Hawaiian Holdings, Inc. (NASDAQ:HA) Q2 2022 Earnings Conference Call July 26, 2022 4:30 PM ET

Company Participants

Jay Schaefer - Vice President and Treasurer
Peter Ingram - President and Chief Executive Officer
Brent Overbeek - Chief Revenue Officer
Shannon Okinaka - Chief Financial Officer

Conference Call Participants

Helane Becker - Cowen
Mike Linenberg - Deutsche Bank
Dan McKenzie - Seaport Global
Chris Stathoulopoulos - Susquehanna International Group
Andrew Didora - Bank of America

Operator

Greetings. Welcome to Hawaiian Holdings Inc. Second Quarter 2022 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jay Schaefer, Vice President and Treasurer. Please go ahead, sir.

Jay Schaefer

Thank you, Maria. Hello, everyone and welcome to Hawaiian Holdings second quarter 2022 results conference call. Here with me in Honolulu are Peter Ingram, President and Chief Executive Officer; Brent Overbeek, Chief Revenue Officer; and Shannon Okinaka, Chief Financial Officer. Peter will provide an overview of our performance; Brent will discuss revenue and Shannon will discuss cost and the balance sheet. At the end of the prepared remarks, we will open the call up for questions. By now, everyone should have access to the press release that went out at about 4 o’clock Eastern Time today. If you have not received the release, it’s 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. These include our most recent annual report filed on Form 10-K as well as subsequent reports filed on Forms 10-Q and 8-K.

I will now turn the call over to Peter.

Peter Ingram

Hello, Jay. Aloha, everyone and thank you for joining us today. Demand for travel to from and within Hawaii remains very strong. As you know, we updated our second quarter outlook at the end of May due to improved demand throughout our network. And today’s results are better than our May expectations. We anticipate strong demand continuing into the third quarter as we increase our international schedule. And importantly, with stability returning to the demand environment, we continue to reduce our debt levels while maintaining a healthy liquidity position.

In North America, yields improved throughout the quarter compared to the corresponding months in 2019, with premium demand leading the way. Every indication suggests a continuation of these trends as we enter the third quarter. Internationally, the recovery in demand has taken root in Australia, South Korea, New Zealand, Tahiti and American Samoa. Travel restrictions in Japan have prevented us from resuming a full pre-pandemic schedule. But these restrictions are incrementally easing. And next month, we are resuming service to Haneda, at the same time as we increase frequency from Narita and Osaka. As we saw when restrictions loosened in North America, consumers in international markets are showing strong interest in visiting Hawaii.

In the second quarter, the commercial team fully implemented variable seat pricing on all North America routes. And early results are exceeding the business case expectations. Building on our success in the Premium Cabin and with our Extra Comfort product, variable seat pricing helps us better capitalize on our award winning service. And as we discussed on last quarter’s call, we are caught in the implementation of our passenger service system transition is underway and on track to launch in the spring of 2023.

Turning to our sustainability efforts in May, we released our Corporate Kuleana Report. Kuleana is the Hawaiian word for responsibility. And this report reflects our commitment to our environmental, social and governance priorities. This year, we announced commitments to replace single-use plastics in our cabins by 2029, to increase local sourcing of food and beverages served on board to 40%, and an ongoing focus on sustainable tourism. As we work toward our commitment to become carbon neutral by 2050, we also announced a strategic partnership with REGENT to support the development of the Monarch, a 100-seat electric seaglider for potential application in Hawaiian inter-island travel.

We also announced an agreement with Par Hawaii, Hawaii’s largest supplier of energy products to explore the commercial viability of locally produced sustainable aviation fuel, or SAF. SAF is by far the most important near and medium-term component of our efforts to reduce our carbon footprint. And this study will be an important step toward developing SAF supply in our home state, which will be critical to our long-term sustainability goals.

I know that staffing has been in the news recently as delays and cancellations create frustrations for travelers and airlines. Our team has worked diligently to stay out of these headlines, with a completion percentage of 99.5% for the quarter and 99.9% from the beginning of the Memorial Day travel period through the end of the quarter. We continue to see strong demand for open pilot and flight attendant positions. Executing on our pilot training efforts will remain a focus of our management team through the end of the year, as this represents the primary constraint on our scheduling flexibility. And while aircraft technician and airport operations staffing remain tighter than we would prefer. We are working to ensure that we can successfully attract the right talent. Tight coordination between our recruiting, training and schedule planning teams is ongoing to ensure that we can operate schedules that we publish.

