Hawaiian Holdings Inc (HA) 2021 Q1 法說會逐字稿

Greetings, and welcome to Hawaiian Holdings, Inc. First Quarter 2021 Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Alanna James, Managing Director of Investor Relations for Hawaiian Airlines. Thank you. You may begin.

Thank you, Doug. Hello, everyone, and welcome to Hawaiian Holdings First Quarter 2021 Results Conference Call. Here with me in Honolulu are Peter Ingram, our President and Chief Executive Officer; Brent Overbeek, our Senior Vice President of Revenue Management and Network Planning; and Shannon Okinaka, our Chief Financial Officer. We also have several other members of our management team in attendance for the Q&A.

Peter will provide an overview of our business, including the continued impact of COVID-19 and an update on our priorities for 2021. Brent will provide an update on our commercial performance and trends, and Shannon will provide an update on our cost performance, cash burn and liquidity. At the end of the prepared remarks, we will open up the call for questions.

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

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

As a reminder, the following prepared remarks contain forward-looking statements, including statements about our future plans and potential future financial and operating performance. Management may also make additional forward-looking statements in response to your questions. These statements are subject to risks and uncertainties and do not guarantee future performance. and therefore, undue reliance should not be placed upon them.

We refer you to Hawaiian Holdings' recent filings with the SEC for a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statement. This includes the most recent annual report filed on Form 10-K as well as subsequent reports filed on Form 8-K.

I will now turn the call over to Peter.

Mahalo, Alanna. Aloha, everyone, and thank you for joining us today. Our first quarter performance exceeded what we were expecting when we last talked to you at the end of January. More so than any time in the past year, we experienced a quarter with more rays of sunshine than dark clouds.

At the time of our fourth quarter 2020 financial release, our outlook was depressed by sluggish bookings at the end -- in early January, which in a typical year is the peak period for first half sales. What we didn't know then is that we were on the cusp of a positive turn. As virus case counts in the U.S. crested in mid-January, even before the pace of vaccinations accelerated, we saw a material improvement in bookings for our North America routes. Week by week, for the rest of the quarter, the bookings pace continued to accelerate.

Neighbor Island bookings also improved, although not as much relative to pre-pandemic levels as North America. If there was any doubt that there is pent-up demand for leisure travel after a year of lockdowns, that doubt has now been dispelled.

Despite the positive evolution of the quarter, our financial performance remains dramatically affected by the pandemic. January results remained significantly depressed, especially after the end of the holiday travel period. February was better, but only benefited a bit from the demand improvement that became apparent at the end of January. March was notably better. So much so that nearly half our passenger revenue for the quarter was recorded in the final month. While we aren't back to where we were pre-pandemic, it feels like we are out of the ditch and back on the highway.

Through this period, we made progress on our objectives for 2021, rebuilding our network to drive revenue, reducing our cash burn and strengthening our balance sheet. There is more work to be done, but we are proud of our progress. We continue to rebuild our network with the launch of 4 new North America routes over the past several weeks. We made important progress on reducing our cash burn and reached a milestone in March achieving positive operating cash flows for the month.

We addressed any lingering skepticism about our near-term liquidity by bolstering our balance sheet, through our at-the-market equity offering and a $1.2 billion debt financing backed by our loyalty program cash flows and brand assets. With $2.1 billion in liquidity, we are no longer actively looking to raise capital. Our treasury team has done a remarkable job over the past year, and we are confident we have the liquidity to withstand whatever remains of this crisis.

As I look out to the second quarter, I'm optimistic about our continued recovery in North America. Bookings have recovered and remained strong. Our booking curve is lengthening as travelers become more confident and demand looks much more like pre-pandemic normal. After a year of staying cooped up at home, our guests are ready to travel. Our Neighbor Island business is lagging North America in its recovery trajectory.

The requirement to obtain an expensive COVID-19 test to avoid a 10-day quarantine on short Neighbor Island flights continues to inhibit demand. With lower case counts and positivity rates than when travel restrictions were imposed, it is time for the state of Hawai'i to remove pre-travel testing requirements on trips within the state. For now, we will take some comfort in the continued evolution of the Safe Travels program, which will soon allow Hawai'i residents to travel between the islands without testing or quarantine if they have been fully vaccinated in Hawai'i.

Our international business remains substantially dormant with strong cargo demand allowing us to maintain minimal service to Japan and Korea. Recovery of our international business remains the biggest wildcard in our return to something that better resembles the old normal. North America is well on the way to recovery, Neighbor Island has improved and will recover substantially when testing requirements are lifted, although the timing of this is not in our hands. The path to recovery in our international business remains less certain.

Restrictions are persisting longer than we had anticipated, especially as the pace of vaccination lags what we have seen at home. We are optimistic, however, that the rapid recovery in demand in North America is a harbinger of strong demand recovery in our international markets as cross-border travel becomes a realistic proposition again. We think this will especially be the case in Japan, where the affinity for travel to Hawai'i is extraordinarily high.

