But I would say on the cost side, we've got a lot of confidence that we can continue to manage things well.

Shannon, maybe just see what -- if there's anything you want to add to that.

Yes. The only thing I'd add -- I agree on everything with what Peter said regarding our CASM ex and total costs. Sometimes we tend to think of a fuel as not being controllable, but there is a piece of fuel that is somewhat controllable. And I think our fleet transition, especially as we get into this environment of rising fuel costs, is going to be really important when you're talking about RASM/CASM spread. I mean, obviously, we're looking at profitability and margin. I think, in addition to all the things that we're doing with labor productivity and automation and things like that, I think the fleet transition will also contribute a lot to better fuel burn and fuel efficiency. And that's an important part of that profitability perspective.

Our next question comes from the line of Joseph DeNardi with Stifel.

Just piggybacking on Hunter's question a little bit. Peter, you mentioned that your returns are going to be towards the high end of the industry. I think what we've learned over the past few years is that it's hard for airlines with superior returns to maintain them unless there's some sort of structural advantage that they have. I'm wondering if you think Hawaiian possesses some sort of structural advantage that will allow you to maintain above-average margins or if this is just a question of increased capacity coming in until your margins normalize, whether that be Southwest or United or whoever else. Or is there something that allows you to maintain better margins?

Yes. Thanks for the question, Joe. I would say there are a number of things. And some of it is reflected in the comments I had in the prepared remarks about no airline being better positioned to serve guests to, from and within Hawaii than anyone else. And some of that is very much structural. I think our fleet as we are moving into this coming period is, as I said in the prepared remarks, more optimally positioned than we have been in a decade, really, for as long as I've been here. I think having a mix of products on the airplane from our front cabin product to Extra Comfort to our Main Cabin product that is specifically targeted to the needs of people traveling to and from Hawaii is an advantage relative to competitors that appropriately configure their airplanes for a broader mix of markets as opposed to specifically for flying here in Hawaii. I think we've got an advantage on the revenue side, and we've seen this bear out in our customer service and -- customer experience scores that with the hospitality that our employees deliver on every flight, and that has served us well over time. And that gets reflected in revenue premium in the markets we serve. So I think there's a variety of things that we can count on to continue to execute very well. On a relative basis, period to period, as competitive environment changes, there will be some differences in our performance. But we are very confident that we are built to compete, and we are positioned to succeed in whatever the competitive environment is.

Yes. That's helpful, Peter. Just on the JAL JV, I'm wondering if you could just talk about economic impact. Is it a rounding error in 2019? Is it more 2020? Any color there? And is the idea that on a like-for-like basis, you guys are just earning a PRASM discount to JAL on somebody's routes for whatever reason, and once you turn this on, that, that discount should go away? Is that how showed we think about it?

Yes. It's difficult at this point to put a precise number to it. And candidly, because we are in the pre-antitrust immunity phase at this point, we don't have specific insights into their route-level revenue performance, and they don't have insights into our route-level revenue performance. I think we do know that the benefits of commercial partnerships in this industry are correlated to how well you can align the interest of the participants. And so codeshare is better than interline at aligning interest. Joint ventures are better than codeshare in terms of aligning interest. And we think we bring 2 carriers together in this partnership that have different strengths in terms of their presence in Japan, their network behind our gateways in Japan, our presence in Hawaii, our history serving Hawaii, our gateways in connecting routes behind Hawaii. That will allow us to serve guests very well and should allow us to generate positive returns as we get into the joint venture.

Our next question comes from the line of Michael Linenberg with Deutsche Bank.

It's actually Matt, on for Mike. Could you just talk about competitive capacity over the next 2 quarters, looking at both domestic and international or more specifically, transpacific to Asia and transpacific to the Continental United States?

Yes. Right now, it looks like fourth quarter industry capacity from North America to Hawaii will be up around 7%. That's about 1 point less year-over-year than what we saw from an industry perspective in 3Q. Based on what is currently published and obviously, some time for that to change, industry capacity looks pretty flat as you look into the front part in the first half of 2019. On the international side of the business, again, it looks generally flat. You've got individual markets kind of up and down a little bit. You still have some competitive capacity being up in Osaka and a bit in Auckland. But absent that, based on what's currently published in front half of '19, is quite moderate, up in the 1% to 2% range. And in terms of 4Q, a similar percentage.

