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Hawaiian Holdings Inc (NASDAQ:HA)
Q3 2019 Earnings Call
Oct 22, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Hawaiian Holdings' Third Quarter Fiscal Year 2019 Earnings Call. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to our host Alanna James, Managing Director of IR for Hawaiian Holdings. Thank you. You may begin.

Alanna James -- Managing Director, Investor Relations

Thank you, Diego. Hello, everyone, and welcome to Hawaiian Holdings' third quarter 2019 earnings call. Here with me in Honolulu are Peter Ingram, our President and Chief Executive Officer; Shannon Okinaka, our Chief Financial Officer;and Brent Overbeek, our 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 o'clock Eastern Time today. If you've not received the release it is available on the Investor Relations page of our website hawaiianairlines.com.

During our call today, we will refer at times to adjusted or non-GAAP numbers and metrics. A detailed reconciliation of GAAP to non-GAAP numbers and metrics, can be found at the end of today's press release posted on the Investor Relations page of our website. As a reminder, the following prepared remarks contain forward-looking statements, including statements about our future plans and potential future and financial 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. Therefore, undue reliance should not be placed upon them. We refer you to Hawaiian Holdings' recent filings with the SEC for a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. This includes the most recent Annual Report filed on Form 10-K as well as subsequent reports filed on Forms 10-Q and 8-K.

I will now turn the call over to Peter.

Peter Ingram -- President and Chief Executive Officer

Hello Alanna. Hello, everyone, and thank you for joining us today. As you have seen in our press release today, our team executed extremely well during the peak summer period and demand to, from, and within Hawaii remains robust. In the face of increasing competition, we reported strong results, which surpassed what we had expected entering the quarter. More precisely, we were well above our initial guidance range on RASM, well CASM ex-fuel fell in line with our expectations at the beginning of the quarter. We posted adjusted net income of $81.5 million and adjusted EPS of $1.72 per share. Our third quarter adjusted pre-tax margin was 14.6%, which brings us to an adjusted pre-tax margin of 11.1% year-to-date.

These results are solid considering the competitive capacity increases we have seen across our network over the past two years, a time when many of our competitors have enjoyed a more benign capacity environment across their networks. And once again, these results demonstrate the resilience of our business model and the competitiveness of our airline. My thanks as always go out to my 7,300 fantastic colleagues both on the front lines and in the back office for their contributions to this performance and for continuing to run the best operation in the business.

I'm also pleased that we continue to make progress toward a variety of objectives we set out for ourselves this year. During the third quarter, we achieved an important milestone with the sales launch of our Main Cabin Basic product. Main Cabin Basic sales for our Los Angeles, Long Beach and Sacramento non-stop routes were launched on September 23rd, for flights commencing on October 21st. And we continue to roll out the product across our North America network in the ensuing weeks.

Bringing Main Cabin Basic to market was a complicated initiative and my thanks go out to all of the people in our organization, who have collectively contributed thousands of hours of effort to this initiative and bringing it in on time and on budget. With Main Cabin Basic, we now have the ideal product in our portfolio for those guests who value the lowest possible price for travel and quite importantly, a new competitive tool against other carriers offering basic economy products today.

During the quarter, we took delivery of our 14th and 15th A321neos, continuing the build out of our fleet to support our North America growth strategy. As we've noted before the A321neo is perfect for our network, not only because it is the right size for the mid-sized origin and destination markets that were more challenging to make work with our previous allwide-body fleet, but also because it is the most fuel-efficient airplane flying between North America and Hawaii. Clear evidence of this is the 3.3% year-over-year decline in our fuel consumption this quarter compared to a 0.4% system capacity reduction. Three deliveries remain on our current neo order book, two scheduled for the fourth quarter of 2019 and our final one in the first quarter of 2020. I should also note that all of these deliveries are scheduled to be from Mobile, Alabama, and as a result we are not expecting any impact from the announced tariffs on European aircraft.

On the international front, we were disappointed with the tentative DOT ruling to approve our partnership with JAL without antitrust immunity. Despite the clear benefits from our cooperation with JAL to date, we believe we need ATI to realize the full consumer benefits of the partnership. As many of you already know, we requested an extension of the deadline for our reply to the show-cause order until November 12th, to allow us appropriate time to better articulate the need for ATI to deliver the public benefits of the joint venture is capable of. We have been granted this extension by the DOT and are working closely with JAL to supplement our application to address the concerns identified by the DOT in its order.

