Hawaiian Holdings, Inc. (NASDAQ:HA) Q1 2019 Earnings Conference Call April 23, 2019 4:30 PM ET

Company Participants

Daniel Wong - Senior Director of Investor Relations
Peter Ingram - President and Chief Executive Officer
Shannon Okinaka - Executive Vice President and Chief Financial Officer
Brent Overbeek - Senior Vice President, Revenue Management and Network Planning

Conference Call Participants

Helane Becker - Cowen and Company
Kevin Crissey - Citigroup
Catherine O'Brien - Goldman Sachs
Rajeev Lalwani - Morgan Stanley
Hunter Keay - Wolfe Research
Mike Linenberg - Deutsche Bank
Dan Mckenzie - Buckingham Research Group
Steve O'Hara - Sidoti

Operator

Greetings and welcome to Hawaiian Holdings Incorporated First Quarter Fiscal Year 2019 Earnings Conference 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 your host, Daniel Wong, Senior Director, Investor Relations. Mr. Wong, you may begin.

Daniel Wong

Thank you, operator. Hello, everyone, and welcome to Hawaiian Holdings' First Quarter 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. 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'll then open the call up for questions, and Peter will end with some closing remarks.

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

During our call today, we will refer at times to adjusted or non-GAAP numbers and metrics. A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found in our press release or in 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 and any subsequent reports filed on Form 8-K.

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

Peter Ingram

Mahalo, Daniel. Aloha, everyone, and thank you for joining us today. As Daniel noted, by now, most of you have seen the results we reported for the first quarter, which reflect the solid start to 2019.

Relative to the expectations we provided at the beginning of the period, we came in right in line, if not at the better end, in terms of revenue, cost, capacity and fuel consumption. I'll let Brent and Shannon take you through the more granular detail later in the call, but suffice to say there were no big surprises in the period.

Our team continues to do a terrific job of delivering the aloha spirit to our guests, and since we last talked, it has been confirmed that we were the nation's punctuality leader for a remarkable 15th consecutive year in 2018.

We've also been moving steadily up the industry baggage handling rankings, coincident with our implementation of baggage scanning throughout our system over the course of 2018. My sincere thanks go out to the best team in the business that continues to deliver day in and day out. I am incredibly proud to be a part of their team.

Of course, we understand that investors remain focused on the evolution of our competitive environment, especially from the western U.S. to Hawaii. During the quarter, we witnessed the confirmation of the initial phase of Southwest capacity to Hawaii with flying commencing late in the period. Nothing we have seen so far deviates materially from what has been foreshadowed over the past 18 months.

And nothing has changed our view that we should continue to execute our strategy and focus on the things we need to do to serve the needs of guests traveling to, from and within the Hawaiian Islands better than any other carrier, just as we have done for many years.

In this context, at our Investor Day late last year and on our fourth quarter earnings call, I spoke about a number of priorities that we are focusing on in 2019 that we believe will bring value to our guests, our team and our investors.

Thanks to the tireless efforts of my colleagues, we've made solid progress against these priorities right out of the gate in 2019. Let me take a few moments to share some highlights of our progress.

Delivering products our guests value is a key area of focus. Earlier this month, we launched non-stop service between Sacramento and Maui, and between Boston and Honolulu as we continue to expand our network. Sacramento marks the eighth North American origin point linked to our growing Maui hub, taking advantage of the A321neos that are the ideal aircraft for the midsized origin and destination routes to Maui from the U.S. West Coast.

Since adding the A321neo to our competitive arsenal just a little over a year ago, we have deployed it on five routes to and from Maui, following through on the strategy for this aircraft that we shared with our investors since we announced the order a few years back.

Boston, meanwhile, marks our 13th U.S. gateway city to Hawaii, more than any other airline, and taps into the largest market for Hawaii visitors that was previously without non-stop service to the islands. Both of these new routes are off to a great start, and we expect them to be core routes in our network portfolio going forward.

While I'm on the topic of connecting more guests to Hawaii, I'll take a moment to provide an update on our planned joint venture with Japan Airlines. We were notified by the DOT at the end of March that our antitrust immunity application was deemed substantially complete, which moved us to the next phase of the process whereby public comments on the application were accepted up until April 15.

Our response to these comments is due this week, and based on where we are in the process, we are optimistic that ATI for the JV can be approved later this year, which would allow us to initiate the joint venture either late in 2019 or early in 2020.

We're encouraged to see the process moving forward and look forward to building on the strong results we are already seeing from our partnership with JAL. And at the same time that we are focused on growing our partnership with Japan Airlines, the DOT initiated a proceeding during the first quarter to allocate new route authorities for Haneda Airport that are expected to be made available for the 2020 summer season.

We applied to add three new daily services between Tokyo's Haneda Airport and Honolulu, which will allow us to build on the successful operation we have established in Tokyo over the past eight plus years.

We're confident the DOT will see merit in our proposal to add service to the largest O&D market between Japan and the United States and provide compelling and unique connecting service to smaller markets elsewhere in Japan, which have excellent potential for growth if more attractive schedules can be made available.

We also continue to make strides in preparing our Main Cabin basic product for introduction later this year. As Brent will explain shortly, Main Cabin basic will enhance our ability to compete against similar products currently offered by our domestic competitors between North America and Hawaii.