In the meantime, we remain focused on managing what we can control. Being disciplined about bringing costs back into the business, setting the foundation for future growth and rebuilding and serving our guests with signature Hawaiian hospitality. The first quarter has been an enormous turning point in our recovery, and we are excited to once again be charting a path to excellence for our guests, our employees and our investors.

I would be remiss if I didn't once again thank our team for their exemplary contributions through this extraordinary period. Amidst the uncertainty of the past year, they have remained steadfast in the pursuit of our purpose, to connect people with aloha, even as the pandemic keeps us more separated than any of us wants. I'm gratified that we are now at a point where we are calling back increasing numbers of our colleagues from voluntary leaves as our business comes closer to full recovery.

Let me now turn the call over to Brent to give you more details on our commercial performance and outlook.

Thank you, Peter, and aloha, everyone. I'd like to echo Peter's gratitude to the entire team once again this quarter. As they've done a fantastic job taking care of our guests and each other as we build back our airline.

Our first quarter revenue performance was better than we expected at the beginning of the quarter as we saw a sharp rebound in close-in demand in North America in the back half of the quarter. Total revenue was down 72% compared to the first quarter of 2019 at the favorable end of our updated guidance on a 49% decline in capacity. Passenger revenue was down 77% year-over 2, while other revenue was down only about 19%, driven by continued strong performance in cargo and loyalty.

While our sequential improvement in first quarter revenue performance was encouraging in and of itself, the events of the quarter marked an important inflection point for our North America business and pointed to continued progress and improvement for the remainder of the year. During the quarter, we continued to rebuild our North America network, adding frequency back into markets we previously served in launching service in 3 new routes, including nonstop service from Ontario, California and Orlando to Honolulu and from Long Beach to Maui. From a traffic perspective, load factors that were languishing in the low 30s in January doubled to the low 60s by March.

And finally, after a disappointingly slow start of the year with booking activity, we saw a material acceleration in February with bookings at roughly 80% of 2019 levels for travel in the second quarter. We saw another step change during the month of March and have been running at over 110% of 2019 booking levels since then.

Unlike previous quarters during the pandemic, we've seen guest confidence in travel expanding further, resulting in appreciably strengthening booking activity for the latter half of the year as well. As such, our current book load factor for both the third and the fourth quarter of this year are now at or above 2019 levels.

As we move into the second quarter, we've welcomed Austin into our network last week, and we'll bring back Las Vegas to Maui in late May. At which point, we'll have all of our pre-pandemic routes back up and running. Finally, we'll launch 4 times weekly seasonal service in Phoenix-Maui late next month. And adding it all up by June, we'll be flying a North America network that is larger than our 2019 capacity.

In the Neighbor Island market, the quarantine and pretravel testing requirement continued to curtail demand. As we progress through the year, we've seen an uptick in traffic driven by North America connections, and a moderate increase in local travel. In the first quarter, we operated about 38% of our 2019 schedule, and we expect to operate about 60% in the second quarter.

The sequential increase is driven by an increase in capacity to Kauai, as Kauai County reentered the Safe Travels program in early April as well as incremental frequencies across the geography to accommodate the increase in demand primarily from connecting traffic.

As Peter mentioned in his comments, last week, the State of Hawai'i announced that Hawai'i residents who have been vaccinated in the state will be able to use their vaccination card to bypass quarantine for travel within the state effective May 11. While it still is early, we've seen a moderate uptick in booking activity for the back half of the second quarter since the announcement. But we believe further liberalization of travel within the state for all travelers is warranted necessary for demand to return to pre-pandemic levels.

Regarding international, we operated only 12% of our 2019 schedule in the first quarter, and we expect to operate a similar level in the second quarter, as we remain in an environment with strong cargo performance and weak passenger demand.

We're continuing to operate with limited service to Tokyo Narita, Osaka and Seoul, but temporarily suspended our service to Tokyo Haneda and consolidated our Tokyo operation at Narita for the time being. At this point, it's not clear when restrictions will be lifted in Japan, but we strongly believe there is pent-up demand and we should see increased booking activity once travel restrictions are eased in Japan.

All other international remains insignificant from a capacity perspective as demand is hampered by travel restrictions and the prevalence of the disease in origination countries. If we roll all that up, we anticipate the second quarter system capacity will be down about 30% to 33%, and that system revenue will be down between 45% to 50% compared to 2019.

Looking further ahead, we are maintaining our summer 2021 planning assumption of operating about 75% to 85% of our 2019 capacity at a system level. While this has been our assumption for several quarters now, the composition is a little different from what we originally anticipated. With more North America flying based on the strength of the demand in that market and less international given the continuing restrictions that abound internationally.