And just as a quick follow-up. How much are fuel surcharges adding to pricing in the Pacific?

In 3Q, we had -- on the international side of the business, fuel surcharges were at just under 5% benefit in the third quarter, which was disproportionately in Japan.

And to clarify that, that's RASM on the international. That's not a system impact.

Our next question comes from the line of Rajeev Lalwani with Morgan Stanley.

Peter, Brent, a question for you. In your prepared remarks, you talked about just some softness in yields from North America. Can you just provide some color as to what's driving it? Is it demand? Is it capacity? Is it just folks getting ready for Southwest? Just any color that you can provide there. And then just as a quick follow-up, I think you mentioned that there's some lingering effects that you're assuming around storms, et cetera, carrying into the fourth quarter. Can you just quantify some of that?

Yes. Let me start on the first part, and then I'll turn it over to Brent, and he can maybe answer the second part on that about the lingering effects of the storms. I'd say this might disappoint you a little bit, Rajeev, but it's really hard for us to speculate on what is driving the competitive action in the marketplace. We have -- we monitor it very closely every day, and we'll come up with our own theories. But if you really want to understand what's going on in terms of pricing of others, you're better to talk to them, and they're probably not going to give you a very straight answer either. So we mentioned it in the call, I would say, because we have seen conversation about it in some of the commentary on the industry. And we think that it's important for us to acknowledge that we do see some softness out there. But really, when it comes to pricing and forward outlook, there is not very much more we can add on top of that.

Yes. And in terms of kind of storm impact and kind of natural disaster moving into the 4Q, Rajeev, we didn't explicitly call out and we didn't specifically kind of tag it as a direct dollar impact. It's inherent in kind of the trends we're seeing and the baseline that we're doing our forecast off of in 4Q. So we don't have an explicit call out right now in terms of what we've put in the 4Q.

Would it be possible to get a second bite at the apple?

Yes, we can take a look at it. And we'll have to triangulate on it a bit. But I think it's something that we can have Daniel follow up on.

Yes. Peter, I just wanted to follow-up to your answer, maybe I'll approach it in a little bit different way. I mean, as it relates to fuel prices moving up, can you maybe talk about your confidence or your ability maybe to recapture that just given that you're more in a leisure market, and so the elasticity of demand to pricing, obviously, is a factor to consider? So maybe approaching it that way in terms of how you're going to handle that as you move forward and some of the fuel hedges roll off.

Yes. I think what I would say is what -- it gives us a lot of confidence, and it doesn't necessarily manifest itself in a particular quarter. But I think our ability to consistently generate a revenue premium and to operate an efficient cost structure means that as capacity and competitive balances shakes out, it should shake out with Hawaiian in a better position. So we don't think any one is better positioned to earn positive returns traveling to, from and within Hawaii than we are. And so as the competition settles out over a period of time, we think we'll be in a good position to cover our costs and then some.

Our next question comes from the line of Helane Becker with Cowen and Company.

Just a couple of questions here. Have you noticed any change in the way people redeem their Frequent Flyer miles? Have they been maybe increasing their redemptions? Or is it about the same as you get ready for some of these capacity changes that are going on?

So Helane, in terms of redemptions as a percentage of traffic, it's pretty consistent year-over-year. Certainly, as we've grown the airline and grown the HawaiianMiles program, redemptions have increased as we've got kind of more miles, more engaged customers. And so overall, kind of load factor contribution, which is probably the easiest way to look at Frequent Flyer, load factor contribution in the third quarter was pretty consistent year-over-year.

Got you. And then the other question I had is, Peter and team, as you know, I've been following the company on and off for very long time now. And one of the things I don't really ever recall is the airline talking about weather and weather events. And it seems like there's been more of that in the past year or so. And I'm just kind of wondering, are you seeing more -- I don't know how to like ask the question. Are you seeing more like disruptions than you would have expected to see? I mean, is there -- or is what you're seeing just an -- is not an anomaly. It's just sort of normal weather events, and we just never really heard about them.