Another priority for 2019 is improving the guest experience and aspiring to make travel effortless. Guest experience is at the core of our ability to differentiate our service and generate a unit revenue premium. And we have several initiatives underway here.

Our near-term focus is particularly on the day-of-travel experience and how we elevate our guests' airport experience. To this end, we launched our brand-new mobile app in the first quarter. The primary features of the new app feature on the day-of-travel experience and guiding our guests through the airport with greater ease.

We'll continue to evolve the app over time, but the first release is already a step-function improvement in functionality that has been recognized by our guests. Even more visible work related to this priority is taking place at our airports, particularly here in Hawaii.

Late in 2018 and into January, we decongested our lobbies in Honolulu by moving check-in for our Japan flights to a new location. This will allow us to address some of the deficiencies in our existing space with less customer impact and help to improve passenger flows and lobby throughput.

We also have plans to overhaul our check-in spaces at other Hawaii airports, replace aging kiosk hardware and develop the phased rewrite of our kiosk software. All of these upgrades will move us closer to our goal of enabling effortless travel.

And of course, there's a lot going on behind the scenes. As I noted earlier, the introduction of baggage scanning throughout 2018 has contributed to a marked reduction in mishandled bags.

These initiatives I've just highlighted and others we have in the works will not only improve guest experience, they will also allow us to operate more efficiently and improve our cost structure, which is another of our 2019 priorities.

As Shannon will speak to later in the call, we see the use of technology, fuel efficiency, labor efficiency and process effectiveness as the key levers that will allow us to bend the cost curve and achieve at least $100 million of annual run rate cost improvements over the next couple of years.

And finally, our fourth priority is building a foundation for the future. This speaks to improving our processes and technology to allow us to scale our business more nimbly going forward. To that end, we launched our mainland technology center in Phoenix, Arizona during the first quarter.

When fully operational, this center will improve our ability to be more responsive in the rapidly changing IT space and deliver innovation more quickly and at lower cost.

So what you are not hearing me say is that in the heightened competitive environment, we are shifting our strategy 180 degrees. In fact, nothing could be further from the truth.

Our products and services are uniquely designed to serve the specific needs of guests traveling to, from and within the Hawaiian Islands, and our outstanding team is focused on serving these needs at the highest level.

Can we execute this strategy more effectively? Sure. In fact, continuous improvement is part of how we've achieved success up to now, and it will be essential as we move forward. The initiatives I highlighted will accentuate our strengths, shore up our weaknesses and position our unparalleled team to deliver the outstanding authentic Hawaiian hospitality that has become our hallmark.

As we deliver on these initiatives, I'm confident that returns will be delivered to our bottom line, and shareholder value will be enhanced for the long-term.

With that, let me turn the call over to Brent to review revenue performance.

Brent Overbeek

Thank you, Peter, and aloha, everyone. RASM for the first quarter was down 3.7% year-over-year, which was in line with our latest guidance update and just under a point better than the midpoint of our guidance on our last quarterly earnings call.

This result included one percentage point of collective benefit from fuel surcharges and foreign currency in the quarter offset by about one percentage point of headwind from the Easter holiday shift.

First quarter domestic PRASM was down 7% year-over-year due to pressure on average fares in North America; continuing demand softness to Hawaii Island and our Neighbor Island network; and the continued evolution of our network, which drove domestic stage length up 6.5% year-over-year.

To highlight the impact of stage length growth on our results, North America and Neighbor Island entities' year-over-year performance were each two to three points better than the combined domestic total.

Meanwhile, international PRASM was up 2.6% year-over-year as continued strong performance in Japan, partially driven by the aforementioned benefit of fuel surcharges, helped us set pricing and currency pressure in Australia.

Cargo revenue declined 2.6% year-over-year in the first quarter. Consistent with industry trends, we've seen some moderate softness for business departing Asia, which is more than offsetting some of the yield improvement we've seen out of the North America market.

Revenue growth for value-added products remains strong. Extra Comfort continues to perform well, driving seat upgrade revenue - revenue growth of 29% year-over-year in the first quarter. Revenue from the sale of HawaiianMiles was up over 40% year-over-year during the quarter as we lap the anniversary of our new credit card deal with Barclays.

Looking ahead, we expect our second quarter RASM to be down between 2% to 5% year-over-year on our own capacity growth of 1.5% to 3.5% year-over-year.

While the midpoint of the RASM range is similar to our year-over-year RASM change in the first quarter, the puts and takes of how we arrive there is quite a bit different. We estimate the Easter holiday shift will benefit the quarter by about one percentage point.

However, fuel surcharges and foreign exchange will become a headwind of roughly 0.25 percentage point. All of this coincides with the backdrop of a material sequential increase in industry capacity in our domestic markets.

Finally, we anticipate our domestic stage length will grow by 8.5% year-over-year, putting further pressure on RASM.

Clearly, we're not satisfied with the year-over-year unit revenue declines, but we're encouraged by what we're seeing in our underlying business and the execution of our long-term strategy.

In North America, demand for the Hawaii vacation remains robust. Our North America load factors remained at high levels and, in fact, grew a little more than one percentage point year-over-year in the first quarter.

Clearly, some of this is a function of the current industry pricing in the market. But we remain optimistic considering North America-to-Hawaii industry capacity is still elevated compared to historical levels.