Overall, we're optimistic about the future and encouraged by the signs of recovery in North America. While the timing of the recovery in our other geographies is still uncertain, our experience with a rebound in North America gives us confidence that we should see similar signs of pent-up demand in those geographies once restrictions are lifted.

As we emerge from the crisis, we are continuing to think about how we adapt our policies and services to better meet the needs of our guests. We have eliminated fees and policies that are of limited economic value and serve as an irritant to our customers. We eliminated change fees last year, and we recently announced that we have permanently eliminated mileage expiration for HawaiianMiles. This change will be particularly valuable to some of our less frequent guests from the Mainland or international markets by providing them more flexibility in engaging with our loyalty program.

Onboard, we delivered a higher standard of service to our guests, continuing to offer hot meals and limited beverage service in all cabins even as our competitors were offering crackers and bottled water. We did so with great attention to safety for both guests and our employees. Beginning May 1, we will reinstate priority boarding for elites and other groups, which had been suspended to streamline boarding. And on June 1, we'll be bringing back other popular elements of our in-flight service, including snack and alcoholic beverage sales in the main cabin.

We are sharing these changes with customers with humility, empathy and a commitment to earning their business as they begin to fly again. We stand well positioned to win the business with the best people, the right products to meet the needs of the Hawai'i traveler.

And with that, I'll turn the call over to Shannon.

Thanks, Brent, and thanks, everyone, for joining us today. For the first quarter, we reported an adjusted net loss of $190.6 million or $3.85 loss per share. We closed the quarter with $1.9 billion in cash and short-term investments, which includes the receipt of $109 million from our aftermarket equity offering, of which $68 million was raised in the first quarter; $167 million from the PSP extension; and $1.2 billion in proceeds from the loyalty bond private placement that we announced on our last call. This figure also reflects the repayment of our $45 million CARES Act ERP loans as well as our $235 million revolver.

With our current $2.1 billion in liquidity, which includes our now undrawn revolving credit facility, we're confident that we have the funds to weather the remaining period of uncertainty as the pandemic winds down. Furthermore, last week, we received an additional $25 million of top-up funds from PSP2 and $19 million from PSP3, with another $90 million expected later in the second quarter. We are no longer actively looking to raise capital and have shifted our focus to strengthening our balance sheet over the long term.

While we are not yet ready to discuss updated leverage and cash targets, we know we will be building a long-term plan as there are limited opportunities for near-term delevering that make economic sense. While we have significantly increased our debt balance over the past year, our adjusted net debt is only $35 million higher than the balance as of December 31, 2019.

Adjusted net debt includes debt, finance lease obligations and 7x operating lease balances, offset by unrestricted cash, cash equivalents and short-term investments. Although our higher cash balance will incur greater carrying costs, we believe it is appropriate in the near term. Having said that, we are encouraged by the improving market conditions, which are moving us closer to the return of consistently positive free cash flow.

For the first quarter, our total operating expenses, excluding special items, were down about 33% compared to the first quarter of 2019 on a 49% decline in capacity, in line with our expectations at the beginning of the quarter. While our fuel expense was higher than expected, It was more than offset by some favorability across various other cost categories.

We expect our second quarter total operating costs, excluding special items, to be down about 20% to 24% compared to the second quarter of 2019 on 30% to 33% lower capacity. The sequential increase in costs compared to the first quarter of 2021 is driven by the variable costs associated with operating a bigger schedule.

We remain committed to being cost competitive, even as we face areas of cost pressures such as airport costs. Having completed our fleet simplification initiatives before the pandemic, mainly the retirements of our 767s, our recent focus has been on fixed cost improvements in areas such as maintenance, planning and scheduling to reduce heavy check time and cost. And last fall, we reduced management and administrative positions by 14%.

Although not as evident when doing less flying, we have also reduced our variable costs which will allow us to grow back our network more cost efficiently, including labor savings from important work role improvements for our flight attendants and process and technology improvements for our airport staff. Although there will be a disparate impact on our unit costs as the timing of bringing back certain parts of our network will vary, given the same entity mix, we believe our unit costs, excluding fuel, would be roughly in line with 2019 levels if our network was fully restored.

Our first quarter daily cash burn was $1.0 million, which was favorable to our original as well as our updated expectations, primarily due to higher net sales. Our net sales for the quarter totaled $4.2 million per day, exceeding expectations due to the strength in North America bookings that Brent discussed. As a reminder, in addition to operating cash flows, our cash burn figures include debt service, interest payments, tax refund inflows and CapEx and severance payments, but exclude CARES Act and other new financing as well as the repayment of our CARES Act ERP loan and revolver.

As Peter mentioned, we reached an important milestone in March, when our operating cash flows or our net sales less our operating cash outflows, turned positive. Net sales are expected to maintain these improved levels as we continue to recover in North America, and we should see another step change in net sales when our other geographies open up.

