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Hawaiian Holdings Inc (NASDAQ:HA)
Q2 2019 Earnings Call
Jul 30, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Hawaiian Holdings, Inc. Second Quarter Fiscal Year 2019 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the conference over to your host, Alanna James, Managing Director, Investor Relations. Ms. James, you may begin.

Alanna James -- Investor Relations

Thank you, Homer. Hello, everyone, and welcome to Hawaiian Holdings' Second Quarter 2019 Earnings Call. I am Alanna James, Managing Director of Investor Relations. 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 will then open up the call for questions, and Peter will end with some closing remarks. By now, everyone should have access to the press release that went out at about 4:00 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 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 the 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 reports filed on Forms 10-Q and 8-K.

I will now turn the call over to Peter.

Peter Ingram -- President and Chief Executive Officer

[Foreign Speech], Alanna. [Foreign Speech], everyone, and thank you for joining us today. As we begin, I'd like to publicly welcome Alanna James to the Investor Relations team. Alanna has been with Hawaiian in various positions for the past 8 years, most recently at the helm of our Ohana by Hawaiian turboprop operation. We are excited to have Alanna join her first earnings call, and I know she looks forward to meeting all of you on the other end of the line. As we have seen in our press release today, we reported solid results in the context of an evolving competitive environment. For each of RASM, CASM ex fuel and fuel consumption, we were not only within but at the better end of the ranges that we guided to during our last earnings call.

As a result, we posted adjusted EPS of $1.23 per share and adjusted net income of $59 million, which surpassed the latest Street's expectations. For the quarter, our adjusted pre-tax margin was 11.4%, which brings us to an adjusted pre-tax margin of 9.1% for the first 6 months of the year. This result leaves us solidly in the competitive mix with our U.S. peers, which is a credible outcome in light of some of the unique competitive dynamics ongoing throughout our network. But it's below where we were a couple of years ago, and we're focused on executing on several important initiatives to move us back toward the top of our peers set. There is no denying that the competitive environment and industry capacity here in Hawai'i is more active than it was a couple of years ago. But our ability to continue to execute well, both financially and operationally, demonstrates that Hawaiian is built to compete and win.

For this, I have 7,300 fantastic colleagues to thank for taking care of our guests and running the best operation in the business. Let me spend a few moments on the competitive changes in Hawaiian's relative position. During the second quarter, Southwest ramped up to the schedule it announced earlier this year, and ANA launched A380 service to Hawai'i. All of this has been foreshadowed for many months. We remain extremely well positioned in the North America to Hawai'i, Japan to Hawai'i and Neighbor Island markets, even considering these developments. In North America, we continue to maintain an impressive revenue premium, and our A321neos are delivering the network advantages we have talked about for several years. On our Neighbor Island routes, we have the best schedule breadth, the right fleet and, importantly, the best cost structure.

And in Hawai'i -- or in Japan, we have established a strong brand with a product suited to the market and a deepening partnering with Japan Airlines. I wouldn't change places with any of our competitors in any of these geographies. We have faced competitive challenges in the past and focused on making our business stronger, and our approach is no different today. And while others are looking at opportunities in Hawai'i, we see opportunity, too. In the second quarter, we launched A321neo service between Sacramento and Maui, growing our West Coast to Maui network to 8 routes. We also launched service to Boston from Honolulu, complementing our established service to New York with a new East Coast route. Both of these new routes are attracting robust demand and are off to great starts. On the international front, we announced new service to Fukuoka in Japan and have been tentatively awarded a new daily frequency between Tokyo Haneda and Honolulu starting in March of next year.

This new flight is intended to give us a new time channel for Tokyo service to optimize connections with our partner JAL, which will allow us to access guests in parts of Japan without convenient service to Hawai'i today. Japan is the largest source of international travelers to Hawai'i by far, and the affinity Japanese visitors have for Hawai'i is unparalleled. We are ideally positioned to capitalize on this affinity as the only airline that can truly deliver authentic Hawaiian hospitality. These upcoming services demonstrate our enthusiasm for the growth potential of our Japan franchise, which will be further bolstered by the implementation of our proposed joint venture with Japan Airlines which is in the final stages of DOT review. We expect to hear a determination from the DOT on this by the end of the third quarter.

All told, the strongest network to and from Hawai'i is getting stronger with each of these developments. Serving this expanding network is a fleet of aircraft tailored to each of our missions. We took delivery of 1 A321neo in the second quarter and remain on schedule to receive 4 more before the year is up. And by this time next year, we'll have our 18th A321neo, the final aircraft in our current A321neo order book on hand. The operating cost efficiency of this aircraft is remarkable, perhaps best illustrated by the noticeable deviation between our capacity and our fuel consumption in the first half of the year. To it, our capacity measured by ASM is up 2.6% year-to-date compared with the first half of 2018. At the same time, our fuel consumption is down 1.6%. If our fuel consumption had grown at the same pace as available seat miles, our economic fuel cost in the first half of 2019 would have been over $10 million higher.