Next, our A321neo rollout is right on track. We took delivery of our 12th A321neo in the first quarter. And as Peter mentioned earlier, we continue to benefit from the aircraft's superior ability to connect midsized U.S. West Coast markets to Hawaii.

We launched - we launched our first transpacific A321neo just 15 months ago. By the end of the second quarter, we'll have deployed the aircraft across 13 routes between the West Coast and Hawaii, including four brand-new routes and nine routes that were previously served by our wide-body 767 aircraft, the last of which we retired in January of this year.

In addition to serving midsized U.S. West Coast markets, the 321neo allows us to optimize service to our larger U.S. West Coast markets. Starting in October, we'll be supplementing our daily wide-body service between San Francisco and Honolulu with an additional A321neo service, thus offering more choices and time-of-day coverage for our guests traveling to and from the bay area. By the end of the year, we'll have 16 A321neos in the schedule, with the last two of our orders entering commercial service in the front portion of 2020.

We're also quite excited about the opportunities our Main Cabin basic product will provide when it launches between North America and Hawaii later this year. While the industry's deployment of basic economy has been slower in Hawaii than on the U.S. mainland, we know there is value for both Hawaiian and our guests once we are able to offer the product.

Notably, Main Cabin basic should help us alleviate some of the downward pressure we've experienced as of late on our Main Cabin yields, especially as the competitive landscape intensifies for the routes between North America and Hawaii.

At a steady state, we expect Main Cabin basic to contribute between $15 million to $25 million of incremental revenue annually for North America. We're also working on the optimal plan for the product elsewhere in the network, so there is potential for further upside to these numbers long term.

In our Neighbor Island network, we've adjusted our capacity to reflect the new reality of a smaller market size to Kona and Hilo on Hawaii island. These adjustments we've made to the schedule reflect the market environment while still allowing us to maintain a robust schedule to meet the needs of our Kamaaina [ph] and visiting guests. And we'll continue to work with local tourism officials as to how we can effectively drive traffic back into the Big Island.

Internationally, our comprehensive partnership with Japan Airlines continues to deliver strong results. Co-chair and airline traffic exchange between Hawaiian and JAL is 25 times higher over the past 12 months versus the comparable measurement period between our previous partner in the region.

And I echo Peter's earlier comments about the tangible enthusiasm both here at Hawaiian and at JAL for the benefits our joint venture can deliver to our guests and the communities we serve.

Revenue from our value-added products remains strong with sales of HawaiianMiles, Extra Comfort and a bit of upgrade products all performing well.

And finally, while the international cargo side of our business has slowed, the domestic business is holding up well, and we look forward to expanding our Neighbor Island all-cargo operation in the back half of the year. And now with that, I'll turn the call over to Shannon.

Shannon Okinaka

Thanks, Brent. Hello, everyone, and thank you for joining us today. I'll start by briefly highlighting our first quarter results. Today, we reported first quarter adjusted net income of $32.6 million or $0.67 per share and an adjusted pretax margin of 6.7%.

And though our first quarter profitability reflects the challenging revenue environment that Peter and Brent spoke to earlier, we still expect to be in the top tier of our domestic peers in adjusted pretax margin during our most seasonally challenging quarter.

Now turning to costs. Non-fuel unit costs were up 1.4% year-over-year in the first quarter, which is in line with our revised guidance range and about one point better than the midpoint of our original guidance range. The improvement from our original guidance range was primarily due to lower-than-expected costs relating to our cargo freighter business.

For the second quarter, we expect CASM ex fuel to range from down 0.5% to up 2.5% versus last year. This includes headwinds of a little less than one percentage point from higher wages and benefits expense from contractual rate increases, filling of vacancies and related payroll taxes; and a little over 0.5 point due to maintenance costs, driven by power-by-the-hour rate increases and feed mix.

Nonrecurring credits received in the second quarter of 2018 were completely offset by lower volumes of heavy maintenance events in 2Q '19. This keeps us on pace for full year CASM ex fuel to be flat to up 3% year-over-year.

And consistent with our past guidance practices, these ranges exclude assumptions relating to the amendable contract with our Flight Attendant Union, which is currently in mediation.

Turning to fuel. Fuel rates have increased since last quarter's call. Based on the fuel curve as of April 10, we expect our economic fuel cost to be approximately $2.19 per gallon for the second quarter and $2.16 per gallon for the full year.

Helping to offset the impact of rising fuel rates is our improved fuel efficiency. In fact, fuel consumption decreased 1.2% year-over-year in the first quarter as we grew our capacity by 2.5%.

Altogether, this benefited CASM by more than 0.5 point. As Peter mentioned, we're focused on our goal of reducing our structural costs by an annual run rate of at least $100 million by the end of 2021.

We've made progress identifying and analyzing opportunities, and I remain confident in our ability to achieve our goal given the projects already underway and others that are in the planning stage.

The areas we believe we have the largest opportunities are fuel efficiency, labor productivity and overhead. Building on the fuel efficiency gained from our fleet transition, we're targeting saving another 2% of fuel consumption longer term.

Corporate focus is being placed on technology and process improvements, both guest facing and for our employees. Improving the day-of-travel experience for our guests includes providing better tools and data for our employees, allowing them to work more efficiently.