Going forward, we're shifting our focus and guidance about the P&L metrics as we're satisfied that we have sufficient cash to carry us through to the point when we are generating consistent free cash flow. And our decision-making will focus on returning to positive profitability and providing the foundation for long-term shareholder returns.

As we move away from discussing daily cash burn, we believe adjusted EBITDAR will be a better metric to gauge our performance through the remainder of this recovery. We expect our adjusted EBITDAR to improve from negative $152 million in the first quarter to a range of negative $70 million to negative $20 million in the second quarter.

On our current trajectory, we see a path to positive EBITDAR later this year even when assuming minimal recovery of our international business. However, achieving positive pretax or net income will require a more substantial recovery both in our Neighbor Island and our international, particularly Japan geographies, which is unsurprising since Neighbor Island and international flying combined represented over 45% of our revenue pre-pandemic. Although the timing is difficult to predict, given the uncertainty surrounding government travel restrictions, we are ready to restore our network and serve our guests in those markets as soon as we are permitted to do so.

While the pandemic is not over, the crisis has substantially subdued, and we are encouraged by our positive trajectory. We're focused on rebuilding our network and making investments that are in the best interest of the long-term profitability of our business.

And with that, we can now open up the call for questions.

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

So after your bankruptcy earlier this decade and after the GFC, you guys decided that you needed to diversify a little bit, and you did. You got bigger in Japan. You got smaller in the South Pacific. But now it seems like a lot of airlines out there globally these days are kind of just sitting around hoping that things go back to the way that they were, sort of pre-COVID.

Are you one of those airlines that are kind of hoping things go back to the way they were? Or do you see this crisis as a good reason to maybe overhaul something strategically like you did last time?

Yes. Just to correct one part of the question, the bankruptcy was closer to 20 years ago than in the last decade. It was in 2000 and...

I meant to say the century. I know. I know. My mistake. I'm losing track of time. But yes, it was so. My mistake, you get the point. It was really after the GFC was where the overhaul really occurred, I guess. So you get the question.

Sure. And I think we had some things in motion even before that point with the fleet decision on the A330-200, which is really positioning ourselves for more international. I think broadly speaking, in the next 12 to maybe 18 months, I wouldn't expect anything dramatic, more evolution than revolution. But I think our business and our industry is going to continue to evolve, and we have to anticipate where things are going and position ourselves where we can be successful.

I don't have any specific plans, obviously, to announce in that regard today, but we're continuing to look at a variety of options that are out there for us. And I'm sure we're going to continue to adapt and evolve our business to position ourselves for success long term.

What I do think -- where I do think we are particularly positioned well right now, though, is that even before the pandemic, where we've seen leisure come back stronger than business and quicker than business travel. That's a continuation of a long-term trend where leisure travel has been growing very well. And I think we're particularly well positioned here with a premium quality of service and an approach to taking care of our guests that positions us well for the continued evolution of the industry.

Okay. No, that's fair. And your ATL was back up to $690 million or so, if I'm not mistaken, which is pretty much where it was in 1Q '18 and 1Q '19, but your capacity is still down 30%. I know that you said that June, you're going to be up, I think you said, but are you just booking way further out than normal?

Have you locked in some really strong yields? I mean, are we going to see like 90% load factors? How is that going to manifest itself, those 2 metrics together?

Yes. So maybe I'll start and then see if Brent or Shannon want to embellish a little bit. I think right now, as Brent said in his comments, North America is booking out very similar to 2019 pre-pandemic levels. For the third quarter, the bookings are basically in line.

Second quarter, we're still a little bit below. I think what you see reflected in the ATL and why the balance may be a little higher, even though the international bookings are not there, is we're still carrying some bookings for trips that were not flown from 2020, even though that balance has been working down as some of that rebooks and will continue to work down over time.

And so you've got that, that is at a higher level than what you would have seen before the pandemic whereas you don't have the international advanced book in there, and those are largely offsetting, I think, and that's what you're observing in the ATL numbers.

Great. Yes. Go ahead.

No -- to follow on to Peter's comments, we have seen, really, the last, I'd say, kind of 8 to 10 weeks, we've seen tremendous strength across North America, and we've kind of hit a consistent intake of bookings that have been above a 2019 levels for 2Q, 3Q and 4Q. As I mentioned, we've kind of closed the gap from historical load factor for the back part of the year. And average fares in those periods have been more aligned. And frankly, average fares in the second quarter have continued to improve as we move through the period as well, that have helped to strengthen the ATL.

Our next question comes from the line of Catherine O'Brien with Goldman Sachs.

Maybe just a question on network given that I think to quote you guys, it's the biggest wildcard what international is going to come back. Are you guys looking at shorter term markets where you could deploy your A330s? I saw that some of your new routes like Orlando and Austin are using these aircraft.