In the meantime, we are continuing to pursue opportunities as they arise, and along these lines, our team is busy planning for the inauguration of our new route to Fukuoka toward the end of November. The response, we have received from the community in Fukuoka has been overwhelmingly positive and we are excited to bring back non-stop service to the Hawaiian Islands to the residents of Fukuoka. Initial bookings are strong, giving us confidence that we can mature this new route quickly. We were formally awarded the additional Haneda slot for which we had tentative approval when we last spoke and we are on track to start the additional service in March of 2020. This new flight promises to add diversity to our flight times giving our Tokyo guests more options and enabling increased connecting opportunities for guests in parts of Japan without convenient service today.

These connections in particular will benefit from our JV if we are permitted antitrust immunized coordination opportunities with JAL. At the beginning of 2019, we express confidence in our ability to continue to compete and win and to continue to be the carrier of choice to, from, and within Hawaii. And our team is justifying this confidence by relentlessly focusing on delivering authentic Hawaiian hospitality to our guests, and executing our specific network missions better than any of our competitors. Our ability to not only sustain, but grow our revenue premium over the other US carrier serving Hawaii in a heightened capacity environment highlights the strength of our proven formula.

As we move toward the end of 2019, I'm pleased to note that we're delivering on the key priorities that we established at the beginning of the year, while also posting strong financial and operational performance. We are delivering products our guests value with our North America Neo expansion, the launch of our new Main Cabin Basic product, our new route to Boston and the growth in our Japan franchise. We have made strides toward our aspiration of making travel effortless with the launch of our new mobile app, lobby improvements in Honolulu and the Neighbor Islands and other investments in our guests day of travel experience.

On this initiative, we have additional projects under way that will deliver an even better day of travel experience in 2020 and beyond. We are on track to generate important structural cost savings through our cost transformation initiative, which Shannon will elaborate on later. And we are building our foundation for the future with technology improvements, process optimization and investments in our facilities.

Looking forward, through the end of the year and into 2020, I see us continuing to focus on some of the same initiatives. At our main hub in Honolulu, we are embarking on a phased approach to overhauling our check-in lobby to increase throughput and enhance our guest experience. We're currently working collaboratively with our landlord, the state DOT to finalize plans for this project. We are committed to delivering our cost transformation initiatives and 2020 will be an important year with analysis ending and realization of savings ramping up. We'll take the final three A321neos on our current order and continue to prepare for our first 787s in the early part of 2021. And from a network perspective, we'll return to Fukuoka in a little over a month and expand our presence in Tokyo next spring, as we continue to fortify our successful Japan business.

How our team has handled increasing competition over the last two years convinces me that we are competing from a position of strength. I'm proud of what our team has accomplished and optimistic that we have all the elements in place to be successful over the long term as the carrier of choice to, from, and within Hawaii.

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

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

Thank you, Peter and Aloha everyone. Our third quarter revenue results reflect robust demand across our network and strong execution by the Hawaiian team. Our top line revenue, capacity and resulting RASM were all roughly flat year-over-year, which is a great result in light of the competitive incursions on multiple fronts. And a 7% increase in our own networks ASM weighted stage -- average stage length. Despite industry capacity in our North America and Neighbor Island geographies increasing 7% year-over-year during the quarter, our domestic PRASM was down only 2.4% year-over-year. We saw a strong close in demand and solid pricing in North America during the back half of the third quarter. While our year-over-year traffic increase was largely expected in light of the weather events during the third quarter of 2018, we were encouraged by the relative yield strength in August and September that exceeded our initial expectations.

Our A321neo routes and new service to Boston are also developing as expected and we're pleased with our performance thus far. Based on the most recent data available to compare our relative revenue performance on the West Coast to Hawaii, not only did we maintain our double-digit PRASM premium relative to our competitors, but we were able to moderately expand that premium. This reinforces the benefits of a strong North American network, optimally configured aircraft and a singular focus on the Hawaii traveler.

The outlook for industry capacity shows a 9% growth next quarter. And while we expect some yield pressure from the increased capacity, we are confident in our ability to continue to compete effectively across a variety of market conditions. As Peter mentioned, we achieved an important milestone with the launch of sales for our Main Cabin Basic product on September 23rd. Prior to the launch of Main Cabin Basic, the lowest fare product we had offered, was our full service Main Cabin product. The introduction of Main Cabin Basic to our product portfolio will further strengthen our ability to compete in North America and will mitigate some of the downward pressure on yield.

