Hawaiian Holdings' (HA) CEO Peter Ingram on Q1 2022 Results - Earnings Call Transcript

Apr. 26, 2022 10:10 PM ETHawaiian Holdings, Inc. (HA)1 Like
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Hawaiian Holdings, Inc. (NASDAQ:HA) Q1 2022 Earnings Conference Call April 26, 2022 4:30 PM ET

Company Participants

Ashlee Kishimoto – Managing Director-Investor Relations

Peter Ingram – President and Chief Executive Officer

Brent Overbeek – Chief Revenue Officer

Shannon Okinaka – Chief Financial Officer

Conference Call Participants

Conor Cunningham – MKM Partners

Mike Linenberg – Deutsche Bank

Helane Becker – Cowen and Company

Andrew Didora – Bank of America

Dan McKenzie – Seaport Global

Catherine O’Brien – Goldman Sachs

Operator

Greetings. Welcome to Hawaiian Holdings Incorporated First Quarter 2022 Earnings Call. [Operator Instructions]

I will now turn the conference over to your host, Ashlee Kishimoto, Managing Director of Investor Relations. Thank you. You may begin.

Ashlee Kishimoto

Thank you, Sherry. Hello, everyone, and welcome to Hawaiian Holdings first quarter 2022 results conference call.

Here with me in Honolulu are Peter Ingram, President and Chief Executive Officer; Brent Overbeek, Chief Revenue Officer; Shannon Okinaka, Chief Financial Officer. We also have several other members of our management team in attendance for the Q&A.

Peter will provide an overview of our performance; Brent will discuss revenue and Shannon will discuss cost and the balance sheet. At the end of the prepared remarks, we will open the call up for questions. By now, everyone should have access to the press release that went out at about 4:00 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 at the end of today’s press release posted on the Investor Relations page of our website.

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

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

I will now turn the call over to Peter.

Peter Ingram

Mahalo, Ashlee. Mahalo, everyone. And thank you for joining us today. We updated our first quarter outlook at the end of March, reflecting better than previously expected results due to strong demand throughout our network. With the effects of the pandemic, more muted now than at any point since the beginning of 2020, we are enjoying a period of strong demand for travel to, from and within Hawaii.

COVID restrictions for travel to the State of Hawaii were lifted at the end of March and restrictions on travel in our key international geographies are appreciably reducing. Looking ahead, we expect record domestic revenue in the second quarter and a steady recovery of international demand as the year progresses.

Let me briefly touch on a few of the following themes for 2022 that we’ve discussed in our previous calls. Specifically, restoring international service and returning to operations at full scale, enhancing commercial flexibility and operational efficiency through foundational technology, succeeding in a disrupted competitive environment and preparing for the 787s.

Internationally, we are underway with the long-awaited recovery in demand for travel to Hawaii as COVID travel restrictions eased in Australia and South Korea. New Zealand is implementing plans to ease restrictions, setting the table for us to restore service in July with flights three times weekly. In Japan, travel restrictions, incrementally eased with the removal of government mandated quarantine and an increase in visitor arrival allowances. But the current restrictions remain a significant barrier to travel, and we will need to see policies evolve further to realize the full demand potential in this geography.

Based on what we’ve seen in Australia and South Korea, we know that there is pent up demand for travel to Hawaii and our international geographies just as we have seen domestically. And we are preparing for our service to return to full scale.

We continue to see strong demand for our domestic business. And our premium leisure model remains successful with strong, present outperformance relative to our U.S. mainland competitors, especially strong performance of our front cabin and extra comfort products shows the continued willingness of leisure travelers to pay a premium for superior products and service. And we can market and distribute these products more effectively than ever before because of our technology investments over the past few years.

On the technology side, our new revenue management system launched successfully at the end of March. Work on the implementation of our PSS is underway and on track to launch in the spring of 2023.

The revised delivery date of our first 787 has not yet been determined. The delay in 787 deliveries is affecting all of Boeing’s customers and we are working closely with Boeing to bring more certainty to the timetable. There is so much to be encouraged about right now that it’s almost difficult to remember that the first quarter began with the Omicron variant suppressing demand and affecting our staffing and operations. I’m very encouraged by how we’ve started an important year of continued recovery after a bumpy first couple of weeks.

I could not be prouder of our wonderful team on the front lines and throughout the company, who are committed to connecting people with aloha. The progress we have made on our goals for 2022 sets us up well for the remainder of the year and for years beyond.

As passenger volume returns, we are actively hiring and training throughout the business. Recently agreed labor contracts ensure our competitiveness as an employer. The ratification of our IAM contracts with our mechanics, airport operations and cargo employees was an important milestone. And our dispatchers represented by the TW just last week ratified a five-year contract. Combined with the agreement, we reached with our flight attendants union in 2020, these contracts demonstrate a commitment to look forward and do right by our employees.