The labor agreement covering our pilots became amendable this month. We have had positive and productive conversations with ALPA well ahead of this month’s amendable date. And we look forward to completing a new contract that recognizes the critical contribution our pilots make to our business and the competitive environment for these highly skilled professionals. At this point, we can’t put a specific timeline to completing these negotiations.

High and volatile fuel prices will continue to be a challenge going forward, especially on our more fuel-intensive long-haul operations. While the gyrations of the fuel, the global jet fuel market are beyond our control, we will focus on managing what we can, including cost management elsewhere in the business and revenue generation. Compared to the challenges of 2020 and most of 2021, these are high class problems. And I am pleased with our performance in the second quarter and the outlook for the third quarter.

Our team throughout the operation and here at our headquarters has done a fantastic job navigating the twists and turns of the past several quarters. And their hard work has been recognized by the traveling public who selected Hawaiian Airlines as the best domestic airline in Travel + Leisure magazine’s World’s Best Awards recent survey. The progress we continue to make on our goals for 2022 sets us up well for the remainder of the year and for years beyond.

With that, let me turn the call over to Brent to discuss our commercial results and outlook in more detail.

Brent Overbeek

Thank you, Peter. Aloha everyone. As Peter mentioned, our second quarter revenue performance was better than expected throughout our network. Passenger revenue was down just 5.5% from 2019. Although 2 points of the quarter’s revenue performance compared to 2019 was due to an accounting revisions that Shannon will elaborate on later.

We operated 112% of our domestic capacity and 31% of our international capacity compared to 2019. Demand for our North American markets was robust throughout the quarter, peaking with a 92.9% load factor in June. Yields also strengthened as we progress through the quarter, with June up about 9% versus 2019. For our inter-island market, the second quarter saw good recovery in both fair and volume and recovery has been rapid for those international markets that have fully relaxed travel restrictions. As we increase our Japan flying, our performance there in the near-term will be constrained by the passenger arrival caps currently at 20,000 per day. However, we are optimistic that the cap will be increased or lifted altogether in the coming months.

Similar to last quarter, our premium products continue to perform very well. We saw continued strong demand for our front cabin, with North America Premium Cabin PRASM, up 37% for the quarter versus 2019. Total ancillary revenue, including seats, bags, cargo and other products, continues to perform exceptionally well. System-wide Extra Comfort revenue was up 2% compared to the second quarter of 2019 despite reduced capacity. In North America, Extra Comfort revenue was up 25% on 15% more capacity. And as Peter mentioned, preferred seats are off to an encouraging start and the benefits will approach steady state as we get later in the year.

Our co-brand credit card program continues to show strong performance, with another record quarter as revenue was up 11% versus 2019. Net retail sales were up 14% and new accounts increased by 11% compared to 2019, both records for the program. Acquisition and spend remain strong, with no signs of weakening. The cargo team recorded its highest second quarter revenue ever, up 50% compared to the second quarter of 2019. Second quarter yields remain strong up 84% compared to the second quarter of 2019, with the strongest demand from our Asia-Pacific sales. Looking forward, we are encouraged by both domestic and international bookings and are expecting continued strong demand for travel to Hawaii. For the third quarter, we anticipate overall revenue to be down about 1.5% from 2019.

Breaking this further down by geography, in North America, we continue to see strong demand, anticipate our load factor to approach third quarter 2019 levels. The revenue environment continues to improve and we anticipate our third quarter PRASM for North America to exceed 2019 levels or roughly 2 points sequential improvement from the second quarter. We expect to fly a similar amount of capacity to the second quarter at about 116% of our 2019 schedule.

While industry capacity to Hawaii is still elevated, we continue to see moderation both versus last year and 2019 as we move through the summer and into the fall. We remain well-positioned and based on the latest data from the DOT we continue to materially outperform our competitors on PRASM in North America. This demonstrates the strength of our North America network focused on the Hawaii premium leisure traveler, award winning service and optimally configured aircraft.

