Hawaiian Holdings Inc (HA) Q1 2019 Earnings Call Transcript

HA earnings call for the period ending March 31, 2019.

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

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the 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 of Investor Relations. Mr. Wong, you may begin.

Daniel Wong -- Senior Director of Investor Relations

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 o'clock 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 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 and any subsequent reports filed on Form 8-K.

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

Peter R. Ingram -- President and Chief Executive Officer

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 a 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, costs, 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 a wide. 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, deviate 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 gas 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 nonstop 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 A321neo's that are the ideal aircraft for the mid-sized 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 nonstop 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. Well, 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 15th. 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 the 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've established in Tokyo over the past eight plus years. We are 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 had 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 Brian 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 experiences at the core of our ability to differentiate our service and generate a unit revenue premium and we have several initiatives under way 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 in guiding our guests through the airport with greater ease, will continue to evolve the app overtime, 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 that other Hawaii Airports, replace aging kiosk hardware and developed a phased rewrite (ph) over 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 bags 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, it 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 you 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 process season 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're not hearing me say is that in the heightened competitive environment, we are shifting our strategy a 180 degrees. In fact, nothing could be further from the truth.

Our products and services are uniquely designed to serve the specific needs of gas 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 the 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 the 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 A. Overbeek -- Senior Vice President, Revenue Management and Network Planning

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 1 percentage point of collective benefit from fuel surcharges and foreign currency in the quarter. Offset by about 1 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. Highlights the impact of stage length growth on our results, North America and Neighbor Island entities year-over-year performance were each 2 to 3 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 to offset 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 American market. Revenue growth for value-added products remain strong. Extra Comfort continues to perform well having seat upgrade revenue growth of 29% year-over-year in the first quarter. Revenue from the sale of Hawaiian Miles 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. Well, 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 1 percentage point. However, fuel surcharges and foreign exchange will become a headwind of roughly one-quarter of a 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 are not satisfied with 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 remain at high levels and in fact grew a little more than 1 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 12 A321neo in the first quarter, and as Peter mentioned earlier, we continue to benefit from the aircraft superior ability to connect mid-sized U.S. West Coast markets to Hawaii. We launched our first transpacific A321neo just 15 months ago. By the end of the second quarter we'll deploy 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 mid-sized 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 widebody service between San Francisco in 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 year, we will 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 on our main cabin basic product will provide, when it launches between North America and Hawaii later this year. While the industries 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 made to the schedule reflect a market environment, while still allowing us to maintain a robust schedule to meet the needs of our Kamaaina 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. Codeshare 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 remain strong with sales of Hawaiian miles, 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 L. Okinaka -- Executive Vice President and Chief Financial Officer

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 pre-tax 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 pre-tax 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 a 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 1 percentage points 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 fleet mix. Non-recurring credits received in the second quarter of 2018 were completely offset by lower volumes with 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 attendants union, which is currently in mediation.

Turning to fule, 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 products already under way 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 gain from our fleet transition, we're targeting saving another 2% of fuel consumption longer term. A 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 analysis 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 capabilities, 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. Well, there is more work to be done. I'm proud of the progress we've made to-date.

Having this be a multi-year effort means that we can do this in a smart way, we'll continue to invest in initiatives that grow revenue, and strengthened our infrastructure and we're avoiding shortsighted 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 tell you the savings achieved. We are 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 -- Senior Director of Investor Relations

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


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Questions and Answers:

Operator

At this time, we'll be conducting a question-and-answer session. (Operator Instructions). Our first question comes from Helane R. Becker, Cowen & Company. Please proceed with your question.

Helane R. Becker -- Cowen and Company -- Analyst

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 A. Overbeek -- Senior Vice President, Revenue Management and Network Planning

Yes. So in terms of advanced bookings, we continue to see a strong demand environment certainly reflected in the guidance that we've given, April has helped out 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, 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 R. Becker -- Cowen and Company -- Analyst

Okay. And then as you -- maybe this is a question for Peter. As you think longer-term about your business, you mentioned that the A321neos gives you an opportunity to fly more 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 you know, 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? Thank you.

Peter R. Ingram -- President and Chief Executive Officer

Sure, thanks, Helane. I guess response where 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, coming 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 of 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 are 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're well positioned it's not like we're 100% of the 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 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 R. Becker -- Cowen and Company -- Analyst

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

Peter R. Ingram -- President and Chief Executive Officer

Sure, thanks Helane.