Our pilot agreement with ALPA becomes amendable on July 1. But for the moment, we are rather uniquely positioned in the industry with no amendable collective bargaining agreements. We’re managing through the challenges of recruiting in a competitive labor market. The hiring challenges are most pronounced for our airports and maintenance teams. I know there is a lot of interest in pilot hiring and for this group, we continue to see good supply, but training is a constraining factor in getting the right pilots into the right classification to support our operations.

Lastly, we will continue to make investments that strengthen our brand as a premium leisure airline. Yesterday, we announced that we will be providing our guests the best in-flight connectivity product in the world. After reaching an agreement with SpaceX to deploy their Starlink WiFi product on our long haul aircraft. The speeds will support fast web browsing and streaming that we’ve gotten used to on our devices on the ground.

Also importantly, we will be deploying it with a simple interface and free of charge to all our guests for however many devices they are accessing on board. We have deliberately trailed the industry in deploying in-flight connectivity because current and previous generations of products perform below our standards over the Pacific, where most of our time in-flight is spent. Until now there was no offering that provided a superior product to match the rest of our in-flight experience.

Starlink changes this, and we think our guests will be delighted when they have the chance to experience it. We expect to begin aircraft deployment in 2023, and we’ll provide an update later in the year with greater detail as we build out our timeline more discretely. Next month, we will reinforce our commitment to sustainability with the publication of our third annual Corporate Kuleana Report. As part of an island community, we have a profound responsibility to contribute to the environmental, economic and social wellbeing of this place.

I’m incredibly proud of the contributions our team has made through corporate action, employee volunteerism and charitable giving to support our community through these difficult times. We’re actively engaged in dialogue around some of the most difficult challenges facing our community, including managing the impact of tourism and addressing issues of social justice and inequality. We’re also looking inward to ensure our own very diverse workforce feels valued and heard, and that Hawaiian remains a great place to work and build a career.

We have much to be encouraged about as we move towards the peak summer travel season. Our unparalleled brand is getting stronger every day. Our purpose and values serve as our compass and are imbued in everything we do. I get to come to work every day with the best team in the airline industry with external conditions in a better place than we have seen in the past two years, I am confident that we are poised for success ahead.

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

Brent Overbeek

Thank you, Peter. Aloha, everyone. Our first quarter revenue performance was better than expected throughout our network and in line with the updated guidance we provided at the end of March. Passenger revenue was down 33% from 2019 as we operated 118% of our domestic capacity and just 25% of our international.

Our premium products are performing particularly well. We saw continued strength and demand for our front cabin with North America premium cabin PRASM up 8% for the quarter. Extra comfort revenue in North America also exceeded 2019 levels for this quarter. Other revenue continues to be a bright spot up 32% this quarter from 2019. Cargo recorded the highest quarter of revenue as we benefited from strong yields from Asia, and we generated the highest first quarter of revenue ever for our HawaiianMiles co-branded Mastercard on strength of card member acquisition and strong portfolio net retail sales.

Looking ahead, we’re encouraged by bookings and are expecting strong demand for travel to Hawaii. The Governor of the State of Hawaii announced the removal of all COVID-related travel restrictions and we saw robust sales in the days following the announcement in early March. Three days in early March were among our all time top 10 single days for direct sales. Our business is recovering. And for the second quarter, we anticipate that our revenue performance will accelerate with overall revenue down 8% to 12% from 2019.

Let me take you through each segment of our business. In North America, we are seeing strong demand and anticipate our load factor to be near second quarter 2019 levels, which were close to 90%. While we are seeing more signs of industry capacity from the Mainland to Hawaii, continue to abate throughout the summer. Industry capacity remains historically high at roughly 117% of 2019 levels.

The revenue environment is improving and we anticipate our second quarter RASM for North America to be above 2019 levels and a greater than 20 point sequential improvement from the first quarter. We expect to fly a similar schedule for the first quarter at about 115% of our 2019 schedule.

We remain well positioned and based on the latest data from the DOT, we continue to materially outperform our competitors on PRASM in North America. This demonstrates the strength of our North America network focus on the Hawaii premium leisure traveler award-winning service and optimally configured aircraft. In the Neighbor Islands, we’re encouraged as load factors are approaching 2019 levels as we expect to fly about 80% of our 2019 capacity in the second quarter.

The pace of recovery has been tempered by the increase in direct flights to the Neighbor Islands, the lack of international connecting traffic and some sectors of the local market that have remained persistently down during the pandemic. However, we are seeing some recent improvement in these sectors, such as travel associated with in-person events, including sporting tournaments and annual festivals.