That, of course, was a defining feature of the business case for the A321neos, and the new fleet is delivering the benefits we expected. We continue to invest in making travel effortless, one of the 2019 strategic priorities I've spoken about since our last Investor Day, and these investments are paying off. Since we last spoke, we will have a new and refreshed lobby at our Maui hub in Kahului. Together with the new mobile app that we rolled out at the end of the first quarter, we're improving our guest experience on the day of travel with more to come in the periods ahead. And these improvements are resonating with our guests as evidenced by improving customer NPS scores during the period. The competitive advantages and accomplishments I just spoke to are rooted in a strategy that aims to serve the needs of the Hawai'i traveler better than anyone. It's what's brought us success to date. It's what's keeping us a step ahead of our rivals now as we face competitive incursions on multiple fronts, and it's what will drive our continued success over the long term.

I'll now turn the call over to Brent to talk about our revenue performance in more detail.

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

Thank you, Peter, and [Foreign Speech], everyone. Our revenue results were largely in line with expectations in the second quarter. Operating revenue was roughly flat on capacity growth of 2.7%, resulting in a RASM decline of 3.1% year-over-year. This included 1 percentage point benefit from the Easter holiday shift and offset a marginal headwind of less than 0.5 point from fuel surcharges and foreign currency in the quarter. Industry capacity growth and pricing pressure materialized as expected in our North America and Neighbor Island geographies in the quarter. North America industry capacity growth accelerated in the second quarter, a trend that we expect will continue in the third and fourth quarters, setting up the full year for growth in the mid-single-digit range. It wasn't that long ago we were talking about double-digit industry capacity growth from North America in 2018.

In fact, when factoring in current schedules on top of the 2018 base, we see full year 2019 industry capacity between North America and Hawai'i that is nearly 17% higher than it was in 2017, the same year we were producing record unit revenue results in the geography. It's not surprising then that the industry pricing between North America and Hawai'i remains below the levels we observed in 2016 and 2017, and has remained as such since the end of the third quarter of 2018. Having said that, our average fares held up well and were in line with expectations in the second quarter. Our Neighbor Island routes saw a material increase in industry capacity in the second quarter. Similar to North America, we expect that trend to continue in the third and fourth quarters. Lower promotional fares continue on a couple of important routes, and while no other airline can compete with our robust interisland schedule, the persistence of these promotional fares is pressuring Neighbor Island yields in the short term.

North America and Neighbor Island PRASM each declined in the mid-single-digit range year-over-year in the second quarter, which led to a decline in overall domestic PRASM of about 7%. The domestic PRASM result is roughly 2 points lower than each of the subentities due to our growing average domestic stage length, which increased more than 8% year-over-year on an ASM-weighted basis. Offsetting some of the domestic pressure was continued strength in our international geography. International PRASM was up nearly 6% year-over-year in the second quarter. Premium Cabin PRASM in international routes posted near double-digit growth, with year-over-year improvements in both load factor and yield as we continue to monetize the investments we've made in the Premium Cabin on our A330 fleet. We continue to perform well in Japan, buoyed by our JAL relationship. Notable on this period was improved performance in Sapporo, Osaka and Tokyo to Kona markets.

Our value-added revenue streams also continue to show meaningful growth. Value-added revenue per passenger was up 15% year-over-year in the second quarter. Extra Comfort and Preferred Seat revenue performance continues to set records, and we are on track to comfortably surpass the $100 million mark for 2019. Similarly, revenue from the sale of HawaiianMiles set a new quarterly record and helped contribute to the record value-added revenue per passenger result in the second quarter. Finally, consistent with the rest of the industry, our cargo business faced difficult macro conditions that continue to pressure cargo volumes, especially out of Asia. As a result, cargo revenue declined 12% year-over-year in the second quarter. We expect pressure to continue in the coming months as uncertainty in trade and the global economy persists.

Looking ahead to the third quarter, we expect third quarter RASM to be down between 1.5% to 4.5% year-over-year, and our capacity to be up between 0.5% to down 1.5% year-over-year. The third quarter year-over-year capacity comparison is lower than our second quarter and what we anticipate our fourth quarter growth will be. This is largely a function of the timing of deliveries of A321neos in both 2018 and 2019, as well as the timing of maintenance events this year. With over half the year behind us, we are now forecasting that our 2019 capacity growth will be up between 1.5% to 2.5% year-over-year. This is 1 point lower at the midpoint of our initial guidance as we adjusted for A321neo delivery delays and some modest trimming of capacity in shorter-term underperforming portions of our network.