Initiatives such as improving the gate and boarding experience and replacing our kiosks will benefit our guests, employees and bottom line. Quicker access to data, improved back office systems and automation of processes will allow us to focus on value-add decisions and analyses rather than transaction processing, which will result in lower overhead expense and provide managerial capacity for quicker and more nimble decision-making and action.

Cost of sale is another significant category of spend where we have opportunities for cost savings, primarily through more efficient distribution and payment acceptance strategies.

This is a company-wide effort. We're making investments in our people and organizational abilities, which is integral to sustaining meaningful cost discipline in the years ahead. By the end of 2019, we expect to have executed initiatives worth about $25 million of annualized savings. While there is more work to be done, I'm proud of the progress we've made to date.

Having this be a multiyear effort means that we can do this in a smart way. We'll continue to invest in initiatives that grow revenue and strengthen our infrastructure, and we are avoiding short-sighted cost cuts that would diminish the high-quality product and service, upon - which our guests have come to expect. We'll keep you updated as we identify additional specific initiatives and tally the savings achieved.

We're focused on executing our strategy. We're actively addressing near-term pressures while continuing to grow with an eye toward the long term. And we're doing it while creating value for our employees, our guests and our shareholders. This concludes our prepared remarks, and I'll now turn the call back over to Daniel.

Daniel Wong

Thank you, Peter, Shannon and Brent. I'd also like to thank all of you for joining us today and for your continued interest in Hawaiian Holdings. We're now ready for questions from the analysts. (Operator Instructions) Operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Helane Becker, Cowen and Company. Please proceed with your question.

Helane Becker

Great. Thanks very much, operator. Hi team, thank you very much for the time. You know, maybe, this is a question for Brent. As you look out to the second quarter, I know it's still fairly early, but can you just talk maybe a little bit about how bookings are shaping up? And also how your customers are responding to the A321neo?

Brent Overbeek

Yes. So in terms of advance bookings, we continue to see a strong demand environment certainly reflected in the guidance that we've given. April has helped that a little bit by the Easter shift. But overall, we're really encouraged with where we're sitting for the quarter and where total demand is at, in the face of some heightened industry capacity.

In terms of customer acceptance of the neo, they've really enjoyed the product. I think some of the comments that we've heard, obviously, new, fresh, clean airplanes as well as delivering products and services on board, and our team are doing a fantastic job.

Helane Becker

Okay. And then as you - maybe, this is a question for Peter. As you think longer term about your business, you mentioned that the A321neo gives you an opportunity to fly more in Midwest cities to the island. And then what about international? For a while, you guys were growing international, and now maybe you're going to do it through the JAL joint venture.

But are there opportunities for additional international service to other markets? Or - a; and b, maybe, with respect to the demand picture on the Midwest cities, are there enough - is there enough demand for people wanting to go from those locations to Hawaii that it would support frequent service?

Peter Ingram

Sure. Thanks, Helane. I guess, in response to where the growth opportunities are for us, I think, there, certainly, is demand internationally. And you highlighted the JAL joint venture, which is a crucially important initiative for us. The - we're hoping to take advantage of that in particular with the new opportunities that are available or becoming available at Haneda in 2020.

And we think we've got a very strong application for some new services there, and I think we see other opportunities in Japan. I think one of the things I would highlight about international markets, generally, is that we've been in a period the last couple of years where the currency environment has been more challenging for people visiting the United States and Hawaii, in particular, as the U.S. dollar has been strong.

But currency markets change over time, and I think we're encouraged - I know we're encouraged by the fact that we're well positioned in the important visitor markets for Hawaii with the network that we have built in Australia and New Zealand and in Korea.

And we see that over the next couple of years, as demand evolves, there will be more opportunities to grow on that strength because even as we are well positioned, it's not like we're 100% of market in any of those places. And I would say the same thing about North America. While we have a leadership position, our seat share from North America is in the high 20% range. And so there is ample opportunity for growth there.

So we see a lot of runway of opportunity throughout our network, and we're in a position because we are well diversified to be opportunistic to pursue what makes sense at a certain point in time based on the demand environment that is out there.

Helane Becker

Great, that's very helpful. Thanks, Peter. Thanks team.

Peter Ingram

Sure, thanks Helane.

Operator

Our next question comes from Kevin Crissey, Citigroup. Please proceed with your question.

Kevin Crissey

Hi, thank you so much for the time. Wanted to talk about the inter-island business generally with two questions. The first is: Can you help me understand why there has been - the root cause of the weakness on the inter-island?

Brent Overbeek

Yes. I think it's somewhat twofold. I think we've had a softening demand for travelers from a long-haul perspective to the Big Island. And that's reflected not just in our own numbers, but reflected in tourism numbers if you look at occupancy rates and visitor data that we've seen there for people whose sole destination has been going to the Big Island, and we've seen some declines there.

We've also seen some declines from people doing multi-island trips. And so people who are either coming here to Oaho [ph] and hopping over to the Big Island for a multi-day trip. Or combining the island of Kauai and the Big Island, we've seen some declines there as well.

And so most of the decline, in what we've seen, has been tourist based, visitor based, and we've seen kind of our closing demand, core demand to what we see in our network within the Neighbor Island has been quite resilient throughout this process.

Kevin Crissey

And is that initially…

Peter Ingram

Kevin, if I could just add to that a little bit. If you step back in 2018, when we initially saw some of the impact on demand to the Big Island it was at a time when we had - the volcano on the island was erupting.