In the Neighbor Islands, we expect to fly about 82% of our 2019 capacity in the third quarter. As with last quarter, we have implemented modest schedule adjustments based on some of the pilot bottlenecks impacting our 717 fleet. We remain well-positioned and continue to maintain a share of local traffic, well in excess of our seat share and earn a very sizable load factor premium as well as yield premium versus our competitor. However, the recent reintroduction of deeply discounted fares will pressure industry PRASM in this entity.

Internationally, as I mentioned earlier, we are seeing a fairly rapid recovery for markets that are not subject to ongoing travel restrictions. South Korea performance is very strong since the quarantine requirement was removed in April. Sydney is built a bit more slowly, but July load factors are in the 80s, which is positive and yields remain strong. Auckland, where we just resumed service in July, is beginning to accelerate and we are optimistic of our performance there. Of course, a full recovery in Japan is dependent on the easing of government restrictions on arrivals and the current yen-dollar exchange rate, which is down about 22% compared to 2019, will increase the cost of Hawaii vacation for these travelers. However, consistent with our other international geographies as restrictions ease, we do anticipate demand to pick up materially.

Moving to our capacity outlook, we anticipate our overall capacity for the third quarter to be down approximately 6.5% from 2019 levels. This is about 6 points higher than the same comparison for the second quarter as we continue to build back in the international network. For the full year, we expect capacity to be down approximately 9.5%. However, this may move a bit depending on the changes to the Japanese government’s cap on arrivals.

To summarize, we anticipate strong domestic demand and we expect our load factors to be close to 2019 levels, Premium Cabin PRASM improvements to continue to accelerate to historical highs and Extra Comfort revenue to exceed 2019 levels. Internationally, travel restrictions continue to ease and we are seeing robust demand for Hawaii vacation. We have the right products for our markets, the strong brand, exceptional team, and a winning formula for success.

With that, I will turn the call over to Shannon.

Shannon Okinaka

Thanks, Brent and thanks everyone for joining us today. Let me start with an update on the balance sheet. We closed the quarter with $1.8 billion in total liquidity, inclusive of cash, short-term investments and our undrawn revolver. Adjusted net debt was $944 million, which continues to be below 2019 levels.

During the quarter, we fully redeemed the remaining principal on our 2020 WTC bonds. The combination of the tender offer in November 2021 and the redemption in June reduced our outstanding debt by $223 million or 11%. Not only does this improve our leverage, but will trim our interest expense by $18 million per year. In total, since we issued our loyalty program bonds in 2021, we’ve reduced our debt load by $607 million or 27%. The remaining debt and lease principal payments for this year totaled $36 million. Our balance sheet remains strong and we have ample liquidity. With high fuel prices and an uncertain economy, we plan to maintain liquidity above pre-pandemic levels for the coming quarters.

Turning to the P&L. We finished the quarter with an adjusted EBITDA of $1.1 million. These results were better than we originally expected despite increases in fuel costs, given the strong domestic revenue results that Brent discussed. As Brent noted, in the second quarter, we recorded additional passenger revenue to accelerate the recognition of spoilage of unused tickets. This change in estimate was based on an evaluation of the trends for passenger use or non-use of unsold tickets. The impact to the second quarter was $10 million more than what we had anticipated entering the quarter.

On the cost side, our second quarter non-fuel costs, excluding non-recurring items, totaled $491 million, with unit costs up 16% compared to 2019, which was at the better end of our expectations. This year over 3-year increase is primarily due to wage and airport rate increases accompanied by lower ASMs. For the third quarter, we expect our unit costs, excluding fuel and special items, to be up about 10% compared to the third quarter of 2019 on a capacity decrease of 6.5%. As with last quarter, this quarter’s biggest drivers are wages and benefits and airport rents. For the full year, we expect unit costs to be up approximately 14% compared to 2019 on a capacity decrease of about 9.5%.

Fuel costs rose in the second quarter to $3.95 per gallon, up approximately 5% from our May guidance update. And we’re forecasting our price per gallon for the third quarter to be $3.50 based on the forward curve as of July 14. We expect our fuel consumption for the third quarter to be down about 12.5% as compared to 2019. Our capital expenditure forecast for 2022 is approximately $115 million, with about two-thirds for aircraft and the remaining third for non-aircraft spend.