Looking past the near-term unit revenue pressures, the commercial team remains focused on building the strength of our underlying business. First, our North America summer bookings are on track, with where we'd expect them to be at this point in the year. While average fares remain below the level we'd seen in the last few summers, the trends are consistent with what we've seen in recent quarters. Next, our A321neos are performing to plan. The introduction of the A321neo has allowed us to grow and transform our North America network. We've launched 7 new routes with year-round service in the past 18 months. So just under 1/3 of our North America routes are still relatively new and developing as expected, with encouraging unit revenue performance trends. Still on the topic of our North America network, we maintained our double-digit PRASM premium between the U.S. West Coast and Hawai'i for the year ending -- the first quarter of 2019, the latest time frame we have data from the DOT.

This is especially notable given double-digit industry capacity growth and this industry pricing levels below historical ranges over that time frame. On the product front, we are on track to launch our Main Cabin Basic product in our North America routes in the fourth quarter. Given our product segmentation success to date, we're confident that this new offering will more effectively tap an important segment of potential Hawai'i travelers and alleviate some of the downward pressure we've seen in our Main Cabin yields. Beyond North America, our partnership with Japan Airlines continues to strengthen. Codeshare and airline traffic are performing very well in absolute terms and on a relative basis compared to our previous partner. We look forward to deepening our relationship with JAL to deliver additional benefits to our customers, the communities we serve and our 2 companies in the quarters ahead.

Finally, as Peter mentioned, we're excited to further expand our footprint in Japan, with Fukuoka joining the network in November. All of these is to say we're executing to our plan and competing effectively in all of our geographies. We're optimizing and growing our U.S. network by expanding our opportunities internationally with aircraft that are tailored for each of their unique missions. We're investing in products our guests value while delivering authentic Hawaiian hospitality, something that none of our competitors can claim. As we've seen over the better part of the last decade, we've built a competitive position that allows us to win in various market environments, which sets us up well for success in the long term.

With that, I'll turn the call over to Shannon.

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Thanks, Brent. Hi, everyone, and thank you for joining us today. I'll start with a brief recap of our second quarter results. Today, we reported second quarter adjusted net income of $59 million or $1.23 per share and adjusted pre-tax margin of 11.4%. We're delivering strong financial results despite the challenging competitive landscape. In the second quarter, CASM ex fuel and items increased to 0.3% year-over-year or a little more than 0.5 point better than guidance. The favorability was due to labor efficiencies from initiatives that are delivering value earlier than expected, improved rates from our ongoing emphasis on stronger vendor management and an unforecasted onetime maintenance credit we received in the quarter. Year-to-date, CASM ex fuel is up just under 1% year-over-year, which puts us squarely in line to post full year CASM ex fuel growth between 1% and 2.5% year-over-year.

This is especially encouraging given our new full year capacity guidance is 100 basis points lower at the midpoint from the original range that we set at the beginning of the year. CASM ex fuel increases due to lower capacity growth are offset by cost reduction initiatives that are delivering benefits earlier than expected as evidenced in the second quarter. This underscores the confidence that we have in achieving our full year 2019 CASM ex fuel target as well as our long-term cost reduction goals. In the third quarter, we expect CASM ex fuel and items to be up between 3.5% to 6.5% compared to last year, which includes the following headwinds: a year-over-year increase in aircraft maintenance events totaling a little more than 1.5 points; the various rate increases including contractual labor and rent of about 1.5 points; and higher ownership and operating costs related to our changing fleet mix as we transitioned out of 767s last year, totaling 1 point.

I'll underscore that the third quarter stands out as an anomaly in terms of year-over-year performance as a result of a number of unique factors in this year's and last year's results. As evidenced by the full year estimate of low single-digit nonfuel unit cost growth, the third quarter growth is not a continuing trend. Not included in our CASM ex fuel ranges are any assumptions relating to the amendable contracts with our Flight Attendant Union, which is in mediation. We're eager to bring this negotiation to a conclusion. And when we do, our next contract to become amendable will not do so until early 2021. Staying on the topic of cost. We're making important progress against our goal of reducing structural cost. We're on track to implement initiatives by the end of 2019 that amounts to a little more than $25 million of annualized savings. Beyond 2019, we currently have line of sight to initiatives worth about $50 million in annualized savings.

We continue to build and stage a pipeline of initiatives that will increase labor productivity, reduce rates and improve terms throughout our supply chain and reduce our fleet and fuel costs, among others. In the pursuit of transformational expense reduction, we've established a dozen cross-functional working teams to thoroughly examine every significant aspect of our cost structure and challenge long-held paradigms in a way that the annual planning process doesn't always accomplish. I'd like to personally thank our teams that have been working tirelessly on not only achieving our $100 million cost reduction target but for promoting and strengthening cost discipline across the entire company. In closing, I want to underscore Peter's confidence in our future. Competitive interest in Hawai'i ebbs and flows. What remains constant is our focus on Hawai'i and the Hawai'i traveler. Simply put, we have the best formula to serve our markets, and we look forward to continuing to demonstrate we are the carrier of choice to Hawai'i. This concludes our prepared remarks, and

I'll now turn the call back over to Alanna.