But I guess, any short term opportunities to deploy those aircraft just given the North America strength? Or do not like kind of quicker, tactical in and out of markets? Just any color there would be helpful.

Sure. Well, I think we actually already have taken advantage of some of that, as we alluded to in some of our prepared remarks. We've shifted gears a little bit with less international flying than we had planned in the bigger North America network than we had planned. Some of the changes that we've announced for the summer, we've made some upgauges for the summer on some 321 routes that will be flying at 330s. And we've also ended some stuff seasonally for the summer that we might not have had the luxury to do before.

So I think we're well positioned for the summer and have a really strong summer here in North America. We'll continue to look at that. And assess the pace at which international is likely to come back. And how does that fit into our fleet and crew capabilities as we move into the fall and take advantage of that in the latter half of the year as well.

And I would add, I think, Brent and the network planning team have also been very nimble over the course of the last year, looking for some opportunities in the charter market that we wouldn't have focused on as much before, looking at flying cargo-only flights with our aircraft.

Some of that activity is going to wane a little bit now as we have restored much more of our schedule. But to the extent we have availability of aircraft in the back half of the year, we've still got the ability to look at those things as well.

Got it. So people getting spoiled on these widebody A330s, at least for the summer. And then one more kind of, I guess, network-type question. Maybe this is tough to fully derive in terms of this contract tree thing. But are you able to pull out what proportion roughly of your interisland traffic was historically driven by international travelers? Just thinking about this as the majority of your international flights do arrive in Honolulu.

Yes. International connecting traffic in Neighbor Island was kind of mid- to high single digits in terms of percentage of traffic. I think overall, if we look at our portfolio of connecting traffic, that was around 30% overall, which is a mix of our own online connecting stuff domestically and then as well as some of our partners and then a component of international, as I mentioned there.

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

Hope you guys are doing well. As you're thinking about these bookings that are coming in, there are 110%, I think, of 2019 levels is what you said. How are you -- how are the yields on those? And I asked because you have a lot of new markets interspersed with markets that you're going back into. And I'm wondering if you have to be very promotional in some of those markets.

So Helane, I think since the last time we talked, we've certainly seen some improvement in the pricing environment. We still see some sale activity for the spring, albeit those levels have clearly improved from where they were at. I think the -- probably the biggest change that we've seen has been just the progression in our ability to inventory manage flights.

So when we're running load factors in the 30s and 40s and 50s, the revenue management side of my team isn't extraordinarily busy. The pricing team is busy, but the RM team, not so much. That has clearly moved forward, and we've become a lot more active in that space. And so really, over the last, I'll say, 4 to 5 weeks, we've seen some continued progress in that.

Furthermore, one area that we didn't include in our prepared remarks that's done -- that we're seeing a good amount of strength is in our front cabin. That business has come back exceedingly strong, and it's an area, both on the pricing and the inventory side that we're going to push hard on. And I think we'll come closer to 2019 levels and may even exceed some of our 2019 RASM levels in the front cabin as folks have some money -- some folks have some money pent-up from the quarantine and are clearly interested in a higher-end experience, and we look forward to delivering that.

In terms of new markets, we've had to do a little bit of promotional pricing to get our name out in some of the select markets. So in places where our name is a little less known, notably in Austin and Orlando. We've done a little bit more promotional activity than we've had to do in places like Long Beach and Ontario, where our brand is well known on the West Coast. But overall, we're encouraged with how both booking and fare levels have come in, in those markets as well.

That's great. That's very helpful. And then my follow-up question is, are you thinking about this from the perspective of people are traveling to Hawai'i because they can't travel overseas. And so there's all this demand for Hawai'i and you guys are like in the way, right? You're just there, you have the capacity. And so on.

And then as international opens at some point in the next, I don't know when, that's just a year or 2, are you thinking that you shift this capacity back to international? Or are you thinking, "Hey, this is working really well in North America to Hawai'i. So let's just go out and buy more planes and do international as an add-on." How are you thinking about that dynamic?

Sure. So -- yes. Thanks, Helane, and I'm glad to see you're traveling again now as well. Welcome back to the sky. I think the way I would put it. People are traveling to Hawai'i because they love traveling to Hawai'i. And so I don't think it is because all of a sudden Hawai'i became the alternative when they couldn't do what they wanted. What they've wanted to do for the past year is travel to Hawai'i, and they were waiting until they could, and so I think that's what we're seeing.

We do have a little bit more capacity in North America this summer than we did before the pandemic, but it is more on the margin than a sort of seismic shift of activity from -- based on airplanes that were flying international. So I think we will largely be able to restore our international flying as demand opportunities improve. And to the extent we are having to choose where to put scarce aircraft capacity, that's a high-class problem relative to some of the things we've been working on for the last 13 months.