The majority of the aircraft CapEx is pre-delivery payments for our 787s. Some or potentially all of these payments may shift into 2023 depending on the timing of our delivery schedule, which is still in flux. The non-aircraft expenditures reflect investments in technology and in our facilities. We expect our adjusted EBITDA to increase in the third quarter to approximately $45 million. While fuel has moderated somewhat in the past month, as Peter mentioned, yields will need to improve further to fully offset the high fuel cost environment. And as we have seen through the first half of the year, fuel prices are susceptible to volatility.

In conclusion, we’re confident that we’re on the road to recovery, and our focus is on the long-term success of our business by strengthening our brand and award-winning hospitality and service to differentiate us from the competition and win in the marketplace, restoring our international service and returning operations to full scale, hiring and training our people as we plan and prepare for our future, and investing in foundational technology to enhance our commercial agility and increase our cost competitiveness. We believe that these priorities are the winning formula to growing value for our shareholders.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Helane Becker with Cowen. Please proceed with your questions.

Helane Becker

Thanks very much, operator. Hi, everybody. So I have, I think just two questions. One is on Orlando. So you guys went to Orlando and now you’re leaving Orlando. Can you just talk a little bit about that decision?

Peter Ingram

Yes, Helane, I think listen, as with the delay of our 787s, we’ve known for some time, we wouldn’t have sufficient aircraft to continue operating on all the routes that we had added in North America as demand for those aircraft increased. And Orlando has been a strong market during the peak periods, but during some of its off-peak periods was a little bit softer than we anticipated. And given where we were with aircraft, it was the best decision right now in terms of the network.

Helane Becker

Got it. Okay. And then so maybe you can just say that like as we think about the guidance, you’ve taken those ASMs out. So what percentage of the growth in ASMs was – would represent Orlando?

Peter Ingram

We’ve taken them out in terms of the guidance, and it would have been relatively small. We’re talking about something that was operating 3 days a week in the back part of – for 3 weeks in September. So I don’t have that number handy, Helane, but it’s pretty de minimis.

Helane Becker

That’s fine. And then on the 717s, with fuel prices going up, does that fill that, does that change the way you’re going to be thinking about replacing the 717s? I know you talked about the new, the Monarch, which kind of could be an exciting opportunity. But just what about the – what about shorter-term, right, because that’s probably a 2030 kind of a thing?

Peter Ingram

Yes. Thanks, Helane. The 717s, we still expect to be operating that airplane at least through the middle of the decade as we’ve communicated before. Frankly, fuel costs on short-haul flying like we have in our Neighbor Island operation is a smaller proportion of the total cost equation than is ground handling costs, airport costs, other things associated with the fact that it’s a very high frequency, high cycle environment. And frankly, that goes for the operating costs of the airplane and the cycle costs on power-by-the-hour deals and things like that. So it’s really not as fuel-sensitive. The 717 is a terrific airplane for what we do. They are really – if we could replace 717s with new 717s, that would probably be the ideal aircraft choice for us at some point. So we’re happy with that airplane, and it doesn’t really change the equation.

Helane Becker

Okay. Alright, well, that’s very helpful. Thanks, Peter.

Peter Ingram

Sure. Thanks, Helane.

Operator

Our next question comes from Mike Linenberg with Deutsche Bank. Please proceed with your question.

Mike Linenberg

Hi, good morning, everyone. I guess a couple here. On the A330s, obviously, you’re bringing the plane back from Orlando since I think you indicated to backfill into some of the international that you’re ramping back up. But what is the utilization on that airplane? When I sort of think what your schedule looks like in September and beyond, it still seems like you’re down pretty meaningfully. Can you talk about what the utilization is? And what sort of embedded productivity gains that you should see as you ramp that fleet back up to full utilization? What’s the headwind?

Peter Ingram

So we aren’t at kind of peak productivity in terms of the 330s. We will get there as we get later in the year and build Japan back a little bit more. So I don’t have the exact number in terms of productivity. It’s probably a little bit less than where we were back in 2019. But as we continue to build back Japan in the latter part of the year, I think we will get back to the same levels, if not maybe a little bit higher of productivity. And I want to say at that point, it was around 12 hours a day, but I don’t have that number handy.