Alanna James -- Investor Relations

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

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Susan Donofrio from Macquarie Group. Please proceed with your question.

Susan Donofrio -- Macquarie Group -- Analyst

Hi everyone. A question on your CASM guide. It's a pretty wide range for next quarter. Can you just go over a little bit on the puts and takes that are going into it, just to give us some sense?

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Sure. Hi Susan it's Shannon. We usually give a 3-point range for the quarter, so that's what we've done. We've got a bit of puts and takes here. You're right. We got about 1.5 points from aircraft maintenance events in the quarter, and it's just volume. More aircraft maintenance events this quarter versus last year. We've got about 1.5 points related to just various rate increases, some being just contractual labor increases. And we've got some rent increases and about 1 point of just ownership and maintenance costs relating to our changing fleet. As you recall, about this time last year, we were exiting our 767s and now we're bringing in 321s, and as we were at the end of life on some 767s and adjusted our plans with delays in the 321 timing, it just changed the natural ownership and operating cost for the 767 fleet.

Peter Ingram -- President and Chief Executive Officer

Susan, maybe just one thing that I'll add to that. Our capacity growth in this quarter is lower than it is in the other 3 quarters of this year. And again, that is a function, as Brent said in his comments, of the timing of deliveries this year and last year. It's also a function of the fact that last year, when we were suffering from some A321 delivery delays, we were flying bigger airplanes, which produced more ASMs on some of our routes in North America. And so there's a little bit of an anomaly in there that is driving the denominator in that CASM calculation a little bit this year.

Susan Donofrio -- Macquarie Group -- Analyst

Okay great. Well thank you.

Operator

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

Kevin Crissey -- Citigroup -- Analyst

Hey. Thank you so much for the time. Can you talk about the importance of frequency in the interisland market? You talked about having that advantage. Can you talk about how that plays out?

Peter Ingram -- President and Chief Executive Officer

Yes. Maybe I'll start and then turn it over to Brent to see if he has anything to add to that, Kevin. I think it helps in a couple of ways. One, we have a lot of frequent customers who are local customers who travel to the islands for business or personal reasons. And they have different -- they value the ability to choose different flight times and to if, for some reason, their schedule gets delayed, maybe push their flight back a couple of hours. And so it's valuable in that regard, in terms of providing utility to people who travel regularly. The other thing that I would say that's important about it is as we connect to our longer-haul trips including our international trips and also other airlines' longer-haul trips, it gives us the ability to access connecting traffic at different time channels for arrivals from the long-haul trips to Honolulu. So that's a couple of the big important things. Brent, anything you want to add to that?

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

Yes. I think Peter covered the highlights, so the only thing I would add a little bit is around kind of our customer segment difference here in Hawai'i versus some of the mainland markets. And that we start our schedule 5:00 a.m. in the morning. It's unusual to have people going to render medical service or construction workers while looking for that kind of time of coverage. That's really kind of unparalleled in terms of what we offer. And so having a bunch of unique products and our customer base that we serve here in the islands, it's really important to have that breadth of schedule.

Kevin Crissey -- Citigroup -- Analyst

Terrific. Thanks. Maybe on the capacity topic again, can you talk about and remind us what your structural thoughts are on that for 2020 and beyond?

Peter Ingram -- President and Chief Executive Officer

Sorry, Kevin. You're sort of wondering what we're thinking about capacity-wise for next year?

Kevin Crissey -- Citigroup -- Analyst

Yes. I'm not looking for a specific number. I'm talking not necessarily just next year but generally. Are you a 4-ish, 3 to 5? Is there a range that you think of is appropriate given maturity of your network or so, et cetera?

Peter Ingram -- President and Chief Executive Officer

Yes. Let me -- let Brent start on that one.

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

Yes. Kevin, we've talked about in the past that kind of our intent is to grow mid-single digits kind of over time. That growth is important in terms of our economic model here. This year -- over the last couple of years, it's been a bit more fluid given transition of fleet, and next year, while we don't have a specific number to guide to, we will have a little bit more long-haul flying. As Peter mentioned, we'll have the additional Haneda frequency that we intend on flying beginning in late March of next year. We'll have the annualization of Fukuoka in there for most of the year. And so while we're not ready to guide to a specific number next year, I think it's fair to say that we'll have a bit more international growth next year.

Peter Ingram -- President and Chief Executive Officer

Yes. And that's also a function of having some of the deliveries packed at the end of this year, which gives us growth in the next year.