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

Brent, just kind of following up on Helane's question a little bit. It looks like your second quarter North American capacity is going to be pretty close to where it was pre-COVID. It looks like industry capacity is maybe up a few points. But what are your expectations for your North America PRASM in 2Q, kind of as a result of those dynamics?

Yes. Well, Joe, we're not giving guidance at the geography level. I will say, we expect to see continued progress relative to historical norms as we move throughout the quarter. And April will be okay, May load factor will be better. Average fare will be a little bit better on historical terms, anticipate continued progress in June. And then as we get out to the latter part of the year, I anticipate that continuing to narrow.

So not ready to give guidance there, but we continue to see material progress both on the traffic side and on the yield side as we move through the latter part of this quarter and into the third quarter.

Okay. Okay. And then, Peter, can you just talk a little bit about kind of confidence in Hawai'i's ability to digest all of this demand or kind of the demand that's coming or any concerns from a labor standpoint or hotel capacity, that, that sort of thing that gives you pause or no?

In the short term, I don't think we're butting up against any hard capacity constraints. I think in the first quarter, as we saw demand inflect positively very quickly. I think there may have been a little bit of a lag in some of the response to bring hotel capacity back on. I think there is -- it was initially some hesitancy having seen fits and starts over the course of the past year to say do we really want to be bringing capacity back on, bringing people back to work in the hotels and other travel businesses, not knowing if things were going to be sustained. I think there's a lot of confidence that things are being sustained right now.

So I think we've got the capacity. There are a couple of things that I think are going to be more transitory like rental cars are unavailable because of some overcorrection in inventory in that part of the business. But those are the sorts of constraints that work themselves back out.

I think one of the things that I do have some concerns about when we continue to work with our partners at the State Department of Transportation on is with the Safe Travels process and the verification of test results and looking forward on Neighbor Island and perhaps, following that on North America of vaccination results. Just making sure we are working to process people through the airports efficiently and so that, that doesn't become a bottleneck is something that we remain concerned about. I think it is very solvable, but it is something we want to make sure that our partners in the system are keeping a focus on the guest experience as we continue to evolve going forward.

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

Yes. Peter, is there -- with the PCR testing requirement in place, is there any move, anything behind the scenes, high level that, that goes away maybe sometime this summer? And I'm just sort of mentioning it in the context that it seems like I'm hearing by Memorial Day, most -- any sort of quarantine restrictions in the Lower 48 should be over with. And so I'm curious if this summer, we're going to see some movement on that?

Or is -- are you just working under the assumption that, that testing requirement will be there through summer? And as peak demand hits, like you said on the earlier question to Joe, you'll just have to -- the airports will have to have the appropriate personnel to just deal with being able to check those people as they come in.

Yes. Thanks, Mike. It's a good question. I think we're anticipating that some of these restrictions will continue to evolve over time. I think it goes without saying, having -- being under the strictest quarantine in the country in the second quarter and the third quarter last year that the government officials in Hawai'i have taken a very cautious approach throughout the pandemic, especially with regards to travel.

And so I think some of those restrictions may linger or some of those limitations may linger a little bit longer than we think. We're encouraged that we're making a step with allowing vaccines to replace testing for Neighbor Island travel going forward. There has been a suggestion. And I think it is likely to happen that in for North American travelers, that flexibility will be offered at some point, although we don't have a date certain on that yet. And I continue to advocate that the testing requirements on the Neighbor Island side should be lifted in the near term. And I'm hopeful that, that's going to happen sometime this summer.

Candidly, with North America, positivity rates and case numbers going down broadly. And particularly, in key places like California, it is going to present an argument that we should consider that sooner rather than later in -- for travel from North America as well. So we'll continue to work with the state on that. Obviously, I can offer no assurances of what decisions will be made and when, but we're going to continue to work to try and let the restrictions when it's appropriate for the safety of our community.

Okay. No, that's helpful. And then I guess a question for Brent. When I think about inter-island or Neighbor Island travel, you versus the competition, did you see any sort of evolution in share over the period? And I'm really trying to get at the fact that there were times where the competition in some markets, basically, either went to a skeleton schedule or disappeared. You guys continued to maintain service. As the hometown carrier, you obviously employ a lot of people who live in the state.

Typically, you'd see people rally around the local carrier and be supportive of the local carrier. Anything that you saw through -- just over time and maybe some permanent gains through this process?

Well, I think it was obviously -- not only did our competitor pull down their schedule. We had a materially different schedule than what we'll have as we build that network and continue to strengthen there. I think our load factors were certainly impaired during that time period, and I think you can go look at the DOT stats and see how we performed on a relative basis relative to the other competitor in that market.

But I'm not sure that, that's a great indication going forward. But certainly, we believe that being the hometown carrier, having the right product, the best schedule, depth of service and breadth of market, I think we stand well positioned to succeed as that market comes back. And we certainly look forward to it coming back later this quarter and into the back half of the year.