Mike Linenberg

Okay. And then when I look at the EBITDA guide for the third quarter, it does look like that you still – you may be close to – at the high end, maybe you’re slightly profitable, at the midpoint, maybe you’re not. I think the third quarter seasonally is also one of your better quarters. Where are we – are we at the limit on how much you can take fares up, given where the fuel prices are and the elasticity of demand? Are we pushing on a string here? Assuming that Asia doesn’t or Japan doesn’t come back, where do you get that additional revenue when you’re dealing with a largely discretionary, relatively more price-sensitive customer base? How should we think about that?

Peter Ingram

Yes. So let me touch on a couple of things and then see if Brent or Shannon want to add on to it a little bit. I think there is still some opportunity for upside. One of the things we’re encouraged about is we look at DOT data, which has a little bit of a lag, but we really haven’t seen changes in the trends. We continue to outperform our competitors in all the geographies we serve in terms of revenue generation, and we know our cost structure is competitive as well. So I think we are the most profitable airline in the markets we serve, but the market mix we have is a little bit different competitively than some of our competitors have across their networks. I think as we get back to flying more to Japan, you’ll see that manifest itself in terms of improved productivity on the labor side. Today, we have more pilots on payroll than we did in 2019, but we aren’t doing as much flying as we did in 2019. So clearly, as we get that utilization up, we have improvement on the cost side. We haven’t seen any weakening in the demand in North America, which is the biggest part of our market. You do see some seasonal changes as we go into the fall, but really nothing that indicates demand. And we are optimistic about Japan. Brent mentioned the potential headwind of the exchange rate. But if you look at how robust demand has been in places like Australia and South Korea, which haven’t necessarily benefited from favorable exchange rates themselves, we have seen a real strong desire for travel and a willingness to spend. And I think Japan is going to help us a lot as we move through the end of the year and into 2023.

Mike Linenberg

Okay. Peter, just a quick follow-on and maybe Brent can add on this. Just you’ve done a nice job on the premium product, and I think that your product stands out. But I – when I look at your widebodies, I feel like you don’t have enough seats, you may – maybe you’ll disagree with me, but I think the premium has been where people are paying up and some of those fares are pretty high. If you had your druthers, is it – what is it, is it 18 seats on the A330, and maybe is the right number, 24 or 28, like if you could have more seats or maybe it doesn’t matter, maybe that’s not the issue there, because I feel like you’re – relative to some of your competitors, you do have a smaller Premium Cabin, and it may be where – that may be where you’re leaving revenue on the table? I don’t know. Correct?

Peter Ingram

Yes, look, Mike, this is a subject we discuss a fair bit around here. And I think we felt when we modified the A330s back several years ago now that we had the right sweet spot for that moment in history. But I think your observation is right. Brent’s been getting on these calls quarter-after-quarter and telling you that our Premium demand has been improving faster than our Main Cabin demand. And I think if we – if there was zero cost to doing a fleet transition and we could complete it overnight and not have aircraft out of service for a long time, we probably would stretch that Front Cabin back a little bit, particularly on the A330s and possibly even on the A321s as well.

Brent Overbeek

Yes, I think, Peter, you took the words out of my mouth. I think if we had a no cost option there, we would clearly go do that. It’s something that we will continue to evaluate kind of the economics over the life of that airplane, not just in the short-term in terms of today’s environment. I will say we have seen probably a little more strength on the 330 than we have in the 321, some of that’s a market mix issue, but overall, it’s done exceptionally well.

Peter Ingram

And Mike, the one last thing I would add on this subject, as we look forward to the 787, which isn’t going to be a huge contributor to our fleet over the next couple of years, but obviously will be going forward. The L.O.P.A. that we have designed for that aircraft actually has a larger premium mix. We dedicate a little bit more of the geography of the airplane to the premium cabin and the 787. So, it’s going to be well suited to where the market has been evolving over the last couple of years.

Mike Linenberg

Great. Thanks for the time everyone.

Operator

Our next question comes from Dan McKenzie with Seaport Global. Please proceed with your question.

Dan McKenzie

Yes. Hi. Thanks guys. Just following up on Mike’s question, just given the movement in the dollar, I am just wondering if you can talk about how that’s impacting foreign point-of-sale versus U.S. point-of-sale internationally to international destinations? And it sounds like things are pretty strong, and that’s not really having an impact at this point. But maybe just clarifying, can you just remind us what percent of the bookings that represents the international inbound? And then just related to this, how that distribution strategy augments that foreign point-of-sale?