Kevin Crissey -- Citigroup -- Analyst

Terrific. Thanks for the time.

Operator

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

Hunter Keay -- Wolfe Research -- Analyst

Thank you everybody. So you've been scaling back from Neighbor Island capacity now for a few months, but just over the weekend, you added some back. I was wondering what changed? Did you maybe cut too deep, or is there a little bit of a demand rebound? Or is this maybe in response to some of the changes in the competitive landscape?

Peter Ingram -- President and Chief Executive Officer

Hunter, some of it was just kind of typical Neighbor Island cleanup. We had some stuff that we trimmed down in a few select markets and quickly brought in back over the week. It was a combination of, really, several things. One was frequency on high demand days. In Maui, we had some ads that we put in for the state paddling championships where, over the next full while, the demand has been exceptionally strong and we wanted to be able to meet the need of groups wanting to go and really travel for that. And then there was a bit of -- a kind of day-week frequency ads later in the quarter. So nothing kind of material in there. A bunch of little things and tweaks that we are making, similar to tweaks that we're making a little earlier in the quarter on the other side.

Hunter Keay -- Wolfe Research -- Analyst

Okay. And then I'd love to get -- I have a question for Peter or whoever, but I'd love to get the corporate view of the effort to take control of the airports away from the state DOT and establish an independent airport corporation. Can you talk about the risks and opportunities for you guys if that happens? I'm thinking maybe nicer facilities but maybe with some higher costs. Let me know what the puts and takes are on this, not necessarily whether or not you think it happens, but maybe the risks and opportunities in the event that it does.

Peter Ingram -- President and Chief Executive Officer

Thanks For the benefit of those who may not know as much about this as Hunter does, Hawai'i is one of 3 states in the United States where the airport is not controlled by an airport authority or some sort of an airport corporation. The state of Hawai'i airports are managed as a department of the State Department of Transportation. And we have -- we and the other members of a group called the ACH, which is the Airlines Committee of Hawai'i, which is all the airlines that operate into Hawai'i, haven't supported for the past several years the establishment of an airport corporation or an airport authority to give us more consistent management of the airport [Technical Issues] in session throughout the year if we have capital projects that need to be approved or modified. We don't have the ability today to do that throughout the year. It has to be done. Those changes have to be done when the legislature is in session.

When we have a change of administration, we are susceptible to capital projects that are in the planning phase being replanned and reguided to match the whims of a changing political environment. And we're also subject to a fairly prescriptive and restrictive procurement code that isn't always the sort of flexible procurement rules that you would like to have for a business where you are willing to trade off sometimes a little bit of cost for quality and for reliability and dependability, particularly when we're talking about expensive long-term construction projects. So we've advocated for that -- for I think going on 4 sessions now. We have been hopeful at various times that that would be passed most recently. There was a bill in place during the legislative session this year, but that bill unfortunately died before the end, and we didn't -- we weren't successful and it's not clear whether a bill will be introduced in the next legislative session, which stars in January of next year.

I should point out that we have, in the past, attributed some of the challenges, with the oversight of the airports, to some of the delays in construction projects and a famous one was our maintenance hangar that we moved into a couple of years ago, which was several years late. Importantly, I should point out that we're -- even though we haven't been successful in getting a change to establish an airport corporation, we're working very closely with the Department of Transportation and the administration to make sure that the big construction project that is ongoing at the airport right now, which is the creation of a new Mauka Concourse, which is a real positive development in terms of giving more gate capability and the state is tracking. And that project is, in fact, on track and construction is going well. And we're optimistic that that will be ready to move into in 2021.

Hunter Keay -- Wolfe Research -- Analyst

Peter thanks a lot.

Operator

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

Catherine O'Brien -- Goldman Sachs -- Analyst

Good afternoon everyone. So Shannon, maybe one for you first. So the $25 million that you have in productive cost savings this year and then you said you have line of sight on another $50 million going forward, is this all part of the $100 million cost program you guys introduced last year at Investor Day? And I guess, could you help us bridge kind of the $25 million to $50 million to $100 million, over what time period are you looking for that?

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Thanks Kitty. this is all part of the $100 million program that we have. We didn't start the program with a bunch of ideas in the bank. We didn't know that we are -- we had 80% of it identified. We really eventually started on this this year. So for 2019, the projects and the initiatives that we will be able to execute will result in a $25 million annualized savings run rate. We also have line of sight to another $25 million worth of projects that we haven't quite initiated yet. But we know how we'll execute and we just have to get through those projects. So that gets us to about half of our total project. And as we're speaking, we have about a dozen working groups just looking at all different types of cost areas in the company to find the other $50 million. So the target is to identify and execute on the $100 million annualized run rate by the end of 2021.

