Hawaiian Holdings, Inc. (NASDAQ:HA) Q4 2019 Earnings Conference Call January 30, 2020 4:30 PM ET

Company Participants

Alanna James – Managing Director-Investor Relations
Peter Ingram – President and Chief Executive Officer
Brent Overbeek – Senior Vice President-Revenue Management and Network Planning
Shannon Okinaka – Chief Financial Officer

Conference Call Participants

Steve O'Hara – Sidoti
Hunter Keay – Wolfe Research
Dan McKenzie – Buckingham Research
Catherine O'Brien – Goldman Sachs
Joseph DeNardi – Stifel
Helane Becker – Cowen and Company

Operator

Greetings, welcome to the Hawaiian Holdings Fourth Quarter and Full Year 2019 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I would now like to turn the conference over to Alanna James, Managing Director of IR. Thank you. You may begin.

Alanna James

Thank you, Sherry. Hello, everyone, and welcome to Hawaiian Holdings fourth quarter and full year 2019 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. We also have several other members of our management team in the room for the Q&A. Peter will open the call with an overview of the business. Next, Brent will share an update on our revenue performance and outlook. Shannon will then discuss our cost performance and outlook. We will then open up the call 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 o’clock 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 statements. This includes the 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

Mahalo, Alanna. Aloha everyone, happy New Year and thank you for joining us today. As you have seen in our press release today, our fantastic team continued to execute well this quarter and we posted adjusted net income of $45.9 million and adjusted EPS of $0.99 per share for the fourth quarter. For the full year of 2019, we posted adjusted net income of $218.9 million, adjusted EPS of $4.60 per share and adjusted pre-tax margin of 10.5%. This is a very good performance overall in light of the heightened competitive capacity environment we experienced throughout 2019.

We delivered double-digit adjusted pre-tax margin in the year where we faced elevated competition within the Hawaiian Islands, between North America and Hawaii and from Japan. Delivering this financial performance is a testament to the competitive advantages that we have built in each of these geographies, giving us great confidence about our ability to continue to execute well in the years ahead. Our focus has been and will continue to be on what we can do to make our airline better at serving our guests. My thanks as always goes out to the 7,400 outstanding professionals throughout the operation and in the back office for keeping us competition fit, running the best operation in the business and delivering aloha to our guests day-in and day-out.

I look forward to sharing the financial rewards for their accomplishments later this quarter when we deliver profit sharing and balanced scorecard payments to our team. At our last Investor Day, in December 2018, we outlined several priorities that would be the focus for the next several years. And as I reflect back on 2019, I'm proud of whatever our team has accomplished. We delivered products, our guests value with the introduction of Main Cabin Basic, the launch of new nonstop service to Boston and Fukuoka and the expansion of our North American network with the A321neo, the most fuel efficient airplane operating between the West Coast and Hawaii.

Thanks to the A321neo, which now number 17 in our fleet, we have expanded our Maui hub to serve nine Western U.S. destinations. We advanced our aspiration to make travel effortless by improving our guests day of travel experience. We launched our new mobile app and renovated the lobbies of our Neighbor Island airports, replacing outdated kiosks. And then just recently in the fourth quarter, we completed the first phase of our Honolulu terminal one makeover with new kiosks on the initial phase of a transformative lobby redesign.

These investments are already starting to pay off through improved net promoter scores and a more relaxed check-in experience for our guests. We made significant progress towards improving our cost competitiveness and we are solidly on a path to achieving $100 million in structural cost reductions by 2021. And we've been building the foundation for our future with investments in fleet technology and process redesign. We took delivery of six A321neos in 2019, executed lease extensions on three A330 aircraft during the year and in the fourth quarter we executed lease extensions on five Boeing 717 aircraft.

Let me pause here for a moment and elaborate on the 717 lease extensions which were executed at the end of the year. We operate 20 717s in our fleet, 15 of which are HA owned and financially unencumbered and five of which are leased. We're often asked about our plans for 717 replacement and we usually answer that there is no plane flying today that is better suited for the unique missions we fly in the Neighbor Island network than the 717 based on its size, economics and durability. By extending our 717 leases to the middle of the decade, we are indicating that we are not planning to replace this fleet in the next five years. Concurrently, we've agreed to extend the power-by-the-hour agreement related to this fleet’s engines and are planning to have a 717 flight simulator moved to Honolulu to allow us to do all of our simulator training at our home base. We'll continue to monitor options for the latter part of the decade, but for now we see no need to deploy our capital to replace these aircrafts.

As we accomplished all of this in 2019, we continued to focus relentlessly on delivering authentic Hawaiian hospitality to our guests and executing our network missions better than our competitors. Looking forward into 2020, as you have seen in our guidance today, we are forecasting a challenging quarter from a revenue perspective. Brent and Shannon will elaborate on the guidance in a bit, but I wanted to take a moment to provide some important context. Based on current scheduled projections, the first quarter features our highest year-over-year increases in competitive capacity during 2020.