We continue to refine our second quarter flight schedule based on some pilot training bottlenecks impacting our 717 fleet. Despite these challenges, we remain well positioned and continuing to earn a share of local traffic well in excess of our seat share, maintain a material load factor premium and continue to generate a sizable yield premium versus our competitor.

Let me take some time to go through our international network and the various policy changes in that geography. Australia lifted its remaining travel restrictions for visitors in February, and we continue to see solid demand of that market. South Korea made it easier for travelers by eliminating quarantine with proof of vaccination beginning April 1. We have seen an increase in demand with load factors expected to increase from the mid-30% in April to mid-70% in June. In response to demand, we’re adding additional frequency during the summer and we’ll be flying five times weekly to Seoul.

Moving to Japan, we’ve seen incremental progress towards reopening with an increase in daily arrival caps and the removal of government quarantine requirements for vaccinated Japanese nationals. We remain uncertain on when Japan will fully reopen. But no, there is substantial pent-up demand for travel to Hawaii.

We are now expecting to fly about 30% of our 2019 international schedule in the second quarter. We remain well positioned with our brand and quality of experience to capitalize in demand for Hawaii vacation, when it materializes in each international market. Rolling all that up, we anticipate our overall system capacity for the second quarter to be down 11.5% to 14.5% from 2019 levels.

Turning to an update on our 2022 commercial initiatives. We implemented our new PROS revenue management system this month and are encouraged with the early results that we’re seeing. The team is developing an experience with the system and things are going great so far. It’ll take some time for us to reach a level of expertise with the system and fully utilize all its capabilities, but we have confidence at this one lock incremental revenue, as it continues to ramp up to steady state.

On ancillary seats product sales, we are seeing steady growth from our extra comfort seat product due to strong demand for this premium product along with seating price changes we implemented at the end of 2021. These resulted in higher first quarter revenue than in 2019 for North America. And looking ahead, we expect continued improvement in our second quarter North America extra comfort revenues per seat to exceed 2019 by about 15%.

Lastly, in January, we launched our new NDC supported technology platform to a positive response. And we are in the process of signing agreements and onboarding major travel agency partners. In addition, this change in distribution strategy will help us provide better information about our product offerings to our guests, which will enhance our revenue generation while at the same time controlling our distribution costs over the long-term.

We expect these commercial initiatives to drive incremental benefits of approximately $10 million this year, as they ramp up to steady state. We are well along on the road to recovery. Domestically, we anticipate strong demand with load factors close to 2019 levels. Premium cabin PRASM improvements to continue to accelerate to historical highs and extra comfort record revenue to record levels. Internationally, travel restrictions are easing and we are seeing robust demand for Hawaii vacation. We have the right products for our markets, strong brand, an exceptional team and a winning formula for success.

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

Shannon Okinaka

Thanks, Brent, and thanks everyone for joining us today. Let me start with an update on the balance sheet. We closed the quarter with $1.9 billion in total liquidity, inclusive of cash, short-term investments, and our undrawn revolver of $235 million. Adjusted net debt was $931 million, which is near our 2019 levels. Our scheduled debt and lease principal payments for this year totaled $122 million, $67 million of which was paid in the first quarter. Our balance sheet is strong and we have ample liquidity and we continue to look for ways to fortify our financial position. We’re comfortable holding a higher liquidity position as we continue to recover and move to profitability and consistent generation of positive cash flow.

Turning to the P&L. We finished the quarter with an adjusted EBITDA loss of $106 million, while reflecting the impact of the Omicron variant and pandemic related restrictions in much of our international network, these results were better than we originally expected given the strong domestic revenue results that Brent discussed. On the cost side, our first quarter non-fuel costs and non-recurring items totaled $472 million with the unit costs up 12.2% compared to 2019. These results are at the higher end of our expectations. As the higher wages resulting from the ratification of our IAM contracts in mid-February were not included in our original guidance.

As a reminder, our IAM contracts primarily cover our mechanics, airport operations personnel, and cargo employees as well as certain administrative positions. Upon ratification, we paid a signing bonus totaling $2 million that was adjusted as a one-time expense and we also recorded a one-time increase to our vacation liability for higher pay rates.

As Peter mentioned, coming to negotiated agreements with our unions is critical to our success and we are well placed in the industry in this respect. Fuel costs rose in the first quarter to $2.83 per gallon, up approximately 12% from our original outlook in mid-January. Our consumption was outside of our range with higher than expected fuel burn as we flew our A330 is a little harder and heavier, about 55% of our fuel was purchased based on Singapore Jet Fuel prices, 35% on U.S. West Coast Jet Fuel prices, and 10% on other jet fuel prices. We have limited exposure to New York Harbor crack spreads that exploded in recent weeks.