Great. And just if I could squeeze in one on the fuel, Shannon. The $1.75, is there an embedded hedge gain in there? What is your hedging position, if yes?

Mike, yes, we hardly have any hedges right now. We just had a hard time last year forecasting our fuel consumption volumes. So I think there might be a little bit. I don't even remember if -- I think it was a gain. But it's really, really small just because we don't have very many hedges on the books right now.

Our next question comes from the line of Dan McKenzie with Seaport Global Securities.

A couple of questions here. I'm just wondering if you can share where the conversations are at with respect to a Travel Passport. So we are seeing the EU embrace the idea of a passport, but I'm really not sure what's happening on the Pacific entity. And I'm just wondering, are those talks ultimately going to be led by the DOT at the federal level? Or is that something that has to happen at the state level? And how are you guys involved with those potential talks?

So there's a variety of discussions going on globally. IATA has been working on this. Ultimately, one of the important building blocks that isn't in place, consistency is government authorities need to set the policy standards. And that has been a moving target and jurisdictions, including here in Hawai'i, continue to have different requirements. And so that makes some of that evolution challenging and creates an environment where it's difficult for the private sector providers to really know what product they're building.

Here in Hawai'i, there have been a couple of pilot projects, including ones which we've been participating with, with CommonPass and CLEAR to develop a digital authentication platform with the safe travels policies embedded in that. Those developments are ongoing, and we're continuing to work on those. But I don't have an ability to tell you today when that is going to be in place and how it's going to be.

I think it does go to the notion for as long as we do have either texting -- testing requirements or vaccine proof as an alternative to that, having some way to electronically validate that is helpful to the guest experience in terms of processing people when they get in the airport. So we certainly encourage that and want to participate in it in any way we can. But we don't control the entire infrastructure.

Okay. So is it -- I guess, at this point, with respect to Japan, is there any other specific, I guess, commentary going on or discussions going on with respect to that? I'm just wondering if you can kind of elaborate a little bit more on the country level here.

Sure. Yes. Well, let me talk about Japan in particular. I mean Japan and Korea are already part of the Hawai'i Safe Travels program. So people arriving from Japan and Korea could today and due today, arrive with a test from an approved testing provider. And there is a network of those available in both of those countries, and that's been in place for some time.

The bigger challenge we have candidly with travel to Japan, where -- and Korea where demand is being impeded, and I'll talk specifically about Japan, is the restrictions on the other end of the route from the Japanese authorities.

And so in addition to needing to get a test to travel to Hawai'i, someone returning to Japan would have to get a test before they leave Hawai'i and another test after arrival. So now you're talking about 3 different tests, potentially some quarantine or stay-at-home restrictions on top of that. And just this past week, as they're struggling with the spread of the virus, some of the major cities in Japan, including Tokyo, have moved back to significant lockdown restrictions and emergency declaration.

So it's really less a case of the policies and procedures needing to be in place in Hawai'i. And more of a case of some of the challenges in the other home countries that we serve. that are why we say the timing of international is a wildcard. I think our optimism that international is going to come back strong is undeterred. And in fact, we are encouraged by the experience we've had in North America. But the timing is a little bit difficult for us to predict right now.

Understood. Okay. And then if I could just squeeze one more in here for, I guess, Shannon. Going back to a question that's come up in the past, and that's structural cost savings. And I guess with the worst of the pandemic and the rearview mirror, I'm just wondering if you can share about costs that have permanently come out of the operation.

What that might mean for CASM ex, say, versus 2019? I'm thinking Hawaiian has become a more efficient airline, but I'm just wondering if you can help us triangulate the dots on what that might mean exactly.

Yes. Dan, thanks. At this point, we're not really able to -- we're not giving CASM guidance into the future. And the main reason for that is because our -- we have 3 distinct entities, right, are very long haul with the international, got your West Coast and your Neighbor Island. And the unit cost and the unit revenues of those entities are so different that the mix really does impact quite significantly the system averages. And so things like not knowing the timing of the international return and how that mix looks against the North America flying makes it really hard for us to guide to unit costs. But yes, we have done a lot of work on our cost structure.

As I mentioned, we didn't have the real big bullet that some of the other carriers had with fleet simplification because we had already done that. But when a lot of work stopped last year, what we were able to do was look at the costs as we brought them back to make sure that they were adding value for the airline that we now are, not the airline that we were 2 years ago.

So sometimes we like to call it zero-based budgeting, but sometimes you carry a lot of cost because that's what you've done in the past that when we stopped everything, we really did look at some things and found ways to do them better. So I mentioned maintenance planning and scheduling.