The North America to Hawaii market has already absorbed a significant amount of industry capacity over the last two years with more to come in 2020 and in the Neighbor Islands, we have the recent entry of new competitive service in Hilo and Lihue while we have not yet lapped last year's entry, a new entry in Maui and Kona. Compounding this, the first quarter is typically the seasonally most challenging for our roots, so it's a tough environment to stimulate demand for the additional capacity. As we progress through 2020, the year-over-year competitive capacity changes are projected to moderate based on current schedules and seasonality becomes more favorable. So we will have a different backdrop as the year progresses.

A challenging quarter does not dim our view that we have a winning formula and we will succeed in the long-term. Providing evidence to support this confidence, the recently released DLT revenue numbers for the third quarter of 2019 show that our North America PRASM premium versus our competitors increased yet again despite two years of above trend industry capacity growth and the fact that our results for this period did not yet reflect the addition of Main Cabin Basic to our product lineup.

Our focus is on what we can control and the execution of our strategy with even greater proficiency. We will maintain our focus on the needs of travelers to from and within Hawaii, we have the right aircraft for each mission in our network, we will continue to strengthen our already competitive cost structure and we will continue to deliver authentic Hawaiian hospitality that our guests value every day. On top of this, the financial resilience that we have built in recent years allows us to invest for the long-term and withstand short-term macro pressures.

2020 will bring to a close our current A321neo expansion as we take delivery of our 18th A321neo in March and we will ramp up our preparations for our next phase of growth with the 787. We'll also continue our investment in improving our guest day of travel experience and we will deliver structural cost savings through our cost transformation initiative. 2020 also brings more growth in our successful Japan franchise with the addition of our third daily frequency from Haneda airport in Tokyo.

Let me provide you an update on where we are with our application for antitrust immunity with Japan Airlines. We submitted our response to the DOT show-cause order on November 12th and our submission focused on a few main themes. We outlined the specific information technology investments that we are making to ensure that we can rapidly achieve the public benefits of the partnership, we expanded the geographic scope of the joint venture to the extent feasible given the nature of our network, We committed to using our partnership to grow service between Japan and Hawaii and we clarified the importance of achieving antitrust immunity in realizing the full public benefits of our growth strategy. Our submission is currently being evaluated by the DOT. And while there is no set time table, we expect a response within the next several weeks. If we are granted antitrust immunity, we expect to implement the JV towards the end of 2020.

Japan continues to be an integral part of our growth strategy and we look to deepening our partnership JAL if we are granted ATI. I feel great about what the future holds for Hawaiian Airlines. We just celebrated our 90th anniversary in November and had a chance to honor the legacy of generations of employees, who built our terrific airline. As we enter our 10th decade, I'm excited that our team has never been stronger and that our business is built for us to compete and win over the long-term, irrespective of the competitive challenges we may face from time to time. We look forward to sharing more with you about our future plans at our upcoming Investor Day in March.

And with that, let me turn the call over to Brent to talk about our revenue performance.

Brent Overbeek

Thank you, Peter, and hello, hi everyone. I'd like to echo Peter's sentiments and want to thank my colleagues for all their great work in 2019 and doing such a wonderful job of taking care of our guests over the past year. We wrapped up another strong quarter fueled by robust demand across our network. Our top-line revenue was up 1.5% year-over-year in the fourth quarter while RASM was down 2.1%, which was in line with our expectations at the beginning of the quarter.

Once again, our fourth quarter results reflect the strength of our diversified network as yield pressure from competitive capacity increases in our domestic network, but partially offset by strong performance in our international business. For the fourth quarter, industry capacity was up 9% North America and almost 12% in Neighbor Island, which contributed to yield pressure during the quarter and resulted in a year-over-year decline in domestic PRASM of roughly 6%. Part of the industry capacity growth in North America was from our own increase in A321neo service as we launched new service from Maui to Las Vegas during the quarter and expanded our breadth of service in key West Coast markets with service at different time channels.

We are encouraged by the performance of these new services so far and expect them to continue to develop into 2020. We're also really happy with the performance of our Main Cabin Basic product which we rolled out across our North American network early in the fourth quarter.

Given where we were in the booking curve when we launched the product the revenue impact for the quarter wasn’t that significant, however it did exceed our expectations. While we are working on optimizing the product offering we are confident that we will be at least at the high-end of our $15 million to $25 million range for Main Cabin Basic once we reach steady state. And we'll be happy to share more details about our expectations for the product at our Investor Day in March.

As Peter mentioned, we recently received DOT data to calculate our relative revenue performance for the year ending September, 2019 and our revenue premium in West Coast markets continued to expand. This once again demonstrates the strength of our North American network focused on the Hawaii traveler and our optimally configured aircraft.