Our leadership team continues to focus on initiatives that keep our costs competitive and offset inflationary and other pressures Specifically for 2022 tailwinds include productivity benefits from recent technology investments and amended labor contracts. Lower aircraft rent – lower aircraft rent expenses through the renegotiation of several of our A330 leases, as well as lower depreciation and amortization expenses. Significant headwinds pressuring our unit costs include airport related costs as airports return to charging airlines for both operational and capital expenses and increasing labor rates from recently amended contracts with our flight attendants, grounds crew, mechanics and dispatchers. Lastly, we are incurring costs, adequately train and position our crew as we grow back our network.

For the second and quarter, we expect our unit costs excluding fuel and special items to be up 16.5% to 19.5% compared to the second quarter of 2019 on a capacity decrease of 11.5% to 14.5%. Sequentially our unit costs are expected to be consistent with the first quarter on a capacity increase of about 5.5%. In addition to higher selling and other variable costs associated with the expected increase in revenue and continuing ramp up of our network, cost increases from the first to second quarter include a full quarter of new IAM wages versus half a quarter in Q1, other contractual wage rate increases and one-time maintenance costs.

We are suspending our full-year guidance for capacity and CASM ex-fuel as the uncertain timing of Japan’s reopening impacts our ability to predict ASMs and therefore unit costs. Although we don’t know the exact timing, people leave the impact of steady state flying in Japan will reduce CASM ex by a double-digit percentage. We expect our fuel consumption for the second quarter to be down 14.5% to 17.5% as compared to 2009. And we’re forecasting our fuel price per gallon for the second quarter to be $3.59 based on the forward curve as of April 21. It is worth noting that the forward curve includes a substantial increase in the refined margin and a widening differential between the geographic indices.

Our capital expenditure forecast for 2022 is $105 million to $125 million with about two-thirds for aircraft, and the remaining third for non-aircraft spend. The non-aircraft expenditures reflect investments and technology and in our facilities. Despite the increase in fuel costs, our adjusted EBITDA is expected to improve in the second quarter to a range of negative $50 million to positive $10 million. We are encouraged that we have line of sight to positive EBITDA and we’re focused on profitability as our full network recovers.

We’re confident that we are on the road to recovery and our focus is on the long-term success of our business. Our priorities are our investments and technology to unlock new sources of revenue and enhance cost competitiveness. Our commitment to strengthening our brand and award-winning hospitality and service to differentiate us from the competition, and hiring and training our people as we plan and prepare for our future. We believe that these priorities are the winning formula to growing value for our shareholders.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Conor Cunningham with MKM Partners. Please proceed.

Conor Cunningham

Hey everyone. Thank you for the time. Just in terms of, I mean, I know you’re in the early stages of your international recovery and I get that. You don’t have a ton of data, but I was just curious if you could provide any context around how bookings look like maybe the day that restrictions are – are eased and just how that – how that flushes out over the next couple of weeks until you actually get the flying again?

And then I’m trying to figure out like the Neighbor Island flying, it seems correlated with the international coverage. So I’m just curious on when you talked about how you’re doing a lot better than your competitor there, but is there a maximum that you’ll be flying in terms of Neighbor Island flying until you have a full recovery on International side? No there’s a lot there, so I’m sorry about that.

Peter Ingram

All right. On the International side, Conor, thanks for the question. We have seen particularly in South Pacific, in Australia, New Zealand when announcement and in Korea as well, when announcements have been made and changes in policy, we’ve seen a pretty quick and pretty dramatic move towards bookings. And I think what we’ve seen, I would say is more direct bookings, shorter booking curve, folks keen to travel as those policies have changed and so we’ve had a really good experience there and we’re certainly encouraged what we’ve seen there. As it relates and we fully anticipate we’ll see similar behavior out of Japan. We know that there’s a keen interest in getting to Hawaii, the safety that we have in terms and comfort – the level of comfort around us as a destination. We know we’re going to be really appealing to Japan as it opens up. And so we’re very much looking forward to that.

In terms of Neighbor Island, I think we’ve said before we anticipate coming back a bit smaller post-pandemic than we did going in. Some of that really is just a function of how we’re scheduling the network. And so before we had some capacity at the beginning of the day out of Honolulu and returning later in the day that was really about positioning aircraft and we switched our scheduling paradigm to now overnight aircraft in the Neighbor Islands. And so we’ve eliminated some of that flying, which was frankly, was not that productive from a revenue perspective.