Catherine O'Brien -- Goldman Sachs -- Analyst

Okay great. Maybe just one clean-up modeling question for Shannon, and then one for the group. Shannon, in the June quarter, you said you had a onetime maintenance credit that was unexpected. Could you help us size the impact so we can think about that modeling going forward?

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Yes. I think that was about 0.3 percentage -- year-over-year percentage points.

Catherine O'Brien -- Goldman Sachs -- Analyst

Okay, great. And then maybe just -- you spoke of some of the trends in international. It

sounds like PRASM has been strong there. Have you seen any discernible change in the fare environment since ANA rolled out its latest upgrading efforts this month?

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

Yes. So for those of you who aren't as intimately familiar with the ANA schedule, they started service with the A380 around Memorial Day and then have been upgrading service. I think there are 10 a week now and will find their way to double daily. It really hasn't had that much of an impact in terms of market performance. There was some initial pricing activity that was a bit more stimulative in nature. That seems to have dissipated. And somewhat offsetting some of the ANA ads has been some OA capacity decreases in those markets as well. And so certainly, there was a lot of press around the ANA A380 entry in the service, but overall we're really encouraged with the performance we're seeing in Japan in total but certainly in Tokyo as well.

Catherine O'Brien -- Goldman Sachs -- Analyst

Thanks very much.

Operator

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

Joseph DeNardi -- Stifel -- Analyst

Good afternoon everybody. I went off to adjust my model for the state paddling competition. When you look at PRASM by route, are you seeing -- just on the North America side, are you seeing kind of PRASM pressure across the board? Or is it isolated at this point just to the routes where you're seeing the increase in capacity?

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

No, it is -- Joe, it is really kind of a route by route impact. Some of it is capacity driven. Some of it is industry-pricing driven. I would say, in general, there is a degree of conformity around performance with some of the markets where we were new entrants. Last year, we were just ramping up service. We've seen more improvement in some of those markets, in getting the right-sized gauge airplane on there in terms of A321s. So it's really kind of a mixed bag. And frankly, it's a bit of a difficult comp given some of the scheduled turmoil we had both last year and this year as we're working through some of the 321 delivery issues.

Joseph DeNardi -- Stifel -- Analyst

Got it. And then maybe one for you Peter. You guys are on track for a few hundred basis points or so in margin compression in 2019. And just based on what the new competitor there said last week about some new route announcements coming, it seems like maybe it's similar capacity environment next year, at least on the North America and Neighbor Island side. Can you just talk about what initiatives you guys think you have to offset another year of margin compression or is that just kind of what we should expect until, I don't know, supply and demand region equilibrium?

Peter Ingram -- President and Chief Executive Officer

Yes. So a couple of thoughts on that. One, a little early to talk about all the impacts on 2020 capacity. Certainly, as you pointed out, one of our competitors has indicated that they plan to make some announcements and that is as foreshadowed as some of the announcements that they made earlier this year. So we've been expecting that. But there may be some other capacity changes as well. So it's a little early to say exactly how the 2019 competitive landscape lays out. In terms of initiatives, I'll highlight a couple of big ones that are going to be coming in late this year or early next year that I think are important in terms of swinging our revenue performance. And one is Main Cabin Basic that we've been talking about for a while.

And as Brent said in his comments, we are expecting to have that roll out as we've been talking about for a while in the back half of this year and be flying Main Cabin Basic passengers before the end of the year. The Japan -- joint business with JAL is another very important one that we're rolling out. That will help us take advantage of some of the new capacity we're putting in Japan, which is in a different geography, but obviously that helps boost our numbers. So those are a couple of the key things that we have going, in addition to the new routes that we talked about in my comments, with the Fukuoka and the new Haneda route. Joe, there are 2 other things I should mention. One, obviously the cost transformation initiative is another piece.

So in addition to doing what we can to turn around the revenue environment, the important initiatives that Shannon mentioned, having $25 million of run rate doesn't mean there's $25 million in this year's numbers. So we'll realize all of that and then some of the $50 million run rate that we've identified and maybe some more as the teams identify more. So that helps. And then one, just one little bit of modeling help to your earlier comment about the State Paddling Championship. Next year, it's going to be in Oahu, so there's fewer teams that will be traveling. So you should factor that in your detail in August for next year.

Joseph DeNardi -- Stifel -- Analyst

Very helpful. Thank you.

Operator

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

Matt Fallon -- Deutsche Bank -- Analyst

This is actually Matt Fallon on for Mike. So how much of the capacity reduction in the new 2019 guide was due to Neo delays, and how much was trimming?

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

I don't have the specific number in front of me, but it was a bit of Neighbor Island trimming, particularly in the front part of the year, most noticeably in kind of 1Q and a little bit of 2Q on Big Island in terms of responding to softening demand that we had seen earlier in the year there. We trimmed a bit of Australia off-peak capacity and so that's probably in the couple of tenths percentage-wise and some of the off-peak periods as there has been a bit of currency pressure.