While the commercial team accomplished a great deal in 2019, we know we have much work ahead of us in 2020. Industry capacity between North America and Hawaii is expected to increase sequentially and it will be up 11% year-over-year in the first quarter of 2020. However, based on currently published schedules, it appears that the first quarter shouldn't be the high-water mark in terms of industry capacity growth.

Our Neighbor Islands network saw continued yield pressure during the fourth quarter consistent with increased competitive capacity and persistent promotional pricing in the market. The outlook for industry capacity accelerates as we move into the first quarter with a 26% increase in year-over-year capacity, which will continue to put downward pressure on RASM.

Overall demand for Neighbor Island travel remains solid and we're competing from position of strength in this geography with our schedule breadth, local loyalty program and superior ability to recover quickly from operational disruption.

Once again, strength in our international geography in the fourth quarter helped offset pressures in domestic. We had another great quarter in international with PRASM up 9% year-over-year in the fourth quarter, our 15th consecutive quarter of year-over-year PRASM improvement.

Again, our Premium Cabin continued to perform well on international routes during the quarter with PRASM up 11% year-over-year We continued to grow our successful Japan franchise during the quarter with the launch of new service to Fukuoka, Japan in November. And we're off to a great start in Fukuoka and are encouraged by the performance of the route.

Given our familiarity with Japan, the strength of our brand there, we expect this new service to mature quickly. We also launched sales of our third Tokyo Haneda to Honolulu service, which begins operating at the end of March. We're excited to continue to grow our Japan franchise through a partnership with Japan airlines and look forward to a positive response from the DOT regarding our application for antitrust immunity.

Our value-added revenue streams had another strong quarter with value-added revenue per passenger up 10% year-over-year. I'm pleased to confirm that we surpassed our $100 million target and generated $107 million in extra comfort and preferred seat revenue in 2019.

Revenue from the sale of Hawaiian miles also had strong performance in the quarter contributing meaningfully to our value-added revenue per passenger and we look forward to sharing more details on our growth expectations for loyalty revenue at our upcoming Investor Day. Cargo revenue for the quarter was down 9% year-over-year due to the continued macro economic conditions in Asia impacting exports from the region.

Now looking ahead to 2020, we expect our year-over-year capacity to increase between 5.5% and 8.5% for the full-year 2020, with the largest increase taking place in the first quarter where we expect year-over-year capacity to increase between 7.5% and 10.5%.

Our capacity increases in 2020 are largely driven by the annualization of new services launched in 2019 as well as our third Haneda to Honolulu frequency which starts in March.

Our first quarter capacity is also a little higher than we had initially planned due to some short term up-gauges for operational reasons. For the first quarter, we expect RASM to be down between 4.5% and 7.5%. The sequential slowing of our RASM in the first quarter is driven by the elevated industry's capacity environment. The increase in our networks weighted average stage length, short term headwinds and fuel surcharge comparisons and the close in up-gauges that I mentioned.

The first quarter is historically the lowest demand quarter of the year and there are a lot of seats coming into the market during low demand months. As we look out further into 2020, the increase in industry capacity tapers-off as we lap some of the ads of 2019 and we expect that seasonally stronger demand will help absorb some of the additional capacity.

Our focus in 2020 will be to ensure we mature developing routes, continue to monetize our premium seat investments, grow the benefits from our Main Cabin Basic product and expand our partnership with Japan Airlines. We're excited about the future here at Hawaiian Airlines and we're planning for our next phase of growth with our 787s while strengthening our revenue generating capability with meaningful revenue improvement initiatives.

I'm confident in our ability to continue to withstand competitive pressures through our diversified network focused on the Hawaii traveler and unmatched guest experience delivered with authentic Hawaiian hospitality.

We look forward to providing more details on our future plans and revenue initiatives at our upcoming Investor Day in March. And with that, I'll now turn the call over to Shannon.

Shannon Okinaka

Thanks Brent. Hello everyone. Hau'oli Makahiki Hou, Happy New Year. I'll start with a brief recap of our fourth quarter and full year 2019 results. Today we reported fourth quarter adjusted net income of $45.9 million or $0.99 per share and adjusted pretax margin of 8.9%.

For the full year 2019, we reported adjusted net income of $218.9 million, adjusted EPS of $4.60 and adjusted pretax margin of 10.5%. As Peter mentioned, it's a strong result given our competitive landscape.

In the fourth quarter CASM ex fuel and items increased 0.8% year-over-year, which was at the favorable end of our guidance range. As several anticipated expenses for the quarter came in lower than forecasted. Our economic fuel cost per gallon for the fourth quarter was $2.05 and our fuel consumption came in at the favorable end of our guidance range, which helped to offset some of the increase in fuel price.

As in prior quarters we continue to see benefits from our A321neo fleet transition. As our fuel consumption grew only 1% year-over-year on a 3.7% increase in capacity highlighting the fuel efficiency of this aircraft.

Additionally, in the fourth quarter we returned more than $23 million to shareholders through dividends and share buybacks. We bought back $18 million of outstanding shares, leaving approximately $29 million remaining of our current $100 million authorization.