Operator

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

Kevin Crissey -- Citigroup, Inc. -- Analyst

Hi, thank you so much for the time. I wanted to talk about the interisland business generally with two questions. The first is, can you help me understand why there has been the route cause of the weakness in the interisland?

Brent A. Overbeek -- Senior Vice President, Revenue Management and Network Planning

Yes, I think it's somewhat twofold. I think we had a softening of 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 who sold 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 Ireland trips, and so people who are either coming here to Oaho and then hopping over to the Big Island from multi-day trip or combining the island of Kauai in 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 from our close in demand, core demand to what we see in our network within the Neighbor Island has been quite resilient throughout this process.

Kevin Crissey -- Citigroup, Inc. -- Analyst

Is that initally --

Peter R. Ingram -- President and Chief Executive Officer

Kevin, if I could just add to that a little bit. If you step back in 2018, when we initially saw some of the, 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 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 toward 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 attraction for people to come and visit.

Kevin Crissey -- Citigroup, Inc. -- Analyst

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

Peter R. Ingram -- President and Chief Executive Officer

So, Kevin. In terms of our own network development as we've grown more direct service into in the Kona, into Lihue, we've expanded the Maui hub. We anticipated and forecasted at some of the connecting traffic of our own was going to move away on the direct nonstops 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've got partnerships with all three and coaches, with all three of the big U.S. carriers, some of that traffic started traveling a little bit more direct on those carriers and that'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 -- Citigroup, Inc. -- Analyst

Thank you. If I can do one more follow-up, on the interisland 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 interisland business do well, is there times where that can happen?

Peter R. Ingram -- President and Chief Executive Officer

I have to admit, Kevin, I don't have the full sort of 60 years 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 services we offer, the great products and our team that continues to do a great job everyday. So we're focused on Hawaiian Airlines being successful.

Kevin Crissey -- Citigroup, Inc. -- Analyst

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

Operator

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

Catherine O'Brien -- Goldman Sachs -- Analyst

Hi, everyone thanks for taking the time. So could you just give us some color between how interisland in North America PRASM trying to underline that domestic total down 7%. I know you've noted that they are each 2 or 3 points better on an individual basis, because of the stage length adjustments, but I know last quarter you gave us the update on the breakup between the two, that would be really helpful. Thanks.

Peter R. Ingram -- President and Chief Executive Officer

Yeah, I don't have the detail in front of me, Cathy, but I think (inaudible) was down about 4% and North America was down about 5% and I think is fairly close.

Catherine O'Brien -- Goldman Sachs -- Analyst

Okay, great. And is that sequential improvement in the interisland from last quarter. Do you think that's driven by your capacity reductions?

Peter R. Ingram -- President and Chief Executive Officer

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 or in 1Q, to meet the new level of demand there.

Catherine O'Brien -- Goldman Sachs -- Analyst

Okay, understood. If I could ask one more. So I think Brent, you noted earlier in the call that you're seeing -- correct me if I'm wrong here I think 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 you're connecting passengers today? And is there some sort of corresponding increase in RASM with that increase in traffic? Thanks.

Brent A. Overbeek -- Senior Vice President, Revenue Management and Network Planning

So Cathy, the number we gave was at 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 -- Goldman Sachs -- Analyst

Understood and does that increase drive -- a RASM increase? Is that RASM positive, neutral negative?

Brent A. Overbeek -- Senior Vice President, Revenue Management and Network Planning

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 code share 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 on one direction and Hawaiian another. We believe that greater choice offers opportunities for customers with us also improving our unit revenue. Furthermore, the amount of traffic that JAL is putting on us within the Neighbor Islands has also increased and that certainly accretive to RASM as well.

Catherine O'Brien -- Goldman Sachs -- Analyst

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

Peter R. Ingram -- President and Chief Executive Officer

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 increase is based on currently published schedules to about 6% and moderately higher into 3Q about a point higher in 3Q. On the Neighbor Island front, industry capacity was down about 5% in 1Q and up about 2.5% right now with published in 2Q as well.

Catherine O'Brien -- Goldman Sachs -- Analyst

And then on the international?

Peter R. Ingram -- President and Chief Executive Officer

On the international side, you've 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 4 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 -- Goldman Sachs -- Analyst

Thank you very much for all the time.

Daniel Wong -- Senior Director of Investor Relations

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.

Stifel, Nicolaus & Company, Inc. -- -- Analyst

Hey guys, this is actually Berdon (ph) on for Joe, thanks for the time. 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?