Yes. So I can just talk about it somewhat anecdotally. But I've been with Hawaiian now for just about 13 years. And I would, on the one hand, agree with you that we've had more tropical storm activity here around Hawaii in the last 4 or 5 years than we did in the first 4, 5 or 6 years that I was here. Interestingly, we actually haven't had a storm with hurricane-force winds hit the island in almost -- hit any of the islands in almost 2 decades. Although we have had some near misses and some tropical storms that did some damage, which, obviously, I wouldn't want to minimize. There's a little bit of an ebb and flow of the storm activity based on whether it's El Niño or El Niña (sic) [La Niña] and the temperature of the waters in a particular year. What we do know is a storm doesn't have to actually hit the islands to disrupt our traffic as there is uncertainty, and we all have -- see lots of weather reports. Their -- we saw in the days leading up to Hurricane Lane, in fact, which, here in Oahu, was a bit of a nonevent in terms of a weather event. It was barely even raining during the point of closest approach. But by the time we got to that point on a Friday morning, a lot of people had changed their plans and canceled their trips, and we were flying some empty airplanes for a couple of days. And so it has an impact on the business even sometimes it doesn't have an impact on the sort of people living here at the time a storm hits. The other thing I would add is I think it was a particularly active -- and I probably can't say past tense yet because I think the tropical storm season goes to November, but it has been a particularly active tropical storm season in Japan. They had -- and that is a big part of our business, and they've really seen a lot of activity this year. A credit to our Japan team. It seemed like every couple of weeks, we were dealing with a storm event, and they really rallied up and performed well. But obviously, that was disrupting to the business in this quarter.

Got you. That's really helpful. And then just one other question, as you transition aircraft types from the 767s to A321s, so I'm assuming you get the -- I think, Shannon, you actually said fuel cost benefit, fuel efficiency. What about in the RASM side? Is the -- as I recall, there's a greater percentage of premium seats. So is that a RASM positive that I should think about it that way?

Yes. Helane, we're got a lot of kind of moving parts as we work through it, kind of like-for-like where we have swaps. I would say, it should be -- clearly should be RASM positive. We've got higher proportion of premium seats. As you mentioned, we've got the ability to monetize Extra Comfort, which is there. But in a lot of the markets we've deployed already, we've actually had a fair amount of moving parts where we've taken a 330 in a market like Portland and split that into 2 A321s. And so we'll have some examples where we'll be increasing kind of capacity within an individual city that makes it a little harder to isolate kind of the pure economics of down-gauging 321s. But certainly, going forward, we'll have a few more in terms of cleaner comparisons.

I'll just underscore the Extra Comfort piece, in particular, which has been a great story for us over the last few years. We never invested in putting an Extra Comfort cabin into the 767s, knowing that they were only going to be in our fleet for a relatively short number of years after we launched that product. That is, the revenue capability of that is, therefore, something that is incremental as we replace 767 capacity with A321 capacity. And you're seeing that reflected this year, and we expect to see more of that as we go into next year and more 321s are in the marketplace.

Our next question comes from the line of Kevin Crissey with Citi.

Quick question on FX. Does that become -- does FX become a headwind in Q4? Or does it remain a tailwind as it was in Q3?

It -- right now, our anticipation, it will become a bit of a headwind. It's -- it was a bit of a tailwind in 3Q, and it will become a bit of a headwind in 4Q.

Okay. And speaking of the Extra Comfort seating and just maybe speaking broadly about the concept of Extra Comfort, it seems to me that type of product seems to be very successful across the sector. Can you talk about why that is working now? I understand why you wouldn't have put it on an aircraft fleet that you were ultimately getting out of. But can you talk about why that works now and maybe wasn't a product that was used 10 years ago, 15 years ago? Why does these products -- or are they being successful now? And why shouldn't an investor think that this is just a procyclical opportunity as opposed to a structural opportunity?

Yes. I'll tell you what I think, and then see if Brent wants to add on to it. But I think about going back 15 or 20 years ago when you think about the first premium economy product that was out there, I think it might have been Economy Plus on United was launched. And it was really a product that was designed to attract a greater share of business traffic and corporate traffic in very competitive markets. And given the distribution capabilities at the time, that was a -- it was really still priced as part of your Main Cabin fare structure, but you were trying to basically attract demand to get to a better part of the booking structure by attracting more demand than your competitors. For a carrier like Hawaiian, with a direct-to-consumer selling proposition, we didn't have a real way to monetize that. So it wasn't something we were talking about when I joined Hawaiian. What changed for us is distribution capability. And as we had more direct distribution, we had the ability to actually charge a separate fare in the Main Cabin versus the Extra Comfort seating and priced as an add-on product on our website. And that was where it first really took off for us. And now we've got the distribution capability through a third-party technology to be able to do that in third-party channels as well, which helps us in the international market. So I think it really is a different situation than it was 10 or 15 years ago. This is not a product that we've lived through many cycles with. And the difference is distribution capability.