Although, we are in the very early stages, we're encouraged by the performance of the product to date and we have every reason to believe that the $15 million to $25 million annual benefit of this initiative will be achieved. I'd like to echo Peter's gratitude to the team involved in launching Main Cabin Basic. I'm extremely proud of the collaboration, dedication and commitment of each of the team members, which resulted in the successful launch of this complex and important initiative. Demand for Neighbor Island travel remains solid. However, we continue to see pressure on yields due to the widely available promotional pricing in the market.

The outlook for the fourth quarter has industry capacity growing 11.6% year-over-year, which we expect will have a continued impact on yields. We are well equipped to compete in this geography for several reasons. We have a breadth and depth, to our Neighbor Island schedule that meets the needs of local travelers, a strong loyalty program based here in the islands, the ideal aircraft for the mission and the ability to recover quickly from operational disruption and continue to deliver value to our guests.

Internationally, we had another great quarter, with third quarter PRASM up 5% year-over-year. Demand for the Hawaii vacation was robust and pricing generally remained strong as we move through the quarter. The premium cabin continue to perform well on international routes with PRASM up 9% year-over-year. Overall, this was the 14th consecutive quarter of year-over-year PRASM improvements for the entity, validating the investments we've made in our team and our product. Japan performance remained strong during the quarter and we are excited to continue growing the franchise with the launch of Fukuoka service in November, while the DOT tentative ruling regarding our ATI application with JAL was disappointing, we're focused on preparing our response to the DOT and continuing to work on building our partnership with JAL.

Our value-added revenue streams also continue to strengthen with value-added revenue per passenger up 10% year-over-year. Extra Comfort and Preferred Seat revenue performance continues to set records and we remain on track to comfortably surpass our $100 million target for 2019. Revenue from the sale of Hawaiian Miles also set a new quarterly record and continues to contribute meaningfully to our value-added revenue per passenger. Cargo revenue for the quarter was down 9% year-over-year due to lower volumes out of Asia. Although we saw sequential improvement versus last quarter, the team has been working hard to adapt to the current macroeconomic conditions.

Now looking ahead to the fourth quarter, we expect our capacity to increase between 3% to 4.5% year-over-year. The largest increase in capacity during the quarter for 2019. Our fourth quarter year-over-year capacity increase is driven by the launch of our new route from Maui to Las Vegas, the reintroduction of our Fukuoka route, the introduction of a second daily service from San Francisco to Honolulu and our new service to Boston, which started in April of this year. We expect continued strength in our international geography, as well as robust demand in our domestic markets, offset by average fare pressure in that entity. The net of this is, we expect our fourth quarter RASM to be down between 0.5% to 3.5% year-over-year.

The nominal sequential slowing of RASM in the fourth quarter is driven by a number of factors. The sequential increase in industry capacity growth, the launch of two new routes later in the quarter, and the impact of our increased stage length. While we anticipate some benefits from Main Cabin Basic in the fourth quarter, we will come much closer to our annual run rate level in the first quarter of 2020, due to our longer booking curve. As we look beyond the fourth quarter and out into 2020, we expect our capacity growth in the mid to high single digits, which is higher than our targeted long-term growth rate of low-to-mid single digits. Our growth in 2020 is driven by the timing of aircraft deliveries and relatively low growth in 2019. This growth is largely fueled by the annualization of new services started in 2019 and the launch of our new Haneda frequency in the March of 2020. Overall, we are optimistic about the future and our ability to compete to win in the markets we serve.

We are excited about our growth prospects as we come to the final phase our A321neo expansion. Bookings for the A321neo routes are on track and our expectations -- with our expectations and we look forward to continuing to grow our North America to Hawaii network with an aircraft as ideally suited to the mission. We're growing and strengthening our North American network as freeing up wide-body aircraft to support growth in our long-haul markets. We anticipate meaningful revenue improvement through multiple initiatives, Main Cabin Basic, the JAL partnership, the continued monetization of our premium cabin investments and other value added revenue, which will drive revenue performance going forward irrespective of the competitive environment. We are executing well against our plan for 2019. Our results demonstrate that we've built a strong competitive position through our diversified network in our unmatched guest experience with authentic Hawaiian hospitality. I am confident that this winning combination will allow us to withstand short-term competitive pressure and succeed in the long term.