Peter Ingram

So, it – we haven’t seen a material shift in point-of-sale. Maybe we are up slightly in U.S. point-of-sale particularly to kind of Australia, New Zealand, but not a material shift there. I think in all of those markets, as they have opened up, we have seen a desire for guests in those countries to travel and have been willing to kind of offset a higher dollar-denominated trip for them. In terms of point-of-sale mix, it differs a fair amount from kind of, I will call it, Australia, New Zealand is a bit different than Japan and Korea. Australia, New Zealand were probably – we are generally about two-thirds point-of-sale, non-U.S. about a third U.S., and Japan, Korea are probably closer to 90% heavy – heavily weighted towards foreign point-of-sale.

Dan McKenzie

And how that distribution strategy is augmenting that foreign point-of-sale?

Peter Ingram

Our distribution strategy internationally really hasn’t changed at all. The recent changes we have made in terms of our distribution policies is with a domestic focus.

Dan McKenzie

Understood.

Brent Overbeek

I think we have seen a little – throughout the pandemic, we have seen a little bit of behavioral shift from guests and more activity getting conducted online, both direct through our website and a little bit more through OTA. So, we are seeing a little bit of a shift away from some of the traditional agencies across geographies, and some of that is coming direct to us, where we can transact and offer more products and services, and really our distribution strategy is intended to continue that and offer that in more channels.

Dan McKenzie

Very good. Second question here, just looking out 1 year to 3 years, 3 years to 5 years, I am just wondering if you can help us reconcile the inflation pressures we are seeing today from where you sit? And just internally, if the plan calls for margins that can get back to pre-pandemic levels or should longer term investors anticipate potentially some – just some erosion here from the cost pressures?

Peter Ingram

Well, Dan, it’s hard to specifically forecast inflation going forward. I think obviously, in the near-term, we are in an inflation environment that many of us haven’t seen in our professional careers. But I do think that this industry has proven resilient over time, particularly in the United States of being able to adjust and adapt, maybe not always as quickly as people would like quarter-to-quarter, but over a period of time, you see supply and demand fall into balance and strategies emerge to be able to develop different revenue sources and different cost savings opportunities. And I think that will play out again and we will be able to return to profitability levels that are comparable with what we have been able to produce historically.

Dan McKenzie

Terrific.

Shannon Okinaka

Yes. I would add that in the medium-term, I think we have a lot of opportunity, especially on the cost side. But I think once we have more of our fleet plans firmed up, I think the commercial team can then do medium-term planning, and that will provide more opportunities for revenue increase. But looking at the cost side, I think we have a lot of opportunity for labor productivity from a variety of things. We – when we get new contracts with our labor groups, obviously, the rates go up day one. But a lot of times, we are able to get some work role benefits that take time to implement. And so I think you will see – we will see better productivity from those contracts over the next few years. I think some of the contracts also get productivity improvements with more flying. So, we will see better productivity from that. Also we are making a lot of investment in technology and facilities, and we should be able to get a lot of good cost savings from those in the next few years.

Dan McKenzie

Terrific. Thanks for the time.

Peter Ingram

Thanks Dan.

Operator

Our next question comes from Chris Stathoulopoulos with Susquehanna International Group. Please proceed with your question.

Chris Stathoulopoulos

Hey. Thanks. Good afternoon. Thank you. So Peter or Shannon, there is a lot going on here with the international regions with respect to FX, different reopening timetables. So, could you rank in terms of utilization, Japan, South Korea, Australia and New Zealand, where you are today? And then how are you ranking these markets or weighting, excuse me, these markets into your planning for 2023? I realize some of this here that you can’t control. But in your prepared remarks, there is just a lot of moving pieces here with respect to your flights into these markets. So, kind of want to better understand if you could, where you are in terms of utilization, but also going forward, how you are thinking about these individual markets and your planning for next year? Thank you.