And then the vast majority of it then has been A321 delays. Things have really just gotten pushed to the right. And so some of our initial plans, for example, we're going to start up a second San Francisco-Honolulu later this year. That was originally in -- our original plan was within the second quarter and now that's going to be actually in the fourth quarter. So things like that, where we've had to slide somewhere growth out to the right. We've had to rejigger some of our maintenance planning to accommodate that. It has been a little bit more challenging, but the vast majority of it has been A321 delays. But like I said, a bit of puts and takes in some other markets as well.

Matt Fallon -- Deutsche Bank -- Analyst

This is a a quick follow-up. If you don't really see yields or cover to where you are comfortable with, do you think there can be more cuts in the margin maybe like Q4 '19 or even into early 2020?

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

At this point, I think we're pretty comfortable with our capacity position. We are producing above average. We've got a nice revenue premium relative to our competitors. In North America, we're encouraged with our performance. On a relative basis, they are even while the macro environment remains off of its historic highs in 2017 and 2018. And we're certainly focused on delivering kind of the breadth and depth of schedule in Neighbor Island that our customers have come to expect from us. And so, at this point, I don't think we see any material changes to that going forward.

Operator

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

Rajeev Lalwani -- morgan stanley -- analyst

Thanks for the time Shannon. first, a question for you. You highlighted a handful of cost initiatives ahead. What's the overarching goal? Are you trying to get back to that sort of flat to down CASM trend? I think that's what you were previously guiding to. So just some color there would be helpful.

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

This cost exercise that we're doing is less about 2019, more about long-term structural cost. Sometimes when we focus on the current year or even the budget process, when we're focused on the next year, we're really limited to what we can do in the short term. And then you playing with timing things and things like that, and that doesn't really help our underlying business. We're not doing this cost exercise because we're at the point of bankruptcy and we really need to save on cash. It really is to allow us to grow more efficient... [Technical Issues] range at this point of 1 to 2.5 points. The cost initiative definitely feeds into that. We've incorporated the benefits that we believe we'll achieve in 2019, but really on the big $100 million cost initiative, it's really more about long-term run rate savings.

Rajeev Lalwani -- morgan stanley -- analyst

Okay. Great. And then a revenue question for Brent, Peter. As it relates to competitive capacity that you've seen come into the market, how quickly has pricing in some of those markets improved? Have you seen sort of rapid maturity and lot of that discounting going away quick? And is there any difference between what you've observed on the interisland side versus the North America side? Hello?

Peter Ingram -- President and Chief Executive Officer

Rajeev, you broke up there real quick at the end. Can you be repeat like the last 10 seconds of your question? Sorry.

Rajeev Lalwani -- morgan stanley -- analyst

Yes. I'm not sure what the last 10 seconds of my question was. Just generally, in terms of as you've seen competitive capacity growth come through, how quickly have the markets matured? Has pricing rebounded at all? And is there any difference, I think maybe this is what you were referring to, between the interisland side and the North America side as far as resilience and rebounding and pricing, if there is any?

Peter Ingram -- President and Chief Executive Officer

Yes. I would say there was certainly -- when we got on and talked last quarter about the North America pricing environment, there was a lot of discussion or a lot of focus on some promotional activity that's been put into the marketplace by some of our competitors. That wasn't really that reflective in what actually selling fares were in, a large part, North America. Our view has been that promotional pricing -- we really just see pricing as kind of continue off the trends we'd seen in 1Q and 4Q of last year. So nothing kind of material in terms of step changes there. On the Neighbor Island side, we have seen a fair amount of activity in promotional activity across a couple of our markets. And while that has seen probably sequential improvement over the course of the quarter, those are kind of incremental steps in terms of week changes, in terms of applicability or nominal increases in fare amounts.

Operator

Our next question is from Dan Mackenzie, The Buckingham Research Group. Please proceed with your question.

Dan Mackenzie -- The Buckingham Research Group -- Analyst

Oh hey thanks for the time guys. Going back to more international growth next year. Can you just remind us how these routes typically spool up? Should we think about this growth as being margin additive or diluted upfront? And what would be driving kind of the -- one or the other, the revenue side or on the cost side?

Peter Ingram -- President and Chief Executive Officer

Sorry, Dan. You broke out again. Which routes are you referring to? You're talking about the new Japan routes?

Dan Mackenzie -- The Buckingham Research Group -- Analyst

Yes. The international growth next year. I was just wondering if you can remind us how these routes typically spool up. Should we think of the growth as being margin additive or margin dilutive upfront?