And even though that affected only 10,000 - or 10 square miles of the 4,000 square miles of the island, it did serve to suppress demand for a little bit, and it closed Volcanoes National Park, which is one of the major attractions and the most significant attraction for one day tours that go to and from the island.

That situation has evolved. The volcano is not erupting right now. But it did. The one day tours don't have as much to see with the volcano not erupting. And so that traffic hasn't come back entirely.

And I think there is an opportunity for us to see if we can - as Brent said in his prepared remarks, to work with tourism officials throughout the state and make sure that we're doing what we can to stimulate the demand for travel to Kona and to Hilo, which still have a lot of great attractions for people to come and visit.

Kevin Crissey

Is any of this a function of the direct flights as - didn't more of your network connect in the past? I'm just wondering whether the strategies of direct connect had or direct flights had an impact overall. Or if this is just a near-term blip?

Brent Overbeek

So Kevin, in terms of our own network development, as we've grown more direct service into Kona, into Lihue, we've expanded the Maui hub, we anticipated and forecasted that some of this connecting traffic of our own was going to move away on to direct non-stops over time.

We also saw over the course of 2018 that a lot of the industry capacity that was going into the market from North America to Hawaii was actually going in directly to the Neighbor Islands.

And so while we got partnerships with all three and co-chairs with all three of the big U.S. carriers, some of that traffic started traveling a little bit more direct on those carriers. And it's something that we could see in the forward schedules, and it was quite small overall, but we knew it was coming and have baked it into our plans.

Kevin Crissey

Good. If I could do one more follow-up. The - on the inter-island also, it's - has there been a time where two carriers have done well? I mean, I'm sure it's probably happened. It's just been a long time since I covered this space. I haven't really seen two carriers that operate in the inter-island business do well. Is there times where that can happen?

Peter Ingram

I have to admit, Kevin, I don't have the full sort of 60 or 70 years of history of when there has been multiple competitors in the market. I would say, I don't see why it wouldn't be possible, but I think, what we're focused on making sure that we're successful.

And I think we're well positioned to be successful because of the strong history we have serving here, how we've tailored our product for the Neighbor Island, the breadth of service we offer, the great products and our team that continues to do a great job every day. So we're focused on Hawaiian Airlines being successful.

Kevin Crissey

Thank you. I know those were some difficult questions. Thanks for taking the questions.

Operator

Our next question comes from Catherine O'Brien, Goldman Sachs. Please proceed with your question.

Catherine O'Brien

Hi, everyone thanks for taking the time. So could you just give us some color between how inter-island and North America PRASM trended underlying that domestic total down 7%. I know you noted that they are each two or three points better on the individual basis because of the stage length adjustments, but - I know last quarter, you give us the update on the breakup between the two. That would be very helpful.

Peter Ingram

Yes. I don't have the detail in front of me, Katie, but, call it, I think Neighbor Island was down about 4%, and North America was down about 5%. I think it's fairly close.

Catherine O'Brien

Okay. Great. And is that sequential improvement in the inter-island from last quarter, do you think that's driven by your capacity reductions?

Brent Overbeek

So it is a little bit better than where we were in 4Q, and some of that is a reflection of the capacity that we pulled down to the Big Island in 4Q - in 1Q to meet the new level of demand there.

Catherine O'Brien

Okay. And there's the - if you could ask one more. I think, Brent, you noted earlier in the call that you were seeing - and correct me if I'm wrong here, you've seen 25% greater connecting passengers over the last 12 months with JAL versus your former partner.

I guess, one, is that right? And then two, what percentage of total passengers are your connecting passengers today? And is there some sort of corresponding increase in RASM with that increase traffic?

Brent Overbeek

So Katie, the number we gave was 25% - 25 times increase in the exchange of revenue that we had between ourselves and JAL, and that was inclusive of both international service from Japan to Hawaii as well as business within the Neighbor Islands. So we don't have it broken out specifically across the two geographies, but it is a material increase from where we were with our previous relationship.

Catherine O'Brien

Understood. And does that increase drive a RASM increase? Is it PRASM positive, neutral, negative?

Brent Overbeek

Oh, it's - we view it as certainly positive, and there is more room to grow as we grow our relationship with JAL. So we've been able to effectively exchange traffic just in the co-chair environment, offering customers more choice across our network and JAL's network from Japan to Hawaii.

So it's not uncommon to see customers mixing itineraries from Osaka to Honolulu with JAL in one direction, Hawaiian in another. We believe that greater choice offers opportunities for customers but also improving our unit revenue. Furthermore, the amount of traffic that JAL's putting on us within the Neighbor Islands has also increased, and that's certainly accretive to RASM as well.

Catherine O'Brien

If I could just squeeze in one more. How does the competitive capacity outlook change from maybe first quarter to second quarter to third quarter? Just any quick broad strokes would be really great.

Brent Overbeek

Yes. I think I'll talk in North America specifically. So North America industry capacity in 1Q was up about 1% year-over-year. As we work our way into the second quarter, that increases, based on currently published schedules, to about 6% and moderately higher into 3Q about one point higher in 3Q. On the Neighbor Island front, industry capacity was down about 5% in 1Q and up about 2.5% right now we've published in 2Q as well.

Catherine O'Brien

And then on the international?