So we anticipate that we’ll likely end up in the mid-to-high-80s probably over time will be the window that we end up in there. As you mentioned we are missing kind of the International connecting and stop-over-traffic there. As we talked about in our prepared remarks, we have particularly with some of the governor’s announcements and changes in policy here in Hawaii. We have seen certain segments of the market start to come back and I’ll call it late March and April. We still have ways to go admittedly in some of those, but we’ve seen some, some encouraging initial signs of that.

Conor Cunningham

Okay, great. And then as a follow-up just on Japan, just to talk a little bit more about that, that the Japanese yen has obviously come under a lot of pressure, and I don’t know if that’s changed your expectation for the recovery ramp over when it does reopen. I know there’s a lot of unknowns, but it has that – has that move in the currency, made you contemplate the, a rebound there a little bit – a little differently, and I appreciate the time? Thank you.

Peter Ingram

Yes. I think we have seen a material move in the yen over the last I’ll call it the last month really or last 45 days. I think it’ll have a bit of an impact that being said, we’ve seen the desire to travel and people’s willingness to pay out of International markets be quite strong. And so on the margin obviously the cost of a Hawaii vacation for Japanese resident will have gone up with the appreciation of the yen or with the appreciation of the dollar versus the yen. So I think it has a, maybe a minor impact but overall I think we’re still pretty bullish on how folks are going to come back and their desire to travel here and spend.

Conor Cunningham

Great. Thank you.

Operator

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

Mike Linenberg

Yes. Hey Brent. Yes, this is another sort of multi-question here. I’m curious if you sort of index the price of a sort of typical Hawaiian vacation, and I’m just in the context of the inflationary pressures that we’re seeing everywhere. I think the Hawaiian vacation was always somewhat aspirational and I suspect that it’s probably a bit higher and again not from a yen perspective, just from a U.S. dollar perspective. So coming from the other way, and the reason I ask is, there has been a sizable amount of competitor capacity withdraws.

Whether it’s West Coast to Neighbor Island or even to Honolulu, and I don’t know if it was just that so many carriers had loaded up so much. And now that the rest of the world is opening up we’re just seeing a recalibration or maybe its higher fuel prices. So I’m not sure if there’s a demand element there, it’s obviously to your benefit for your competitors to scale back. But I was somewhat concerned that there may be some impact on the demand side and/or it’s just very expensive to fly some of these long-haul flights given where fuel prices are. So I know that’s kind of a multipronged question sort of following up on Conor, but however best you can answer it. Thank you.

Brent Overbeek

Yes. I think I will say certainly over the last – over the last 15 months, we’ve seen a lot of capacity go directly off the West Coast in the Neighbor Islands. And so really Maui, Kona, and Lehua have all seen a material increase in industry capacity, kind of well in excess of what, what previous levels were. I think what we’ve collectively seen from an industry perspective is that some carriers were suffering from a load factor perspective. And if you look at some of the competitive data there, people were struggling to fill some of that capacity so combined with higher fuel; it only is a bit rational that some of that is probably finding its way out of the market.

In terms of kind of cost index, it has been, certainly we’ve seen lodging prices that have been quite high more so in the Neighbor Islands than in Oahu, and that could be a contributing factor. Now all that being said most of our capacity is in Honolulu and Maui. We do have a bit of direct service into Kona and Lehua. Forward looking demand looks strong and we’re really encouraged with how kind of bookings look for us and so while some of that capacity has come out, we still see a pretty strong demand environment really across – across all of our markets into Hawaii from North America.

Mike Linenberg

Okay, great. That’s helpful. And then just another question to you on the Japanese market. You said earlier that presumably as Japan starts to relax some of these COVID restrictions, and I know they’ve been already starting to relax. That you expect to maybe see a similar response as what you’ve seen with Australia, New Zealand and Korea.

Historically though, I always thought, and I know this is past and things probably have evolved, but that a large portion of Japanese trips to Hawaii, the consumer discretionary element was, a large portion of it was done through the travel agencies and the Japanese being planners would book those six to nine months out in advance. And so with summer upon us, assume say the rules are relaxed in the next month or two. Do we get that type of snap back or has that Japanese consumer already booked for his or her family a trip to, I don’t know, Okinawa or somewhere else in Asia-Pacific?

I’m curious about how that has evolved and whether or not it will snap back as quickly given that historical trend.

Brent Overbeek

So, I would say historically we did have more Japanese point of origin traffic that would work through a travel agency partner in plan and advance maybe not quite as much as you had indicated in your comments. But we had seen over time that continue to kind of narrow in terms of planning time relative to departure.

I think what we’ve seen broadly across the pandemic is people are more interested. And I think this will apply in Japan as well. People are more interested in planning on their own and getting things done. So, they’ll continue to work with our key agency partners, but I do think we will see more direct sales, more OTA sales and people planning and shortening their planning horizon.