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

In terms of the big international routes that we've got adding next year, adding a frequency into Haneda, we've got a well-known brand there going into the preferred downtown airport, we're going to open up some new markets in terms of domestic connectivity into more secondary cities into Japan. And so we're really excited about that. And while it's additional capacity, I think, our view is between that and the JAL relationship, that's going to hit the ground running. In terms of Fukuoka, I think, it is a well-established market. It is one where we think we've got the right formula to succeed. Again, the benefits of the JAL partnership are going to be there. We've got the right level of frequency, having a premium cabin and extra comfort. Inevitably, there'll be a bit of a ramp-up period. But in my view, this will be relatively shorter compared to other international markets.

Peter Ingram -- President and Chief Executive Officer

Yes. And I would echo that. We've talked about maturity of international routes before. But they're really -- they're not all created equal. And certainly, the maturity of Japanese travel to Hawai'i is different from anything else international into Hawai'i. And Tokyo, in particular, is the most mature city of the most mature country in terms of how it develops. And that's been our track record since we've been serving Japan for about a decade now.

Dan Mackenzie -- The Buckingham Research Group -- Analyst

I see. A second question here. Just regarding the new law restricting Airbnbs in Oahu. I'm just wondering what your initial thoughts are around how that might impact demand in Hawai'i. How are you guys thinking about that?

Peter Ingram -- President and Chief Executive Officer

Dan, it's an interesting one and we don't have a real precise assessment to be able to give you in terms of what the impact is going to be. We do expect that there will be some curtailing of the availability of vacation rental accommodations in the coming months. That will either make it potentially more expensive or more difficult for people who want to have those sort of accommodation experiences. And that may manifest itself in some pressure on demand from North America. It's really hard for us because this is a fairly opaque market to understand exactly how big that is. But I think we're optimistic that, based on our strong position in the market and our revenue premium and the breadth of our service and how strong our brand is, we will be able to withstand any of that pressure better than any one of our competitors.

Dan Mackenzie -- The Buckingham Research Group -- Analyst

Understood. If I could maybe squeeze one more here. Just looking at the 10-Q, as you guys were kind of going through your script, the one thing that struck me was the stock buyback in the quarter seems like it was a little light just given where the stock is. And I guess I'm wondering, why not be a little bit more aggressive and perhaps signal a little bit more confidence in the outlook here?

Peter Ingram -- President and Chief Executive Officer

Dan, I don't know that I agree with your characterization of it being a little light. I think we bought back a little bit more in the second quarter than we did in the first quarter. We've got a buyback program that we have executed against over a period of time. And we've had, in addition to the capital we're returning to investors in the form of dividends, which we have been declaring quarterly, so we're going to continue to be opportunistic about how we buy back. We think there is tremendous value in doing that right now when we balance out with our other capital needs as we always do.

Dan Mackenzie -- The Buckingham Research Group -- Analyst

Understood. Thanks a lot appreciate the time.

Operator

Our next question comes from Helane Becker, Cowen. Please proceed with your question.

Helane Becker -- Cowen -- Analyst

Thanks very much operator. Hi everybody. Thank you for squeezing me .I just have 2 questions. One, as you think about market opportunities as -- and growth over the next few years, how do you think about the difference between domestic and international, A. And B, as you think about adding international capacity, how do you think about markets like Japan? I think you served Fukuoka at one point in the past and you're going back, but there are other markets that you've been in and out of. Is there a time when it makes sense to go back to some of those markets?

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

In terms of -- one of the things that we've established over time is really a balanced network and the flexibility to be able to grow and react to market demand, whether it be on the international side, the West Coast or even deeper into the mainland. So we've got a flexible view of how we can adapt and change to changing market conditions there. In terms of the international side, I think I'll pick on Fukuoka specifically. It is a much different market than when we previously served it. Industry capacity is going to be down north of 60% from when we previously served it. If I looked at our ability in terms of commercial execution, having the right airplane with a lie-flat product, our ability to put Extra Comfort in and monetize that, our relationship with JAL and what that brings, both today in terms of just their presence and down the road in anticipation of getting ATI, I think it is a comparison of 2 very different things. And so I think as we look at the market now, we expect very different results from where we were before.

Helane Becker -- Cowen -- Analyst

OK. That's very helpful. Thank you.

Operator

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

Peter Ingram -- President and Chief Executive Officer

Thank you, Homer. [Foreign Speech] again to everyone for joining us today. We appreciate your interest, and we look forward to talking to you again in a few months.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Alanna James -- Investor Relations

Peter Ingram -- President and Chief Executive Officer

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

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Susan Donofrio -- Macquarie Group -- Analyst

Kevin Crissey -- Citigroup -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

Catherine O'Brien -- Goldman Sachs -- Analyst

Joseph DeNardi -- Stifel -- Analyst

Matt Fallon -- Deutsche Bank -- Analyst

Rajeev Lalwani -- morgan stanley -- analyst

Dan Mackenzie -- The Buckingham Research Group -- Analyst

Helane Becker -- Cowen -- Analyst

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