Brent Overbeek

On the International side, you got some puts and takes. So in 1Q, in markets where we operate, international capacity was up about 1% in 1Q. In 2Q, we start to see a little bit of industry capacity change in Osaka and Auckland with some declines there.

So industry capacity goes down in the mid-four percentage point range. And then in 3Q, a little bit greater decline as we move our way into 3Q, kind of in the 5% to 6% range based on published schedules right now.

Catherine O'Brien

Thank you very much for all the time.

Daniel Wong

Thanks Cathy, another quick reminder. If we can keep the question, so one question, one follow up that would be great.

Operator

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

Unidentified Analyst

Hey guys, this is actually Bert on for Joe. This one is for Peter or Brent. Just wondering have you seen North America front cabin sales trends remain strong. And do you have the ability to flex premium or Extra Comfort sales in markets where it makes sense?

Brent Overbeek

Yes. So front cabin continues to perform really well. I don't have the specific details in front of me, but I want to say that front cabin RASM in North America was kind of mid-single digits percentage better than overall RASM performance. So we continue to see strength both for the lie-flat product and the 330s, but the 321 product's off to a good start as well.

In terms of flexibility around both Premium Cabin and Extra Comfort pricing, it's stuff we'll continue to evaluate over the normal course of business. And we've got some additional technology improvements that we foresee coming over the next while that will help us be able to meet that at a more granular level than we currently have today.

Unidentified Analyst

Great. That's helpful. Just as a follow-up. Shannon, wondering if you could talk about the CapEx profile over the next few years. And where you see being free cash flow positive as far as corporate priorities?

Shannon Okinaka

Yes. Thanks. So from a CapEx perspective, I don't have numbers in front of me, but just talking through - most of our CapEx is in aircraft obviously. So for this year, we are accepting six 321 neos, one more next year, and that's it for aircraft deliveries in 2020. Our 787s will start arriving in 2021, and that first year has two. So fairly moderate after this year.

This year's got a little bigger bubble with aircraft deliveries. Profitability, pretax margins, positive cash flow, those are all high priorities for us, and it's a big reason why we're doing our cost initiative.

We balance all of those things. We're still investing in infrastructure for the long term, but really one of our bigger focus areas is ensuring we're reducing our costs and investing in revenue growth opportunities as well, like Main Cabin basic.

So profitability and cash flow generation is definitely top of mind. This year, we are forecasting free cash flow - positive free cash flow, obvious, smaller than in prior years, but even with the aircraft deliveries, we are still forecasting positive free cash flow.

Unidentified Analyst

Great, thanks so much everyone for the time.

Operator

Our next question comes from Rajeev Lalwani, Morgan Stanley. Please proceed with your question.

Rajeev Lalwani

Hi, Peter, Brent, Shannon.

Peter Ingram

Hi, Rajeev.

Rajeev Lalwani

Brent, in terms of the guidance that you put out there for RASM, does that reflect currently published schedules? Or is it schedules plus some assumptions on what may or may not come?

Brent Overbeek

Yes. Rajeev, that's our best view of the marketplace at this time. And so we've done it based on what we think is going to be in the market. I think at this point, we're not going to speculate as to what and when other people are going to put additional capacity into the market.

Rajeev Lalwani

Okay. That's fair. And then this may be for Peter, but you as well, Brent. In terms of the Hawaiian Airlines customer, how have they reacted to the entry by Southwest? I mean, is it a product that they're even interested in? Or something they're looking at? What have you been able to gather from talking, again, to your core customers?

Peter Ingram

I think what I'd say is that we have a variety of customers, and they are across the spectrum of interest. And candidly, that's why we offer different products ranging from the Premium Cabin to Extra Comfort to Main Cabin and soon adding Main Cabin basic to that product portfolio. So some of that product base or customer base surely overlaps with demand for Southwest.

I think there will be customers who make choices based on a variety of attributes. Again, we would come back to saying, "Overall, we've tailored our products, our services, everything we do, how we schedule our airplanes and the great hospitality provided by our guests to serve Hawaii travelers, in general, better than anyone else." And we think we're well positioned to do that today and continue to do that long into the future.

Rajeev Lalwani

Thank you. I'll respect the two questions.

Peter Ingram

Thanks, Rajeev.

Operator

Our next question comes from Hunter Keay, Wolfe Research. Please proceed with your question.

Hunter Keay

Thank you So Peter, I got to say given the - I'm surprised that how resilient pricing has been from the West Coast to Hawaii over the last five years or so relative to the amount of capacity that's been added.

And obviously, we discussed earlier in the call with this good conversation with Kevin about maybe there is like a channel shift going on there away from some of the inter-island. But holding that aside for a second, why do you think that is?

Why do you think pricing has been so resilient relative to the capacity? If I were to say, is it more a function of the West Coast U.S. economy being really, really strong? Or is it sort of the absence of ULCCs creating kind of a more traditional competitive environment?

Peter Ingram

Well, demand has been strong for a number of years, I think that's right, and certainly strong economic performance in the core Western regions. Western U.S. is the largest source of visitors to Hawaii. So that has certainly helped. Over the course of five-year span of time, we've seen a variety of different capacity environments.

We saw a period earlier in there where capacity was more benign and we were able to generate improved revenue for ASM and yield in that environment with the strong demand with more capacity.