For the full-year 2019, we bought back 5.2% of our shares outstanding and when coupled with our quarterly dividends returned more than $91 million to shareholders. On the financing front, as Peter highlighted earlier, we executed lease extensions on five Boeing 717 aircraft, which will provide significant cost savings while securing our Neighbor Island fleet into the middle of this decade.

As part of the transaction, we're also bringing a 717 full flight training simulator to Hawaii, which will allow us to centralize all pilot training in Honolulu and further reduce our costs.

During the fourth quarter, we continued to make good progress on our cost transformation initiative. For the full year 2019, we achieved $26 million in benefits from our structural cost savings and have included a little over $60 million in our cost guidance for 2020. We're on track to achieve our $100 million structural cost reduction target in 2021 and our teams are actively engaged in evaluating additional opportunities for further savings in the future.

We plan to lay out the details of our cost transformation program at our Investor Day in March. Looking ahead, to 2020 we expect the CASM ex-fuel on items to be down between 1.5% and 4.5% for the first quarter of 2020. Our year-over-year CASM ex performance will vary throughout the year, largely driven by the timing of maintenance events.

For the full-year 2020, we expect CASM ex-fuel and items to be between down 2.5% and up 0.5%. This includes headwinds from the initiation of a A330 landing gear overhauls and 787 fleet transition costs offset by the maintenance cost benefit associated with a higher mix of A321neo flying as well as lower A330 and 717 aircraft ownership costs.

Our CASM ex guidance for 2020 includes the expected benefit from our cost transformation initiatives, but as in the past does not include any assumptions relating to the amendable contract with our flight attendants union. We're eager to bring these negotiations to a close and reach an agreement which recognizes the contributions of our flight attendants to our company's success while maintaining our cost competitiveness for the long term.

We're also entering into negotiations with the IAM, which represents our airport employees and mechanics among other employee groups. Although, the IAM contracts are not amendable until January of 2021 we have agreed with IAM to work toward reaching a new contract prior to the amendable date. It's also important to note that the CASM ex fuel metric does not reflect the benefit of increased fuel efficiency from our A321neo transition, but includes the increased ownership cost of the new airplanes.

Keeping fuel price constant, the fuel efficiency benefit is expected to bring another half point of overall CASM improvement year-over-year at the midpoint of our guidance. Based on the fuel curve as of January 28th, our economic fuel cost is estimated to be $1.97 for the first quarter and $1.85 for the full year of 2020.

As of December 31, 2019 consistent with our policy, we've hedged approximately 50% of our projected fuel requirements for the first quarter of 2020. Our CapEx for the full year 2020 is expected to be between $220 million and $260 million, which includes our 18th and final A321neo delivery, predelivery payments for a 787s and facilities and information technology investments.

Overall, I'm pleased with our financial performance in 2019 and I'm optimistic about our future. We have a resilient business capable of producing solid returns in the face of increased competition. We have a strong balance sheet and we're well positioned for long term success.

I look forward to seeing you in person and giving you more details on our future plans at our Investor Day in March. This concludes our prepared remarks and I'll now turn the call back over to Alanna.

Alanna James

Thank you Peter, Shannon and Brent and we'd like to thank all of you for joining us today and for your continued interest in Hawaiian Holdings. We are now ready for questions from the analysts. As a reminder, please limit yourself to one question and if needed, one follow-up question.

Sherry, please open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Steve O'Hara with Sidoti. Please proceed with your question.

Steve O'Hara

Yes. Hi. Good afternoon.

Peter Ingram

Hi, Steve.

Steve O'Hara

Hi. If you could, I guess in terms of the expected decline in revenue in the first quarter, is there a way to kind of talk about how much of that you think is self-inflicted in that you have a lot more capacity growth or something like that where you're adding capacity to the market versus what's being added to the market.

Peter Ingram

Let me start on that, Steve, and then I'll hand it over to Brent to provide a little bit of detail. I think the situation you're seeing is a function of primarily of industry capacity growth. We've got something on the order of mid-twenties percent capacity growth from the industry in the Neighbor Island part of the network, which is still not having lapped the entry of service of a competitor into Maui and Kona last year. And then new service at Lihue and Hilo this year.

Our Neighbor Island capacity is basically flat. So, in the context of your question, there's, there's really no impact there from our capacity actions, but it is a substantial industry capacity increase. I think, North America, which is North of 50% of our overall revenue, we do have some capacity growth, our investments have been performing well and – but we have seen industry growth as well. So, maybe Brent if you want to add any more color to that.

Brent Overbeek

I think, we would grow more in North America in 1Q than we will the rest of the year and that's largely a function of timing of aircraft deliveries. And so, our North American growth rate will just taper off, as we get in 2Q and see if that's really just a function of timing as and when aircraft entered the fleet this year and last year.