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

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Thanks, Brent. Hello, everyone, and thank you for joining us today. I'll start with a brief recap of our third quarter results. Today, we reported third quarter adjusted net income of $81.5 million or $1.72 per share. And adjusted pre-tax margin of 14.6%. Our ability to continue to deliver strong financial results demonstrates the strength of our business model, the benefits of a diversified network and our resilience to competitive pressures. In the third quarter, CASM, ex-fuel and items increased 4.9% year-over-year in line with expectations at the beginning of the quarter. As a reminder, the sequentially higher year-over-year costs we experienced in the third quarter were an anomaly due to unique factors related to our fleet transition and the timing of maintenance events and are not evidence of a trend. Our economic fuel cost per gallon for the third quarter was $2.04, which is better than our expectations at the beginning of the quarter, despite the short-term blip in prices in September.

On the financing front, we closed aircraft that Japanese yen-denominated financing transactions totaling $220 million during the third quarter. The yen-denominated loans provide a natural cash flow hedge to our yen revenue exposure at a very attractive coupon rate of less than 100 basis points. We also extended the leases on three A330 aircraft resulting in meaningful cost savings. We've structured the A330 lease extensions in a manner that maintains flexibility in our fleet plan, such that we can adjust the growth of our network to our desired pace based on market conditions when we start receiving our 787 deliveries.

Additionally, in the third quarter we returned $26 million to shareholders through dividends and share buybacks. We bought that $20 million of outstanding shares, leaving approximately $47 million remaining of our current $100 million authorization. Year-to-date through the end of the third quarter, we bought back 3.9% of our shares outstanding. During the third quarter, we continued to make good progress on changing the way we do business to generate structural cost savings, primarily through vendor management and aircraft ownership initiatives, we're now on track to execute over $40 million of annualized savings by the end of 2019. And continue to see more opportunities in these categories and others such as labor productivity and overhead. Altogether, we have identified initiatives with the cumulative potential for annual savings of over $150 million and we're in the process now of evaluating their feasibility as well as prioritizing them against our strategic imperatives to ensure alignments. I'm confident that we'll reach our $100 million target in 2021 and deliver on this important priority.

Looking forward to the fourth quarter we expect CASM, ex-fuel and items to be up between 0.5% and 3.5% compared to last year, reflecting more normalized year-over-year changes. Our fourth quarter CASM, ex-forecast includes headwinds from contractual labor rate increases and the associated benefits totaling about 1 point, an increase in IT spend as we invest in our technology capability totaling about 0.5 point, an increase in variable compensation due to improved financial performance totaling about 0.5 point, the impact of maintenance credits received in the fourth quarter of 2018 not expected to reoccur in 2019, as well as an increase in aircraft maintenance events totaling about 0.5 point, and offsetting these pressures are savings from our A330 lease renegotiations totaling a little more than 0.5 point.

We're increasing our full-year CASM, ex guidance slightly primarily due to an increase in variable compensation due to improved financial performance as well as higher than expected fleet transition costs. Not included in our CASM, ex-fuel ranges are any assumptions relating to the amendable contract with our flight attendants union. We continue our negotiations with our flight attendants under the oversight of the national mediation board. We're eager to bring these negotiations to a close and reach an agreement, which recognize the contributions of our flight attendants to our Company's success while maintaining our cost competitiveness for the long term.

Based on the fuel curve as of October 10, our economic fuel cost is estimated to be $2.02 for the fourth quarter and we are lowering our full-year forecast to be $2.05. As a September 30, 2019 we've hedged approximately 50% of our projected fuel requirements for the fourth quarter. Our capex for the full year 2019 is now expected to be between $410 million and $430 million, which is within our initial guidance range. As we look ahead into 2020, we're expecting much lower capex than 2019 with only one planned aircraft delivery. This will give us an opportunity to focus on generating greater value from our current investments and prepare for our next wide-body growth phase, while driving long-term structural cost reduction initiatives.

Overall, I'm pleased with our financial performance, particularly given the evolving competitive environment and I'm optimistic about our future. We're committed to cost discipline, which combined with our multiple revenue initiatives will position us for continued success in the long term as we generate value for our guests and our shareholders. Over the years we've built a world-class airline with a strong brand and healthy balance sheet. We have the right aircraft with superior revenue-generating capability for each distinct mission in our network. And we deliver award winning authentic Hawaiian hospitality to our guests each and every day.