This year, we've certainly seen some pressure on yield that we've talked about. But demand remains very, very strong. Visitor counts to the islands are very, very strong. And I think some of it, in addition to the economic strength in the West Coast, some of that is just a testament of the enduring allure of Hawaii as a destination.

We are the world's premier leisure destination. And it is even more accessible from the Western U.S. than it is the eastern U.S. And I think that just draws people back over time, and we look forward to that demand continuing for a long time.

Hunter Keay

Right. Okay. And then could you give us a little more color on the co-chair relationship you have with the Big Tree? Can you remind me is that a one-way co-chair? Is that a two way co-chair? And I'm wondering if that'd become a little bit lopsided in their favor. And how we should think about that going forward, particularly now that you've got little more gauge flexibility and options with the A321s?

Brent Overbeek

So it's one-way, them coding on us just within the state of Hawaii. It's long-standing relationships we've had with all three carriers. And we intend to continue those going forward. We think it's a good transaction for us. It is - offers some utility of our Neighbor Island network for parts of the U.S. that we don't serve.

And as we have evaluated the business, we're very happy with it, and we'll continue to do that and offer that utility to them but also to the people in the state of Hawaii as well.

Hunter Keay

Thanks guys. I appreciate it.

Peter Ingram

Thanks, Hunter

Operator

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

Mike Linenberg

Hey, two quick ones here. Peter and Brent, you could probably jump in on this. Just the application for Honolulu, Haneda. Let's say you get - maybe, you get three, maybe you get two, but you have two flights a day right now.

So essentially we're talking about a doubling of capacity and presumably there may be some others who come from Haneda into Honolulu using some of the other sort of slots or route authorities that will become available.

Peter, did I hear you correctly that it sounds like that rather than a local market, you also look at potentially connecting secondary over Haneda with some of those additional frequencies?

Because that would seem like, if you're just concentrating or focusing wholly on the local market, that we would probably see some meaningful pricing pressure given the capacity increase. Just your thoughts on the strategy there.

Peter Ingram

Yes. Maybe, I'll start and then ask Brent if he wants to chime in with any other comments. First, just to recap what we have flying to Tokyo today. We fly 11 flights a week from Tokyo to Honolulu, plus another three from Tokyo to Kona, all from Haneda Airport. Plus, we've got other Tokyo service with a daily flight from Narita to Honolulu.

So a total of three a week total flights from Tokyo area airports into the - or three a day flights from Tokyo airports into Hawaii. The application we have because of the availability of more daytime slots that are expected with this grant allows us, if our application is granted in its entirety, to offer flights in some different time channels into Haneda.

And one of the things - and Mike, I know you're a student of the industry, and you would know this well. A lot of the domestic service in Japan is into Haneda, not to Narita. From some of the smaller places in Japan, they have flights to Haneda.

If you want to connect to Tokyo, and you don't have good connectivity to a - one of the few direct Haneda flights into Honolulu now, you would have to transport a rather lengthy transport out to Narita to get connectivity out there.

So it's really not as easy today. Certainly, we would expect to attract more local demand in Tokyo, and there is well into the double digits of overall flights a day from Tokyo to Honolulu. So it's a big market, and we would expect capacity to ebb and flow with demand over time overall.

But our flights, with being able to operate in the time of day that we have proposed, would add a pretty unique opportunity to connect to some of the communities that really don't have good connecting access to Hawaii today.

Brent Overbeek

Mike, as Peter mentioned, the local market itself is a big deep market with a variety of carriers serving it today. And in many cases, a lot of these secondary cities in Japan really - if they have an option of a single one-stop connecting in Japan, it is through one ANA flight.

And so we'll be able to offer a variety of options, if we're granted what we applied for, for numerous cities, some of which don't even have a single one-stop connecting service today. And given the affinity that Japanese consumers have for coming to visit Hawaii, we think that's a really compelling proposition and an underserved market relative to what exists today.

Mike Linenberg

Great. And then Brent, just one quick one. FX, you called that out as a headwind in the second quarter. So presumably, with even the fuel prices are up, there is a bit of a lag. So if it's a headwind in the second quarter, does it potentially become a tailwind in the third quarter given the movement in fuel of late?

Brent Overbeek

Yes. So the currency - the fuel situation drives more of the volatility than the currency, Mike. The - probably the easiest way to think about it is particularly in Japan with the index being a bit lagged, we had, in 1Q, so for ticketing in January through March, call it, we were - on a year-over-year basis, we were between JPY 4,000 and JPY 4,500 one-way, up year-over-year in terms of fuel surcharge.

Then when we actually switch into April and May, we actually are down JPY 2,000 year-over-year. And then as we look forward, while we don't have definitive numbers into the rest of the summer, I think we'll be much closer to parity year-over-year as those come into play. So it's a bit perplexing based on the timing of the measurement period, particularly as you can...

Mike Linenberg

That's very helpful. Thank you.

Peter Ingram

No worries.

Operator

Our next question comes from Dan Mckenzie, Buckingham Research Group.

Dan Mckenzie

Hey, thanks for the time. Going back to Japan. And JALPAK switched on a year ago. In the back of my mind, I always thought that could be a material driver of revenue, and international PRASM was up 2%. If, I guess, you look over the past year, how has the JALPAK relationship trended? And what are the impediments from better monetizing that relationship?