Steve O'Hara

Okay. Thanks. And then maybe just on the, I guess it was, kind of on the tech side with the JAL JV and the issues there. Can you just talk about, are these substantial investments that need to be made, and will they be made anyway, regardless of whether the JV is approved? Thank you.

Peter Ingram

Yeah. Let me talk about that. There were, when we go back to the show cause order that the DOT issued in the third quarter of last year, there were a number of things that they highlighted as wanting to see additional evidence from ourselves and JAL before they were prepared to grant anti-trust immunity. And, specifically those related to there were a number of them that related to technology and its technology in the context of things like, seamlessly transferring, connecting passengers between two airlines or having last seat availability on our website for connecting trips on JAL.

These are the sort of IT capabilities that carriers that are part of global alliances have typically made investments over time and have in place. And in our case, entering into our partnership with JAL, we have not had a sufficient business case to justify those investments over time. The opportunity to deepen our partnership with JAL gives us the ability to have that business case.

And certainly that is further bolstered by the potential for antitrust immunity. We made some of those investments over the course of 2019. We're continuing to invest now, so we're building the capabilities. I think some of this is, if anything, it's an acceleration of an investment. And so would have been sensible for us in the long term and it just makes sense in the context of where we are with the partnership with JAL to accelerate those investment into the near term and prioritize them over other IT investments we might've been making this year.

Operator

Our next question is from a Hunter Keay with Wolfe Research. Please proceed.

Hunter Keay

Hi everybody.

Peter Ingram

Hi Hunter.

Hunter Keay

Hey Peter. I noticed if I'm not mistaken, I think you bought those 10, 787s, like three weeks before you announced the JAL JV. So, I'm kind of, I know the JV is really more about growth and not pricing. So, the question is really how does the lack of a JV impact the decision potentially keep those planes and really do you need all 10 in the event that you can't get ATI and go forward with it?

Peter Ingram

Yes, I'd say the timing of the order and I don't remember exactly when the time of the order was vis-à-vis the joint venture announcement. But really the 787 investment and the JAL JV are really independent. When we ordered the 787s that was an investment in an aircraft that we expect to be flying for the next couple of decades. I suspect we'll over time end up with more than 10, not just 10 aircraft.

It is an aircraft that works well throughout our network today. When on routes like a Honolulu to New York, Honolulu to Sydney, a variety of our routes into Japan that would be the ideal aircraft with or without a JAL JV. So, I don't think there's any question that we feel very good. If we had, if we had to go in a time machine and see if we'd make the same decision again, I think we would make exactly the same decision again on the 787s.

As far as, the right number, one of the things we've highlighted over time is, we have structured, over time our lease expirations and other opportunities to alter the size of the fleet. With regards to the 787s coming in and the potential for a A330-200 to go out in a way that allows us to within a range dial our capacity growth up or dial our capacity growth down in a way that allows us to match, supply of our product in the marketplace with the demand that exists out there. So we feel really good about where we are in that context.

Hunter Keay

Okay, thanks. And then, Brent, if I'm not mistaken, correct me if I'm wrong, but it looks like you loaded some A321s on the Inter Island. Can you talk about that decision? Is this something that we should expect to continue or is this one of the – that to get back to that operational comment you made before earlier in your prepared remarks?

Brent Overbeek

That is – thanks Hunter. It has actually attracted a unique amount of curiosity. It's not anything strategic that we're looking at changing. Frankly, as we were adding our Las Vegas-Maui service and adding some frequency into Honolulu, Seattle, we needed a bit of a bridge to get that airplane back and forth, as it is serving those two markets. And so, each direction, one direction each day a week, it's going back and forth and we've, we elected to do the scheduled service and it sits conveniently out of Maui in the heart of our bank there. So it provides some more connecting opportunity into here. But it's not any strategic shift, it's just a function of how we're routing airplanes and how we deployed our 17th, A321.

Hunter Keay

Got it. Thank you so much.

Peter Ingram

Okay, thanks Hunter.

Operator

Our next question is from Dan McKenzie with Buckingham Research. Please proceed.

Dan McKenzie

Hey, thanks. A couple of questions here. So, I know you discontinued service to China in the first quarter of last year and you don't serve Hong Kong. But I wonder if you can size the revenue from that inbound demand that either comes through Japan, either directly or on your flights or via your relationship with JAL.

Peter Ingram

Yes, it's, so it was actually, I believe it was the fall of 2018 that we suspended our service to Beijing. So, we've been out of that for about a year and a half. And part of that, the reason for that was that the business case for a direct service to China always relied on the market growing. And while we had seen growth it hadn't grown at a pace sufficient with delivering, returns on our investment and so we left the market at that time.

Today we have very limited, service from China. And candidly, there's very limited service overall, very limited amount of the overall tourism in Hawaii is from China. I think I heard someone last night from the Hawaii tourism authority quoting a number of 1% or less than 1% of the overall visitors in Hawaii are from China. So it's a small part of the market today.