This concludes our prepared remarks and I'll now turn the call back over to Alanna.

Alanna James -- Managing Director, Investor Relations

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Joseph DeNardi with Stifel. Please state your question.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Yeah, thanks. Good evening. Brent, I think, you said in the third quarter, North America PRASM was down 2% on a 7% increase in industry capacity, which is a really, really good result. Can you just theorize on what's driving that? Is it kind of demand stimulation from some of the new capacity in the market? Is it demand shifting from other markets, I'm sure some of it's your own good execution, but maybe just a little bit more color on what's driving that.

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

Sure. Joe, I think it's a combination of several things. I think it is, one, starting with kind of matching the right airplane for the right markets for us in terms of our 321 rollout plan and we continue to execute really well on those and generates a benefit of that fleet. Some of it is wealth, in our case is benefits of continued investments and extra comfort and premium cabin, which are driving performance in the front part of our airplane that is certainly helping the bottom-line and beyond that I think, we had really good execution in that quarter, that was a bit choppier last year in terms of some weather events and so our execution as we got through the latter part of the quarter was quite good and we saw solid performance there.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Okay. And then Shannon, sorry if you mentioned this, but I guess relative to Brent's kind of capacity commentary for next year, what should we think about CASM ex trends into next year and then maybe beyond that as some of the cost savings initiatives take hold?

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Yeah, I think Joe, so we're still in our planning process for 2020. So I'm not quite ready to give guidance, but we can talk about some of the puts and takes in Brent's ASM comment about 2020 is important, much higher than what we saw this year. Also we're fully baking in the $40 million of cost savings that we've already executed on this year, plus more. We haven't -- like I said, I can't give guidance quite yet as we're still going through the planning process. But I'm very excited about that. As well as -- we've got lower capex, not really related to tell CASM, but we've also got, trying to think -- none of the guidance of course includes any of the AFA assumptions that obviously would probably be an offset whenever that's resolved hopefully soon. But -- well, I can't give guidance, I can't say that I'm really happy with where we are as we look forward with costs. I'm really excited about our cost savings initiatives. So without giving guidance, that's probably the best I could give you.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Okay, thank you.

Operator

Our next question comes from Steve O'Hara with Sidoti & Company. Please state your question.

Stephen O'Hara -- Sidoti & Company -- Analyst

Yeah, hi, good afternoon. In terms of the the capacity growth and the issues there with the capacity coming into the mainland, I'm just curious what the impact so far has been from the change in the regulations around Airbnb's and I guess their short-term rentals and things like that, I guess some of the government agencies you seem that they are -- I think it was [Indecipherable] that was kind of negative in terms of the impact. Just curious you've seen anything there and maybe what you expect longer term?

Peter Ingram -- President and Chief Executive Officer

Yeah. Thanks, Steve. As of right now, we haven't really been able to see any impact on demand that we can attribute to the changes in regulations around vacation rentals. It is something that we continue to monitor and we'll look to see if there's anything we can identify going forward. But right now based on how we closed out the third quarter and our bookings in the fourth quarter and going into next year, we continue to see robust demand for travel to Hawaii from North America and from our international destinations.

Stephen O'Hara -- Sidoti & Company -- Analyst

Okay. And then I guess when I think about Hawaiian versus other airlines' maybe US-based Airlines, I'm just wondering -- it seemed like you guys have kind of short haul and long haul, not a lot of in-between. But in terms of the opportunities that are out there, where do you see the better opportunity set, is it longer haul opportunities or is it shorter haul opportunities within -- maybe North America I guess or versus international? And then, are you able to source aircraft in a timely manner to kind of meet those opportunities? Or do you think you have the right kind of fleet going forward to target those? Thank you.