So, is it perfectly analogous to what we saw in Australia? Maybe not one for one, but I do think a lot of those same characteristics will continue to change as Japan comes online.

Peter Ingram

And Mike, this is Peter. I would just underscore the point that over time the distribution, the third-party distribution paradigm internationally is evolving. We are seeing more direct sales. We have over the course of the pandemic when sales were limited, the direct channel held up much better than third party channels. And in fact, the pandemic itself has likely, has caused in some of these international markets where third-party is important a retrenchment in those businesses that are focused on that, a closing of some of their retail outlets.

So, we expect that that evolution to continue, but we also expect they’re going to remain important partners in those geographies in the coming years.

Mike Linenberg

Okay.

Brent Overbeek

Yes. And actually, one important thing that’s happened over the last little while in terms of more symbolic right now than generating bookings, but during the pandemic, actually a lot of the wholesalers couldn’t actually promote packages to Hawaii. And that has changed recently now with some of the governmental policy changes to where they can get to the point where they can actually start to market packages to Hawaii. And so that at least will be in place and will be ready for as additional restrictions come off, particularly the arrival cap as Peter alluded to is kind of probably the most important one for us to move forward.

Mike Linenberg

Okay, good to know. Yes, thanks gentlemen. Thank you.

Operator

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

Helane Becker

Hi everybody. Thanks for the time. So, two questions here. As you think, maybe for Shannon, as you think about going forward, where do you think your liquidity or your cash balances need to be for you to feel comfortable?

Shannon Okinaka

Hi, thanks, Helane. We’re still looking at it. We’re not really in a rush to do a big balance sheet analysis and figure out our target. I think we’re really comfortable right now with our cash balance. Obviously, it’s higher than where it probably needs to be. But I think for now, it’s okay. As we still don’t know exactly when Japan comes back and what that rebound looks like from Japan.

We’re also working out still trying to determine the delivery schedule for our 787s. And with that, then we’ll look at the financing, how we choose to finance them as well as just a quite a large debt maturity wall in 2026. So, we’re just – I think until some of those things become a little bit more certain we’re not going to establish a cash target or liquidity target, but we’re just really comfortable with our position for now.

Helane Becker

Okay. That’s hugely helpful. And then on the 717s, I guess, I have been reading and you guys just talked about the training issues that you have. Does it just make sense to take a look at that aircraft type and think about – and I think it was mentioned that you are basing aircraft in Neighbor Island overnight, which you’ve never done before. Does it make sense to maybe think about replacing those with larger aircraft that might be more fuel efficient and enable you to still do achieve the goals of being an important part of Neighbor Island travel?

Brent Overbeek

Yes. So, look, the 717 is a terrific aircraft for what we do as we’ve said for really, as long as I’ve been with Hawaiian. It’s a pretty good size for the demand levels in the market. It is a low operating cost airplane from a cycle perspective which in many cases the cycle impacts on maintenance costs, is a bigger driver on very short haul flying than fuel cost is.

We’re able to keep that airplane flying well through the middle of this decade. We’ve got a majority of our fleet that is owned with no outstanding debt on it. And so that makes it an extremely low ownership cost fleet for us.

Eventually we will be looking at replacements. I think a couple of things that we consider is whether an airplane slightly larger would be better. I don’t think it would be dramatically larger because at the fringes of the day that would give us an airplane that was putting more seats in the market than we needed.

We’re going to continue to evaluate that over time, maybe a little bit bigger than what we have now would be better. But I don’t think it would be dramatically bigger. It wouldn’t be the size of our 321s with 189 seats. That’s just more than you need a lot of times of the day in the Neighbor Island routes, right?

Helane Becker

Yes, got you. That makes a lot of sense. Okay. All right. Well, thanks very much for your time and help.

Peter Ingram

Thanks, Helane.

Operator

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

Andrew Didora

Hey everyone, thanks for the questions. Brent, I know obviously a ton of moving parts here in terms of the recovery – the international recovery. Since we don’t break out the unit revenues by entity, can you just give us a sense of sort of the RASM differential between the Mainland and Dryland and international? I’m just trying to get a sense of how RASM will trend based on mix as your international network comes back.

Brent Overbeek

Yes. I mean, I get – either at this point, it’d be kind of hard to think about kind of guiding for third quarter for the reasons you mentioned. A lot of that really depends on the pace that Japan comes back both the amount of resources that we’ve got to it beyond what we’ve got in kind of our 2Q guidance. And the pace of demand in terms of booking curve. But again, I think we feel pretty confident about those.