I think in the long term there is still, an argument to be made that China is going to be a more important source of demand. But, as we sit here in 2020, it is really not a significant piece of Hawaii tourism overall and certainly not a significant piece of our business.

Dan McKenzie

Yes. Understood. Okay, good. Another question here, just given the status of the buyback program and the dividend, I wonder if you can provide maybe a finer point on capital returns this year in what you might be targeting exactly. And I guess, what that might depend on and so I guess what I'm getting at is just given where the market cap is, are you inclined or are you considering, potentially accelerating the stock buyback program or potentially even augmenting it?

Peter Ingram

Yes. Let me, let me start with that, Dan, and then I'll see if Shannon wants to add any comments on top of mine. I think what broadly, when we think about deployment of free cash and we do expect to generate free cash flow this year and have some to deploy. We think about it in the context of what opportunities do we have to invest in our business that we believe can deliver returns in excess of our cost of capital. And that is typically our first priority and then beyond that, we look at opportunities to reduce debt and in the broad category of debt, I would also add to that things like paying down pension liabilities. And then we look at opportunities to return capital to investors in the form of buybacks and dividends.

And I think we try and keep those balanced. It has not been our practice to accelerate, rapidly and to try the time the market on that. We are a little bit more, systemic about that in how we have treated it over time. But, that's sort of a high level philosophy around how we think about that.

I think one of the other things we're mindful of, sometimes is it sometimes it makes sense to just hold a little cash because we're looking forward into capital needs in the coming years and rather than deploying it all and having to go and fundraise to get that money back in the future. We want to make sure we're thinking about the next couple of years ahead and just not 2020. Shannon, anything you'd add to that?

Shannon Okinaka

No, I mean, I would just add that, in 2019 we bought back a little over 5% of our total outstanding shares. Since 2015, we bought back almost 18% of our total outstanding shares. So, I think we've done quite a bit in this arena and we'll continue to look at it as Peter mentioned in a balanced way.

Dan McKenzie

Very good. And I'm wondering if I can squeeze one last one in here. On the $100 million in cost savings initiatives, it looks like the better end of the full year guide for CASM ex fuel in 2020 implies that it could fall 2.5%. And I'm just wondering, if that, that down 2.5% that better into the guide factors in the full cost savings or if there is or what that might sort of include exactly.

Shannon Okinaka

Yes. Thanks Dan. It includes about $60 million of cost savings. And part of that is dependent on the timing of when we execute certain initiatives. So, it can be more if we can get it done quicker or you know, but we've built in about $60 million into the guide.

Dan McKenzie

Very good.

Peter Ingram

And so Dan the $60 million, corresponds roughly to the midpoint of the guide. And I think the range around that is really just capturing the fact that, we're only a month into the year and there's some variability that, can exist both favorably and unfavorably on some of these numbers.

Dan McKenzie

Understood. Okay. Thanks for the time guys.

Operator

Our next question is from Catherine O'Brien with Goldman Sachs. Please proceed.

Catherine O'Brien

Hi everyone Thanks so much for the time. So Brent, one for you I was just wondering what was the premium seat growth in 2019 and then what does that look like for this year? And then part two of that is what should we think of as the biggest driver of revenue growth for 2020 outside of capacity? Would that be either both basic economy or is there maybe some further fine tuning on some of the pricing of premium seats? Thanks.

Peter Ingram

Katie, I don't have the premium seat numbers in front of us in front of me. We'll follow up with you on that. As I look out into 2020, I really see kind of multiple areas of growth. You alluded to the growth of Main Cabin Basic, the product is off to a really good start where we'll spend some more time talking about that at Investor Day. We're encouraged with the initial results, we're going to continue to fine tune that product as we look at its applicability across our network.

So, I would say that that is one, I think we've got some continued improvement in optimization in the front cabin we've had multiple years of successful growth there. I think we still have some room in front of us, to continue to improve performance for that product. And then I would say we've got some opportunities as well, around ancillary product optimization. And we'll talk a little bit more about that at Investor Day as well.

Catherine O'Brien

Okay. Got it. And then actually two more for you Brent. So, you shared what total domestic RASM was, but can you just talk about the breakout between North American Inter Island and then also maybe a bit of a follow-up to Dan McKenzie's question, but have you seen any discernible falls in bookings from our international markets given what's going on with the coronavirus? Thanks.

Brent Overbeek

Yes. In terms of a breakdown of domestic, North America was down, mid-3s, Neighbor Island was down six, kind of consistent with what the overall number was, and then obviously the impact of stage length in their drags that number down to six overall.