Peter R. Ingram -- President and Chief Executive Officer

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 (inaudible) product and the 330s, but the 321 products off to a good start as well. In terms of flexibility around both premium cabin and extra comfort pricing, itself will continue to evaluate over the normal course of business. 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.

Stifel, Nicolaus & Company, Inc. -- -- Analyst

Great, that's helpful, thanks. Just as a follow-up. Shannon, I'm 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 L. Okinaka -- Executive Vice President and Chief Financial Officer

Yes, thanks, hi. 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 321neos, one more next year and that's it for aircraft deliveries in 2020. Our 787s will start arriving in 2021 and the first year has two. So fairly moderate after this year. This year has got a little bigger bubble with aircraft deliveries. You know profitability, pre-tax margin, positive cash flow those are all high priorities for us and it's a big reason why we're doing our cost initiatives. We balance all of those things. We are still investing in infrastructure for the long term, but really one of our bigger focus areas is ensuring, we are reducing our costs and investing in revenue growth opportunities as well like Main Cabin basic. So profitability and cash flow generation definitely top of mind. This year, we are forecasting free cash flow -- positive free cash flow, albeit smaller than in prior years, but even with the aircraft deliveries, we are still forecasting positive free cash flow.

Stifel, Nicolaus & Company, Inc. -- -- 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 -- Morgan Stanley -- Analyst

Hi, Peter, Brent, Shannon.

Peter R. Ingram -- President and Chief Executive Officer

Hi, Rajeev.

Rajeev Lalwani -- Morgan Stanley -- Analyst

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?

Peter R. Ingram -- President and Chief Executive Officer

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

Rajeev Lalwani -- Morgan Stanley -- Analyst

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

Peter R. Ingram -- President and Chief Executive Officer

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 tax for comfort to main cabin and soon adding main cabin basic to that product portfolio. So, some of that product base, our 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, continue to do that long into the future.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Thank you. I'll respect the two questions.

Peter R. Ingram -- President and Chief Executive Officer

Thanks, Rajeev.

Operator

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

Hunter Keay -- Wolfe Research -- Analyst

Thank you. Hey -- so Peter, I got to say given the -- I'm surprised at 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 that there is good conversation with Kevin about maybe like a channel shift going on there away from some of the interisland, 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 you will seize creating kind of a more traditional competitive environment?

Peter R. Ingram -- President and Chief Executive Officer

Both, demand has been strong for a number of years. I think that's right and certainly strong economic performance in the core Western regions. The Western U.S. is the largest source of visitors to Hawaii. So that has certainly helped. Over the course of a 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, improve revenue per 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 it is just a testament to 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 drives people back over time, and we look forward to that demand continuing for a long time.

Hunter Keay -- Wolfe Research -- Analyst

Right. Okay, thanks. And then could you give us little more color on the codeshare relationship you have with the Big 3? Can you remind me, is that a one-way code share or a two-way code share? And I'm wondering has that become a little bit loop-sided in their favor? And how we should think about that going forward particularly now that you've got all mortgage flexibility and options with the A321s?

Peter R. Ingram -- President and Chief Executive Officer

So it's one way then coating on us, just within the State of Hawaii. It's long-standing relationships we've had with with all three carriers and we intend to continue those going forward, we think it's a good transaction for us. It offers some utility of our Neighbor Island network for parts of the U.S. that we don't serve. And, you as we've evaluated the business, we're very happy with it and we'll continue to do that, not for that utility to them, but also to the people in the State of Hawaii as well.

Hunter Keay -- Wolfe Research -- Analyst

Thanks guys. I appreciate it.

Peter R. Ingram -- President and Chief Executive Officer

Thanks Hunter

Operator

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

Michael Linenberg -- Deutsche Bank -- Analyst

Hey, two quick ones here. Hey, 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 to 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 a route authorities that will become available. Peter, did I hear you correctly that it sounds like that rather than local market you also look at potentially connecting secondary over Haneda with some of those additional frequencies, because it would seem like if you just concentrating refocusing 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. Thanks.

Peter R. Ingram -- President and Chief Executive Officer

Yes, maybe I'll start and then that ask Brent if he wants to chime in with 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 slot, so there 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 one of the things and Mike, I know you are 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 -- at the 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, when we would expect capacity to ebb and flow with demand overtime 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.

Michael Linenberg -- Deutsche Bank -- Analyst

Okay.