We also looked at our fleet and thought, we had 20 717s. And we knew that we could do the same amount of 717 flying with 19. And as we looked at things like parts cost, it made better economic sense to part out a 717, so that's what we did. We've also looked at things like in-sourcing some things like purchasing or acquiring a 717 simulator. That will -- right now, obviously, it's hard to see the economic or financial benefits. But as we ramp up our flying again, we will definitely come back as a lower cost airline.

So while I can't give you guidance, I've got a long list that we could walk through of just these different types of cost categories where we've found savings.

That's helpful. Can you just put a big number, a big round number around what all those cost savings might be without implying what that would mean for CASM?

Not really because some -- a lot of them are variable, variable costs. And it really does -- you can put numbers when you know how much you're going to fly and when you're going to fly it. But it really is difficult to quantify until we know where we end up from a -- when we're at a more stable point in capacity.

Our next question is a follow-up question from the line of Catherine O'Brien with Goldman Sachs.

Really quick modeling one that's actually kind of a follow-up to the unit economic discussion you've had with Dan, but on the RASM side. How should we think about the impact of international being quite a bit smaller than normal going forward on RASM? Typically, you have some of your -- all of that all A330 driven, a lot of premium seats, but also a lot of ASMs.

So as we go through this summer, should we -- if international kind of stays in line with current levels, should we think about that actually potentially being a boost to unit revenue? Or I've got it mixed up?

Yes. So if you compare -- again, similar to Shannon's answer of having kind of 3 distinct pieces of the network in terms of a short, a medium and a long. As we change the weighting of those. And as we work through the summer, I think it will -- the pace at which Neighbor Island comes back, we'll probably have a bigger influence on that overall.

And so clearly, it will have an impact, but kind of based on the uncertainty of how much we'll fly in Neighbor Island as we build that back. That will probably have a bigger influence in terms of overall unit revenue change in the second and third quarters.

Our next question comes from the line of Chris Stathoulopoulos with SIG.

So 2 here and maybe trying to get to Dan's question in a different way. But as we look at the ASM recovery and granted there's still work to do here with the return of Neighbor Island international travel. But could you help us frame or how should we think about the cadence of CASM ex-performance? And what are some of the metrics aside from that absolute number that we should be looking for? Is it something perhaps a marginal cost per mile?

And then just remind us on the fixed versus variable cost mix, what that is in a typical steady state? And then how should we think about that as you ramp back up?

Yes. Chris, yes, I think in general, as we ramp back up capacity, our CASM will continue to decrease. Our fixed costs are pretty stable at this point. So really, depending on what entity the capacity return is in, generally, the ASM additions will lower our unit costs. I don't think we're adding -- like I said, it depends on the entity mix. But generally, we're not adding higher-cost ASMs than where we were in 2019. Our variable costs are not generally higher than where they were in 2019. It just really does depend on entity mix.

From a fixed versus variable, I don't have that off the top of my head as we -- it's been changing, obviously, over the past year. We can get back to you on some of what we said about that. But generally speaking, the percentage of fix is decreasing relative to variable, of course, as we bring them up flying.

Okay. And then my follow-up, and I realize you may not want to give out your guidance here. But as we look at where pretax margins were in 2018, 2019, call it around 11.5% there on average. What do we need to think about, if you could put into buckets or weigh these areas, what we would need to see with respect to RASM appreciation and then savings from any structural cost reductions and then fuel and labor productivity?

Yes. Chris, this is Peter. So as Shannon said in her comments, that as we see capacity overall recover to 2019 levels, we would expect our cost -- unit costs to also be in the ballpark of 2019 levels. And that's made up of some improvements in things like the maintenance planning and the reduction in our administrative staffing helping to offset some of the inflationary pressures that we and other airlines see like areas like airport costs.

Then sort of distilling that back to the margin question, the open question then becomes revenue. And I think on the revenue side, we're really encouraged by the demand recovery in domestic and how that is ramping back up and how as load factors come back to more historical levels that you can start to see an environment where yield can be managed closer to historical levels and ultimately drive for improvements.

We're not there yet in Neighbor Island as we are getting there in North America. In international, I think beyond the fact that we're sort of really in the starting blocks in terms of seeing any sort of recovery is the question of, are we going to see any structural changes in the supply and demand makeup and the competitive sets in some of those geographies? And we -- internally, we'll speculate some about what may or may not happen.

Externally, I'm not going to speculate on that. But certainly, we're going to be in a position where we'll be looking for opportunities to drive revenue improvements in some of the international geographies as they start to come back online.

So It's a little bit too early to be saying we're going to hit a pretax margin level of X by 2020 X. But certainly, we're thinking through how some of those things can evolve, making sure we're doing what we need to be doing on the cost front. And driving the revenue side as we have opportunities presented by the market.

There are no further questions. I'd like to hand the call back over to Peter Ingram for closing remarks.

Mahalo, again, to everyone for joining us today. We appreciate your interest, and we look forward to updating you on our progress again in a few months. Aloha.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.