I would say Japan is somewhat is fairly close to West Coast from a PRASM perspective higher than – typically higher than the rest of our international network. So probably in line I think with long haul. And so that will be consistent. As we think about things going forward, I – we’re encouraged with the progress we’ve seen in North America. But I’m not sure we’re kind of at the high point of where we can get North America. So I’m optimistic that there’s more runway in third quarter that we can continue to perform it and grow some unit revenue there as well.

Andrew Didora

Okay. That gives me a general sense on the international RASM. And then I guess, Shannon, this pre-pandemic, you did hedge fuel, you had some nice hedge gains back in 2018 if I remember correctly. I guess any plan to go back to a more meaningful hedge policies out of what needs to change for you to reconsider that. Thanks.

Shannon Okinaka

Yes. Thanks, Andrew. So although, it doesn’t show up in our results, we actually still have a hedge – hedging program in place. We did some analysis through the through the pandemic when we were determining whether to – whether or not to start hedging again as the domestic business came back. And that analysis showed that, that over time, we weren’t truly we didn’t have really big gains or losses over a longer period of time.

So we moved the program to be a little bit more opportunistic where we’d buy more at lower prices and less. And at this point right now, it’s at zero at higher prices. And we really look at it to as like an insurance program. So if you think of it like insurance right now the premium is really high and you’re getting a lot less coverage. We tend to buy out of the money options. And so if you’re getting 10%, 15% out of the money right now, you’re looking at really high prices. So what it would take to get us to buy some hedges is for some of that pricing to come down to make it a more reasonably priced insurance program for us.

Andrew Didora

Understood. Thank you.

Operator

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

Dan McKenzie

Hi, thanks guys. Continuing on the international theme and you leave it to me to kick a dead horse here. I believe international revenue in 2019 was just over $700 million and I’m just sort of extracting that from the 10-K so please correct me on that. But what percent recovered were you in the first quarter and where – what recovery are you expecting in the second quarter in the guide here?

So I guess I’m just trying to get a more precise idea of what’s missing exactly. And then just related to that is the expectation that just given pent up demand and I know you’ve talked about this in prior questions but is the expectation that the international side of the business could ultimately be better than 2019 once things open up here?

Peter Ingram

Yes. So Dan, on the international, I think you’re in the ballpark with the $700 million, I think of about it – as about 25% of our revenue pre-pandemic. The – in terms of the recovery, I don’t have that my fingertips what percent we were recovered in the first quarter, but it was still pretty dramatically off through most of the last several quarters up till this one, we were probably between 90% and 95% still missing from the market.

We did start to see the ramp up in the first quarter from Australia, but even that was held back a little bit and probably of the 25% of our revenue pre-pandemic that was international about 70% of that was Japan, maybe even a little more than 70% Japan. So the biggest by far of the international markets is still sort of trying to grind out of the starting gates for us. So we’ve still got a lot of runway left in terms of getting international back, but it is encouraging to see Australia up and running and gaining some momentum, South Korea gaining momentum, New Zealand getting ready to go. And we just – we’re looking forward to having Japan join the party in a meaningful way.

Dan McKenzie

Yes. And then I guess is the expectation that given pent-up demand, you can business, ultimately that’s going to be higher than 2019.

Peter Ingram

Look at – I think there’s some opportunities there. I don’t think it’ll snap there right away, but if you look at how when cases are down in Japan, the demand for domestic travel appears very strong. I think there’s a real willingness to travel as we’ve seen domestically as the carriers flying between Europe and the U.S. Mainland have experienced. And I think we’re going to see a really robust recovery as people have the ability to get out and stretch their legs and travel and do the things they’ve been missing for a while.

Dan McKenzie

Understood. Second question here, the 8.5 points of incremental CASM-ex pressure in the March pressure pardon me in that per the March update? I know you guys aren’t guiding to full year CASM-ex at this point, but how much of that 8.5 points is in the second quarter and the third quarter? And what I’m really after is just what the CASM-ex drop could look like once international is ultimately restored here?

Shannon Okinaka

Yes. Thanks, Dan. I don’t have those numbers broken out by quarter in front of me. So I can’t answer that piece, but the adding that to Japan will have a large impact on our CASM. I think as I spoken the prepared remarks, we’re looking at expecting double-digit decreases in CASM-ex once Japan is in a steady state. So I think you should expect CASM-ex to have good improvements once the capacity comes back.

Dan McKenzie

Very good. Thanks for the time you guys.

Operator

And our final question is from Catherine O’Brien with Goldman Sachs. Please proceed.