Brent Overbeek

So Dan, it's gotten off to a really good start. We are the only carrier that JAL has put in JALPAK besides themselves. We were able to sell a good amount of JALPAK. But I think we are certainly not done at this point. They have today - in essence, our relationship with JALPAK is that of an agency and an airline.

And so we've got a relationship that incentivizes them a bit to sell our product, but certainly as we get into - with anticipation of granting ATI, we anticipate that their incentive to sell on us in a metal neutral fashion will continue to grow that opportunity that much more for the network that we have today where we overlap with JAL but certainly in places where we don't overlap. And we've seen great success in places like Chitose, where it was a unique, new offering for them.

Dan Mckenzie

Right. I suspect you don't have any ability to sell a basic economy fare?

Brent Overbeek

That - we haven't talked about those specifics with them. And at this point, we haven't announced any plans to put basic economy in international markets. And so at a time when that becomes appropriate, we would - and we have ATI, we would be ready to have that conversation with JAL.

Dan Mckenzie

And that actually leads to my second question here. Thanks for the new info with $15 million to $25 million in new revenue from basic economy. Just wondering if you can just provide some take rate and average upsell fare amount behind that estimate? And the reason I ask is the estimate seems pretty conservative.

Brent Overbeek

Well, thanks, Dan. As we went and seized the opportunity, we've looked at largely what's selling in the West Coast to Hawaii amongst the existing products in terms of what we can discern in terms of take rates from industry data sources. Certainly, what other carriers report on a macro perspective is their whole network. And having a different customer mix in terms of business and leisure is something that, certainly, they have factored in their macro numbers.

As we try to seize the opportunity, we really focused on the information that we've got is to what viab [ph] and what people are doing out of competitive channels in the West Coast as well with competitive pricing in the market. So I wouldn't extrapolate what other carriers are doing at a system whole compared to what that's doing for them in the West Coast to Hawaii.

Peter Ingram

And I would just underscore that basic economy is still a very new product overall in - from any North American carrier. And it's just been evolving a little bit in Hawaii. We did want to get some estimates out there, so people could have an opportunity to put some scale around what the expectation is as we roll our Main Cabin basic out in North America. I do expect that to continue to evolve over time.

And I think the more - most important thing about it is having products that are available to target, consumers who value different things in their air travel products. And I think having the right product suite out there, which we think this moves us into the direction of is going to be positive for our competitive posture overall.

Dan Mckenzie

Okay. I appreciate, thanks for the time.

Operator

Our next question comes from Scott O'Hara (sic) Steve O'Hara, Sidoti. Please proceed with your question.

Steve O'Hara

Hi, good afternoon.

Shannon Okinaka

Hi, Steve.

Steve O'Hara

Hi. Just curious on the application for the Haneda slot. If I recall, you guys did go on for a slot or a couple of slots the last time. And you didn't get it. I'm just wondering why you think your case is stronger this time versus last time.

Peter Ingram

Actually, Steve, I think we got what we asked for last time. We were the only applicant for a night time slot, and we have the night time slot. And I believe we asked for one daytime, and we received the one daytime slot. And I think our application is strong this time. There is a total of 19 applicants for 12 available frequencies or 12 frequencies that are expected to be available. Our application focuses on the largest O&D between Japan and the United States.

And as we talked about earlier, we've got a compelling case for being able to provide connectivity to some really underserved markets. So we think we have a strong case, and we look forward to hearing the DOT's determination in the months ahead.

Steve O'Hara

Okay. Well, understand correctly. And just the follow-up, maybe. It seems like UHERO [ph] has kind of taken back their economic forecast, and there seems to be a lot of concern at least on their end for the HPA [ph] about visitor growth, visitor spending, et cetera.

And I'm just wondering, I mean, as an outsider, I mean, it seems like there is some sort of a change happening in terms of the - maybe the welcome that visitors and tourists are likely to get in Hawaii. And I'm just wondering if that's - if you see that as being a potential headwind, or that's more just posturing maybe trying to raise fees down the road or something like that, raise revenue to kind of alleviate some of the choke points at tourist attractions, et cetera?

Peter Ingram

Yes. Steve, we've seen a lot of growth in visitor arrivals over the last few years to the point where, I think, 2018, we were very close maybe even a little above 10 million visitors overall to the island. As we've gone into the latter part of 2018, I think that growth started to flatten out. And early part of 2019, as we look at the visitor data, it's been flat to, if anything, down very low single digits in the first couple of months.

I don't know that I would read too much into that. I think there is a period of time when there is expansion in markets that things settle out a little bit. I think there is a discussion that is going on and should go on about how we manage tourism sustainably in Hawaii.

And that is sustainable from an environmental perspective and sustainable from a community perspective and very much sustainable from an economic perspective because we need to keep in mind that tourism is the core engine of the economy of Hawaii.

And so keeping it healthy and strong is something that is important to everyone in this community. And certainly, as we go forward, at Hawaiian Airlines, we're very keen to be a part of that discussion and make sure we've got sensible policies in place to manage tourism growth for sustainability in all those areas I've mentioned going forward.

Steve O'Hara

Okay, thank you very much. I appreciate it.

Peter Ingram

Thanks, Steve.

Operator

We have reached the end of the question-and-answer session, and I will now turn the call back over to Peter Ingram for closing remarks.

Peter Ingram

Mahalo, again, to everyone for joining us today, and we appreciate your interest and look forward to talking to you, again, in a few months. Aloha.

Operator

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