Peter Ingram

Maybe I'll just start on the coronavirus question. And it is certainly something I know all of you in the investment community are trying to calibrate the impact and it really is a difficult challenge at this point because I think there is – we all have so much uncertainty about what is going on here and how it's going to develop in the coming days. I think as we've looked at it and we've had some discussions internally over the last several days, as we sit here today there is obviously an enormous medical challenge in China and a rapidly growing epidemic in China. And from the perspective of airline industry that is manifesting itself in significant reductions in near-term demand. And I think you have seen in the last 48 hours the response of global airline serving China to that to rapidly reduce and in a number of cases eliminate capacity to China.

So clearly that's an acute impact in the here and now. In terms of – and again, from our perspective, at Hawaiian, I'm not serving China, they’re – we're not participating in that because we don't have a dog in that hunt. In terms of looking at our network, the next question then becomes what happens from here with the coronavirus particularly in countries outside China, whether it's in the Asia region or North America or Australasia as it pertains to our network. And there we've got again a lot of uncertainty in any of the countries that we serve to date there are single-digit typically reported cases of the coronavirus. Most of those are cases, the vast majority of those are cases that have annexes back to China.

And so I think it's really difficult to extrapolate where it goes from here and whether the severe medical issues that are existing in China end up being exported at scale to other geographies. Whether that happens or not, then there's another fallout question of weather concerns about this as it gains more media attention starts to affect travel demand. Right now, we have seen very little evidence, but it is early days of that. And I think it is likely in our sense if that were to happen that it would manifest itself in the places that are closest to China like Korea in the example of our network and then spread out from there in the event that that the crisis continues to worsen, but it is purely speculative for us to say anything on that today. And maybe just Brent, I know your team has been looking to see if there are any signs of demand changes?

Brent Overbeek

Yes. So, I mean, it's a little bit challenging to measure as we're sitting in the midst of kind of lunar New Year and that impacts booking velocity and that moving around over the last several years. As we've looked at it close, no real discernible impact, particularly out of our major geographies. Japan demands holding up well; Australia and New Zealand, things are strong; and North America bookings continue to be strong. We have probably more lunar New Year impact in Korea, so we'll keep a close eye on that and how things transpire there. But as Peter mentioned from a macro impact, we haven't seen any real impact. Yeah.

Peter Ingram

Yes. And it's obviously something we're going to be paying attention to in the days and weeks ahead because it would appear that that we're still in the early days of the developing health crisis.

Catherine O'Brien

Thank you for all that color.

Peter Ingram

Yeah. Thanks, Catherine.

Operator

Our next question is from Michael Linenberg with Deutsche Bank. Please proceed.

Unidentified Analyst

Hey…

Peter Ingram

Hi, Mike.

Unidentified Analyst

This is Mike for Mike. Hey, just one on Japan with all the new Haneda slots for both the U.S. and Japanese carriers, we've seen a bit – we've seen some of the carriers moving their services over from Narita. But how do you view the overall market for Honolulu to Tokyo as it pertains to aggregate capacity and Hawaiian’s positioning with that as – within that as we head into the summer?

Peter Ingram

Yes. So in terms of changes related to Haneda and – those are going in at the end of March. Our service from Haneda to Honolulu, which will be our third daily Haneda flight is the incremental frequency associated with the opening up of Haneda access this year. JAL has or will be flying two services from Haneda. Those are replacing two services in Narita. ANA has got a service that was already there, that's been there for several years. And then, so there is one other incremental one. There's one other one at Haneda and that is Delta and that is again a sort of a swap of capacity that was in Narita. So really it's – our flight is the only incremental one there. And then at Narita, we see a little bit of incremental capacity from ANA continuing to expand their Narita flying and some other changes moving around in the marketplace, but not as much incremental from the Haneda movement as we might have thought directly tied to that event.

Unidentified Analyst

Got you. Okay. Thanks guys.

Peter Ingram

I think, you know, obviously it's – as we've talked about in our JAL filing and on other calls, it's a big deep market. We're going to add a frequency into it. We're excited about the trip. We're adding beyond just getting another trip into Haneda and offering some greater time of day convenience getting in at the time that we're going to be able to get in. We'll be able to open up a lot more connectivity with JAL into domestic Japan and we think that there's some – there's untapped market there that we'll be able to continue to grow with the additional capacity as well.

Unidentified Analyst

Great. Thanks guys.

Peter Ingram

Sure. Thank you.

Operator

Our next question is from Joseph DeNardi with Stifel. Please proceed with your question.

Joseph DeNardi

Yes, thanks. Peter, just in terms of the international PRASM strength that you guys saw, is there any FX or surcharge tailwinds in fourth quarter? And then do you have any expectations for those factors affecting first quarter?

Peter Ingram

Yes, let me turn that one to Brent.

Brent Overbeek

Yes. So when we look in 4Q, we actually had a little bit of a headwind from fuel surcharge and FX that grows a bit as we get into Q1. We had – last year was a little bit anomalous in terms of Japan fuel surcharge based on the timing mechanism. Fuel surcharges were a fair amount higher in 1Q in Japan last year, so we'll see a greater impact of that in 1Q. And then while it's a little early to forecast into 2Q, we do see some of that headwind will likely start to moderate a bit as we get into 2Q.