Yes, I agree with Peter. I think the distribution has done a whole lot. And as we went through earlier this year in terms of opening up distribution to third-party through EMD, that has clearly benefited us on the international side of the business. And I think the other is really just customer choice. And that is really kind of recognizing the value in the product. And I don't think, as airlines, we did a great job of marketing that at first in terms of kind of the benefits and what consumers were getting out of that. And once we were able to get that message across and empower them with technology to be able to make the purchase quite easily from a distribution perspective, those 2 synergies really pulled together. And we're seeing some strong results from it.

Our next question comes from the line of Dan McKenzie with Buckingham Research Group.

I just have a few questions. So there is a lot of background noise in the third and fourth quarter RASM trends. And I guess, just going back to an earlier question. I think it was Rajeev's. It is helpful to strip out mother nature just to get a sense of whether trends are improving or deteriorating on a sequential basis. So we don't have the hurricanes, but we're also lapping the exit of violent Island Air here October of last year, so that creates even more noise. And so I guess, I'm wondering if you can elaborate a little bit more about how we should think about these trends sequentially.

Yes. Let me let Brent take that one.

Sure. So yes, Dan, as you pointed out, there are a lot of moving parts. And as we said with Rajeev's question, we don't have mother nature specifically borne -- or broken out in terms of 4Q. With respect to Island Air, we are getting at a point where a good chunk of that is in 4Q already. So if you looked at their operation, they were winding down in October of last year. They pulled their schedule down quite a bit, and we have seen some strong traffic even in October as a result of that. And then there is cessation of service in early November. So a good chunk of that was already in the 4Q base from last year.

So sequentially, third quarter or fourth quarter, do we think about it just being steady? A little bit better? A little bit worse? How do we think directionally?

Overall, I would say with some of the pricing environment that's existed from the third quarter into the fourth, I would say sequentially a bit worse in North America, specifically.

Got it. Okay. And I guess, if I focus on the North America and those weakening trends, at least when I look at the data, it seems to be more East Coast-driven than West Coast. West Coast demand why it actually looks pretty firm. I'm just wondering if you would share that view. Or is there -- am I maybe missing something here?

Yes. I think demand overall is holding up reasonably well. I think we've seen -- it varies from market to market, Dan, in terms of some of the pricing activity that we've seen. And I won't go into the specifics there. But yes, there have been some pockets of pricing in the Midwest and the East Coast that have been pretty highly discounted. But we've seen some fares off the West Coast as well that some of our competitors have taken some more aggressive action from the year-over-year perspective on.

I see. Okay. Brent, while I got you here, average up-sell to Comfort Plus, how has it, I guess, transformed over this past year? What was that average up-sell? Where are you at today? And I guess, I'm just trying to get a sense of what inning we're in with respect to the opportunity there.

So we'll share a bit more at Investor Day in December. If we look at this year, it was a year of rapid growth in terms of the supply of Extra Comfort seats. And so we'll continue to see that in terms of through the fourth quarter of this year and into 2019 as we'll have additional 321s joining the fleet and the annualization of that. So utilization remains quite good. We continue to expand our distribution internationally, and our take rates there have continued to go up. But I think there's still some more opportunity for us to succeed in that space, and we'll share some more information around that at Investor Day.

I see. If I can squeeze one last in. I guess, this one will be for Shannon. What has to go right or wrong to hit the better or worse end of your cost outlook? It looks like it's about the usual GAAP that you guys provide. But it's about a $0.20 EPS swing. I'm just wondering what you're thinking could swing that one way or the other.