Catherine O’Brien

Hey everyone, thanks for the time and apologies in advance, one more Japan one. But I just want to make sure I’ve got this right. I just want to confirm there’s currently no quarantine required for Japanese citizens returning to Japan from vacation Hawaii as April 10. I guess, is that right? And if so, what are the remaining government restrictions that are behind your decision to suspend for your guidance due to uncertainty around that full international relaunch. Or is it just that even with the quarantine drop, there’s still some hesitancy to travel or is it the U.S. entry requirements? I know that’s kind of a bundled question there, but I’m just trying to get a sense. Yes, thanks.

Peter Ingram

Yes. Let me try to explain what the most significant restriction is, and I’ll let Brent or others chime in if they have more. So the removal of the quarantine is very helpful. What is most constraining for us right now is over the past couple of years, the Japanese government has had a policy of doing post arrival testing for people coming back from international trips.

And there have been limits at various point in time that are placed on the carriers in terms of the amount of traffic they can carry on their airplanes, basically, because of the constraints in doing those arrival testing. So the ability to do that testing at scale is limited. And so what they have done is imposed either weekly or per flight caps on the number of people that each carrier can bring into the country.

Currently, those caps are at about 10,000 arrivals per day, that are allocated across all of the carriers operating in the market. If you look back pre-pandemic, typical demand would be more like 140,000 or 150,000 passengers a day. So there is this artificial hard constraint on the number of people that can come into Japan, even if there is sufficient demand to fill an awful lot more seats.

Brent Overbeek

Yes. I think as Peter mentioned, until we’ve seen some sequential progress in that cap coming up, but it’s still – our allocation is still quite small. And so that’s going to need to grow material or get removed to get things kind of back at scale, I think is the critical impediment at this point.

Catherine O’Brien

Got it. And I guess, from your government just quick follow-up on that one before my second one. From your government affairs folks, is there any read through on that’s a pretty, I don’t know, it’s what like 7% of 2019 demand is allow right now. Any timeline on when that gets raised or just really kind of depend day to day here?

Peter Ingram

Yes. We’ve been hesitant to try and speculate on that, because every time we’ve done that up till now we’ve been wrong. And I feel confident that it will come back. We’re seeing most of the world, even in some of the places that had the biggest restriction, not just in our network with place like New Zealand, but if you look at Singapore and some other places in Southeast Asia, these restrictions are being removed.

Last year, there was a lot of speculation that after the Olympics, there would be a loosening of restrictions in Japan. Then there was a question of, well, maybe it’ll be after the elections that were last fall. I think the hope of those being the catalyst for removal of restrictions was dashed a little bit by the first the Delta wave and then the Omicron wave of cases at the end of the year.

It’s our understanding that, problematically for us, some of these restrictions remain politically popular in Japan, which is in contrast to the attitude we see in this country around restrictions associated with COVID at this point. And there are some elections that are coming up, I believe it’s in July of this year.

So we don’t expect a material move in policy before July, we may see some more of these increments where the cap went from 5,000 to 7,000 to 10,000, but I don’t know that we’ll see a full liberalization before those elections in July. But I don’t want to speculate, because I don’t have enough insight into what the catalyst is going to be that that really opens it up more comprehensively.

Catherine O’Brien

Totally understand a complex issue. And then maybe just – I realize it’s hard to compare across the airline, just given the varying states of network recovery. But at the midpoint of your guidance, I’m getting a RASM, that’s going to be up like 3% to 4%, which is a bit lower than some of your peers. I would think having your historically significant exposure long haul flying in your international network currently be smaller than normal. I would think that’d just be a RASM boost mathematically. But maybe there’s something else you want to highlight as an offsetting drag. Like, maybe they’re just the less inter island or higher percentage of capacity in new markets or maybe I’m just wrong in that international impact, which is so many colors. Thank you so much for the time.

Peter Ingram

Yes. I think Catie probably the biggest impact is that we talked about in our prepared remarks is really the amount of capacity that’s in the market right now. And while that continues to abate, if you look at our market, we’ve got 117% of North America capacity compared to 2019 in the second quarter. And I think if you took that for a big portion of some other folks, and I think that’s going to look a little bit worse than what it exists largely in the mainland. And it’s headed in the right direction in the short-term. I think we’re doing all the right things and performing really well in a difficult competitive environment. But I think we still are at a unique position in terms of our domestic business, in terms of the amount of competitive capacity relative to the comp period people are looking at.

Catherine O’Brien

Totally fair. Thank you so much for that.

Operator

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

Peter Ingram

Mahalo, again, for joining us today. The strong demand improvement as we move through the first quarter gives us confidence in the periods ahead. I’m extremely proud of our wonderful team, who are committed to connecting people with Aloha. And we appreciate your interest and look forward to updating you on our progress again in a few months. Aloha.

Operator

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.

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