Brent A. Overbeek -- Senior Vice President, Revenue Management and Network Planning

Mike, as Peter mentioned, the local market itself is a big deep market with a variety of carrier 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 up a variety of options, if we're granted what we will applied 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 under-served market relative to what exists today.

Michael Linenberg -- Deutsche Bank -- Analyst

Great. And then, Brent. Just one, quick one FX, you call that out as a headwind in the second quarter, so presumably with even though fuel prices are up, there's 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 A. Overbeek -- Senior Vice President, Revenue Management and Network Planning

Yes. So the currency situation -- 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.

Michael Linenberg -- Deutsche Bank -- Analyst

Okay.

Brent A. Overbeek -- Senior Vice President, Revenue Management and Network Planning

We had in 1Q suffered ticketing in January through March, call it -- we were on a year-over-year basis, we were between JPY4,000 and JPY4,500 one way up year-over-year in terms of fuel surcharge. Then when we actually switch into April and May, we actually are down JPY2,000 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 out of Japan.

Michael Linenberg -- Deutsche Bank -- Analyst

That's very helpful. Thank you.

Peter R. Ingram -- President and Chief Executive Officer

No worries.

Operator

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

Dan McKenzie -- Buckingham Research Group -- Analyst

Hey, thanks for the time. Going back to Japan and JAL pact 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%. So I guess if you look over the past year, how has the JAL pact relationship trended and what are the impediments from better monetizing that relationship?

Peter R. Ingram -- President and Chief Executive Officer

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're 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 selling 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 -- Buckingham Research Group -- Analyst

Right, I suspect JAL didn't any ability to sell a basic economy fare?

Peter R. Ingram -- President and Chief Executive Officer

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

Dan McKenzie -- Buckingham Research Group -- Analyst

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

Brent A. Overbeek -- Senior Vice President, Revenue Management and Network Planning

Well thanks Dan. As we went and sized the opportunity, we've looked at largely what selling in the West Coast to Hawaii among 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 at 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've tried to size the opportunity, we really focused on the information that we've got as to whether what are viab (ph) rates 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 R. Ingram -- President and Chief Executive Officer

And I would just underscore that you know 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 -- the most important thing about it, is having 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 -- Buckingham Research Group -- Analyst

Okay. I appreciate, thanks for the time.

Operator

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

Sidoti & Company, LLC -- -- Analyst

Hi, good afternoon.

Shannon L. Okinaka -- Executive Vice President and Chief Financial Officer

Hi Steve.

Sidoti & Company, LLC -- -- Analyst

Hi, just curious on the application for Haneda slot. If I recall, you guys did gone 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 R. Ingram -- President and Chief Executive Officer

Actually, Steve, I think we got what we asked for last time. We were the only applicant for night time slot and we have the night time slot, and I believe we asked for one daytime slot and we received 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 have talked about earlier, we've got a compelling case for being able to provide connectivity to some really underserved market. So we think we have a strong case and we look forward to hearing the DOT's determination in the months ahead.

Sidoti & Company, LLC -- -- Analyst

Okay. Well I stand corrected. Thank you. And just as a follow-up maybe it seems like UHERO kind of taken back their economic forecast and there seems to be a lot of concern at least on their end to the HPA about visitor growth, visitor spending et cetera. And I'm just wondering, I mean as an outsider, it seems like there's just 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 point toward the tractions et cetera.

Brent A. Overbeek -- Senior Vice President, Revenue Management and Network Planning

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 you know there was a period of time when there is expansion in markets, 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 prominent 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 mentioned going forward.

Sidoti & Company, LLC -- -- Analyst

Okay, thank you very much. I appreciate it.

Peter R. Ingram -- President and Chief Executive Officer

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 R. Ingram -- President and Chief Executive Officer

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.

Duration: 63 minutes

Call participants:

Daniel Wong -- Senior Director of Investor Relations

Peter R. Ingram -- President and Chief Executive Officer

Brent A. Overbeek -- Senior Vice President, Revenue Management and Network Planning

Shannon L. Okinaka -- Executive Vice President and Chief Financial Officer

Helane R. Becker -- Cowen and Company -- Analyst

Kevin Crissey -- Citigroup, Inc. -- Analyst

Catherine O'Brien -- Goldman Sachs -- Analyst

Stifel, Nicolaus & Company, Inc. -- -- Analyst

Rajeev Lalwani -- Morgan Stanley -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

Michael Linenberg -- Deutsche Bank -- Analyst

Dan McKenzie -- Buckingham Research Group -- Analyst

Sidoti & Company, LLC -- -- Analyst

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