Dan, so assuming you're talking about fourth quarter, I mean, I think we have a pretty good handle on fourth quarter for us because we're small sometimes and unexpected maintenance event can swing some numbers. But it would really be an unanticipated event. For the fourth quarter, other than something like that, I really can't think of what would really change our course on our guidance, maybe if we got to an agreement with the AFA in the fourth quarter as our guidance doesn't include any assumption about that. Looking ahead to 2019, really, most of the 2019, we're still working on the details of the budget. But a lot of the guidance for flat to down unit costs in '19 is really about fleet transition. And so getting the 767s out in the first quarter, flying the 321s more, so getting actual productivity from all the labor that we've hired in 2018 is important. So I guess, if something changes with that transition plan, that could cause -- if for some reason, we had delays in A321neos next year and we had people unable to fly airplanes, then maybe that could change some of what we see. That is still a little controllable. We have a lot of investment dollars. We're continuing to make an IT, and I think that's really important for the long term. So I don't know that I'd want to pull that bag too much. But I mean, if we really needed to pull some levers, I mean, we do have some levers that we can pull on the cost side to come down if things changed.

Our next question comes from the line of Steve O'Hara with Sidoti.

Just on the, I guess, the A321s, I mean, there are bits of issues with delivery, delays, et cetera. I mean, what's your confidence that those issues are behind you and your kind of your plan going forward won't be interrupted by that?

Yes. So obviously, we had a big setback in the first quarter back in February when deliveries halted for a period of time. As we said in the prepared remarks, we are substantially back on track now. I think that, that setback has caused some other challenges in the supply chain and the production process that affected some of the deliveries in 3Q. And -- but right now, we've got a lot more confidence with 9 airplanes on property and another 2 coming by the end of the year or about delivery time lines. I'm -- I can't sort of speculate about the unknown unknowns. But based on the known unknowns, I think we're in a mode now of where delivery dates are swinging a few days or a week one way or the other as supposed to where we were back in the first quarter. And hopefully, our partners on the manufacturing side of the industry can keep that performance up and 2019 will be a little bit more quieter in this regard.

Okay. And then maybe just on the flat to down, I guess, language about 2019, I think at the last Investor Day, there were some comments about the CASM -- overall CASM impact of the fleet transition with the A321s, 767s, et cetera, redeploying the A330s. And I mean, can you update that at all? I mean, is that kind of still on track? And then what does that mean for 2019 or 2020?

Steve, this is Shannon. And actually, we'll get into a lot more of that detail at Investor Day. So at this point, I think I'll not comment too much on it. We plan to go through some of that math and impact to CASM at Investor Day.

But Steve, I'll just say there is nothing about the cost performance of the 321 that has changed our view of the deposit effect it will have on our route network.

Our final question comes from the line of Susan Donofrio with Macquarie Capital.

Just a couple of quick questions. First, just with respect to the Extra Comfort, are you able to fully sell that now on all the seats? I know there was an issue just because you do have the 767s now. So if you could just clarify that.

So we don't sell Extra Comfort on our 767s. We do have an exit row seating that we sell on the day of operation on the 767s as what we call Preferred Seat. But that's just day off because we've got some different configurations on there. But as we get those 767s retired, we will have the dedicated Extra Comfort seats on every one of our mid-haul and long-haul flights. And we do have extra leg room seating also on our 717s.

Okay, great. And then I'm just curious, Peter, you talked about the weakening of pricing over the past 7 weeks, any idea if you think it's more due to the competitive environment? Or it's due to some of the severe weather events and just getting some bookings back? And do you have any color on that?

We obviously can't speak for anyone else. I think we feel like bookings have recovered substantially from the weather events. They generally, particularly on the long-haul flights, effect things more for the particular period in question. So we feel pretty good about demand overall, but really can't speculate about what may be motivating others and what they're looking at in their numbers as they decide what pricing they have available on the marketplace.

Okay, great. And then just last, just for you, what was your stage light in third quarter? And what's the expectations for fourth quarter and first half of next year?

Why don't we -- I'll have the team get those numbers and take that, talk to you offline about that, Susan. We'll follow-up.

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

Thank you, operator. Mahalo to everyone for joining us today. Despite some twists and turns in the first 9 months of 2018, our performance throughout the year, so far, reinforces our confidence in our plan and our ability to successfully compete in any environment. We intend to continue to execute well and look forward to closing out 2018 on a strong note. Lastly, I have to say, please save the date for our upcoming annual Investor Day in New York on Tuesday, December 11. We look forward to seeing many of you there. Aloha.

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