Peter Ingram

Yes. Let me start, and hopefully, I hit the mark correctly on where you are going with the question. I think in Australia, New Zealand, South Korea, we are pretty much at a steady state level in terms of the amount of capacity that we would have in those markets and may vary by a frequency or two here or we may make some adjustments seasonally. But we are not dramatically below where we intend to be for the near-term on how we allocate aircraft to those regions. Japan, we are still pretty considerably below. During this period, we were just operating a single daily flight to Osaka, pre-pandemic that was a daily. We are less than daily on Narita, that was daily before. We had two flights in Haneda, daily flights before the pandemic. We were about to add a third, and we don’t start flying to Haneda until August. And then there is Fukuoka and Sapporo. So Japan, we are still operating really a fraction. I don’t have the precise number, but we can get that for you, but it’s a fraction of what we were doing before. So, that’s where – that’s where the growth is coming on the international as we look forward to the end of this year, but even more importantly into 2023.

Chris Stathoulopoulos

Okay. And my second question here. So, from your competitors’ recovery and their core market shares moving forward. So, I was wondering if you could give some color here with respect to capacity off the U.S. mainland, how that’s – what you are seeing? And also any color with respect to fares, and anything that you are able to speak to confidence with 30 days or 60 days out there? Thank you.

Peter Ingram

Yes. I will start with that one and then maybe hand it over to Brent. On North America to Hawaii flying, capacity has come down a little bit from where it was in 2021, but it still remains above where it was in 2019 pre-pandemic. So, it’s still been a net add over the course of the pandemic, although some of our competitors have made some adjustments over the last few months. So, that’s probably the biggest one. International, we have seen more of the capacity come back, again, with the exception of Japan, where the competitive capacity is still substantially on the sidelines as we are.

Brent Overbeek

Yes. Relative to ‘21, clearly, we have peaked and are coming off of that, and we are still, from an industry capacity a bit above where we were at in 2019, albeit that’s abating a little bit as well as we get into the fall. Obviously, that’s a fair amount more than the capacity that remains for travel within the Lower 48, where industry capacity is down a fair amount. So, we are a little bit in terms of our geography, had a bit of a capacity disadvantage. There not to get into specifics on pricing, but I will say yields have held up throughout the summer. We had a really strong June that I referenced. The rest of the summer looks good. And even into the fall, we are continuing to see pricing improvements and average fare improvements versus 2019 at this point.

Chris Stathoulopoulos

Okay. Thank you.

Operator

Our next question comes from Andrew Didora with Bank of America. Please proceed with your question.

Andrew Didora

Hey. Good afternoon everyone. Brent or Peter, I mean you both mentioned the variable pricing initiative. Can you maybe provide a little bit more color around that when it was introduced in each of the regions? And I guess what kind of impact do you think it has had on pricing in these early days?

Peter Ingram

Well, the early days, the impact is quite small. So, we implemented it fairly early in the quarter. And what we are doing is charging for some of our more desirable Main Cabin seats. We did not – all the guests who had pre-reserved seats in those seats, we let them remain in those seats. And so our ability to sell some of those in the second quarter was rather small, as we get into the third quarter, it gets greater, gets in the fourth quarter, obviously, even more. We have been really encouraged by the take rate. Again, we have got a little bit of a restricted supply as we are moving through the quarter. And our business case on this has it at kind of in the $10 million to $15 million on an annual basis. And I think at this point, we are – while our results are still early and we have got a long ways to go, I think we are pretty encouraged with the domestic results we have seen so far. We have not rolled it out in any of our international markets yet, and that’s a process that we are working through. But our intention in there is that we will roll the products out in those geographies as well in the months ahead.

Andrew Didora

Got it. And then I guess just on the implied 4Q capacity here, I guess one, there is a pretty big disconnect versus your schedules. I think your schedules are up mid-single digits. I guess, where do you have to adjust the most? And I guess sequentially 3Q to 4Q, just curious on like what’s the limiting factor here? Like why isn’t there a bit more of a step-up in capacity, especially with international reopening?

Peter Ingram

So, we have got – I think going back to one of the previous questions, for the most part, we are reopened internationally and everywhere about Japan. We have got a little bit of schedule cleanup that we need to do and particularly in the front part of the fourth quarter, and you will see that probably in the not-so-distant future. So, that I think is probably the majority of the disjoint that you are looking at.

Andrew Didora

Okay. Thank you.

Operator

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

Peter Ingram

Thank you, operator. Mahalo again to all of you for joining us today and the strong demand improvement as we move through the first half of 2022 gives us confidence for the periods ahead. I am extremely proud of our team and their commitment to deliver an outstanding guest experience. And we appreciate your interest, and look forward to updating you on our progress in a few months. Aloha.

Operator

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