Joseph DeNardi

Helpful. Peter, you've spoken over the years about how capacity in your markets finds a level over time. I'm wondering if you have a sense as to – maybe there's a rule of thumb, if your margins are x, all this capacity growth has pressured your margins, then industry margins excluding yours must be x minus something. Is there anyway to think about that just in terms of when capacity may start to rationalize a little bit? Thank you.

Peter Ingram

Yes, it's an interesting question and it's difficult to predict the timing. Obviously, our competitors don't consult with us on their capacity plans for serving Hawaii. I think some of it depends on what's going on in the macro environment as well, how carriers see opportunities in different parts of their system, what the fuel price environment looks like since this tends to be long haul flying with a higher fuel price component. But I do think that in a world with rational players, people should be making investment decisions on where they fly based on where they see the biggest opportunities. And I would say clearly a couple of years ago when our margins were in the high teens, it was easy to see opportunities in Hawaii.

I think as, you know, our margins haven't fallen off a cliff, but they are in a more moderate range in the 10.5% range over the last year. And I think the – we would certainly expect over the next couple of years, I think, to see a little bit of a moderation of growth and perhaps over time some retrenchment by the marginal routes where people are generating lower RASMs and particularly if costs go up for a variety of reasons for other carriers. But for us right now we're really just focusing on making sure we're executing day to day and making sure that our capacity is not the marginal capacity in the market and we don't think it is right now.

Joseph DeNardi

Yes, that's helpful. Shannon, just quickly on the fuel cost guide for the year, the 1.85 seems a little low. Is that just kind of timing of when you guys did it? Or is there any hedge gain in there? Thank you.

Shannon Okinaka

Yes, there is no hedge gains in there. No, I'm guessing you're comparing to energy. If you recall, a lot of our fuel is purchased based on the [indiscernible] index, so it does differ from LA and WTI. So sometimes that explains that that difference between us and the industry.

Peter Ingram

But I think there has been some decline in the last few days in the fuel price. I believe there's a footnote on the fuel cost guidance number that that will tie it right to the direct day that we did it.

Shannon Okinaka

Yes, it's January 28th. So that was – if you look at the fuel curve on the 28th and that's where we pulled it.

Peter Ingram

Yes.

Joseph DeNardi

Thank you very much.

Peter Ingram

Sure.

Operator

Our next question is from Helane Becker with Cowen and Company. Please proceed.

Helane Becker

Thanks, operator, hi everybody and thank you for the time. So, I guess, Peter, I have a different question on the China thing. As that capacity comes out from the U.S. carriers and others, do you – are you concerned that they put it on a temporary basis into Hawaii from sort of new markets or additional capacity from existing markets?

Peter Ingram

Helane, that’s the – we’ll, get part of that answer as it's obviously up to them, not up to us again. I think if you look at and I've just monitored a couple of the announcements in the media in the last couple of days, most of what I've seen has been published capacity adjustments that go out from a week or two to maybe through the end of the first quarter. And so, I think in cases like that, if I was thinking about in the context of our business, we would not be thinking about redeploying that capacity necessarily anywhere in the short-term because if you're planning to go back into those other routes fairly quickly, you're going to need those airplanes. And it is difficult to just be toggling capacity in and out of markets on a short-term basis. So I put a relatively low probability on that, but again, you'd have to go ask some of those other carriers.

Helane Becker

Got you. No, I think that's very helpful. Thank you very much. And then Shannon, for you I just have one question. You talked about the five lease extensions. And then I think you said something about how it would save you money, right. I kind of missed that part. But your rent expenses down for the quarter quite a lot and for the year. So is that like that the fourth quarter, is it new run rate we should be thinking about?

Peter Ingram

So, let me start with that, Helane. I think some of the – some of what you're seeing in the rent expense in the fourth quarter doesn't reflect the 717 lease extensions at all. Those were done at the very end of the period. What we did do as I mentioned in my comments in the call during the year, last year, was we had some lease extensions related to a couple of our A330. So those were A330s that were right near the beginning of our original acquisition of that fleet back in 2010 and they were among some of the higher cost leases we had. And as I think most people are probably aware of the 330-200 market has moved considerably since that time. And so, I think that's what you’re seeing reflected in there. In terms of the run rate, I think what's in the fourth quarter may does – certainly doesn't reflect the 717s, but it otherwise reflects our fleet from the perspective of the A330s and the A321neos.

Helane Becker

Okay. That's perfect. Thank you very much.

Brent Overbeek

Sure.

Peter Ingram

Thanks, Helane.

Operator

We have reached the end of our question-and-answer session. I would like turn the conference back over to Peter Ingram for closing comments.

Peter Ingram

Mahalo again to everyone for joining us today. We appreciate your interest as always and we're very excited about our future prospects and look forward to talking to you more about them again at our Investor Day in March. Aloha.

Operator

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