Peter Ingram -- President and Chief Executive Officer

Yeah, let me start and then maybe see if Brent has any additional comments. I would say we see opportunities in the future in a variety of places. I think in our market share of any of the geographies we serve with the exception of Neighbor Island is not so high that we don't have opportunity for gains and there has consistently been growing demand for travel to Hawaii. I think nearer term, obviously, we've got the Japan flights we're starting in November and March of next year, so that's a lot of the focus for the next year or so. I think we see continued opportunities in North America to build our franchise and certainly in Japan going forward and elsewhere internationally. So we've built a network that is really focused on the important sources of Hawaii visitors. And I think that gives us the opportunity to be opportunistic about looking at things that are available when they become available. And so currency and fuel and different macro factors will have an effect from time to time, but I think we're in a position with our diversified network to Hawaii of being able to take advantage of opportunities and also to adjust to circumstances.

As far as your fleet question goes, I think for, we do have aircraft on order. As Shannon mentioned, primarily once we get through these A321noes between now and March, the aircraft we have on order right now are 787s. 787s will allow us to, in some cases free up some narrow bodies for other opportunities or to grow long-term and will also be able to replace A330s. Beyond what's currently on order, I would say for the aircraft that we are likely to grow with, which is the ones that are generally in our fleet right now, there is considerable order book. So there is a bit of a lag to get to them, but we've anticipated that and we've got aircraft on order and we've got flexibility to manage our growth with retirements over time if circumstances warrant.

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

Yeah, I think Peter laid it out very well. We've got a real ability to kind of grow opportunistically wherever we see the opportunity in the network, whether it be on West Coast, whether it'd be deeper in the North America, whether it be the international side, and the timing of 787 deliveries and what that does from a fleet flexibility really will enable us to be opportunistic as we look into '22 and '23 and beyond.

Stephen O'Hara -- Sidoti & Company -- Analyst

Okay, thank you very much.

Peter Ingram -- President and Chief Executive Officer

Thanks, Steve.

Operator

Thank you. Our next question comes from Helane Becker with Cowen & Company. Please state your question.

Helane Becker -- Cowen & Company -- Analyst

Hey, thanks very much, operator for the time. And, hi team, thank you very much for taking the question. Can you just talk about the acceptance or the increase that you're seeing in your corporate card? I don't know what's the right word, take rates in given the increased competition or capacity in the local market?

Peter Ingram -- President and Chief Executive Officer

Yeah, sure, Helane, you used the term corporate card. I think you're referring to our co-brand credit card, which [Speech Overlap]

Helane Becker -- Cowen & Company -- Analyst

Yeah, sorry.

Peter Ingram -- President and Chief Executive Officer

Corporate program to it, but most of [Speech Overlap] personal focus. We've actually had -- no problem, it's a great question and we've actually seen really strong demand. We are on track for a record in new card applications for this year and strong growth over 2018. So we're seeing great demand for the card. It is we've got terrific penetration here in Hawaii. It is also very popular with people on the US mainland, particularly on the West Coast and we're happy with the continued growth of the credit card portfolio.

Helane Becker -- Cowen & Company -- Analyst

Is there any way you can like say, numbers or can you say we saw ex-percent growth in the quarter or in the year or some numbers that just give us a sense of what great penetration and excellent acceptance means?

Peter Ingram -- President and Chief Executive Officer

Yeah, let me think about that one and we'll think about how we can give some more information going forward. I don't have it on my fingertips right now and I don't just want to sort of shoot off a number haphazardly. So let us take that one away.

Helane Becker -- Cowen & Company -- Analyst

Okay, fair enough. And then my other question is just with respect to aircraft deliveries, I think, your last aircraft on this order comes -- you mentioned in the first quarter and then you don't get anything till 2021. So when we think about returning capital to shareholders next year, are you thinking about increasing the share repurchase program or are you thinking about storing -- what is the right word, warehousing the cash for like the next round of aircraft purchases or how should we think about 2020 as -- I don't know capital return year or cash generation year -- what you do with free cash flow, anyone of those, like pick one? Thanks.

Peter Ingram -- President and Chief Executive Officer

Sure. Let me, start and I'll let Shannon chime in if she wants to add on to this. I would say first of all, Shannon gave the numbers we've been executing on the outstanding share repurchase and we're more than halfway through the $100 million program we announced in the latter part of last year. So we are continuing to think about capital returns. Also, we've got the dividend that adds to the capital returns profile. I'm not going to speculate on what will happen after the current program goes, but I will say that as we build our plans for next year, one of the features that Shannon mentioned, this was our capex is lower next year, that combined with our expectations of our performance means, we would expect to have greater free cash flow generation next year and we will obviously be thinking about the priorities for that free cash flow generation, whether it is reinvesting in the business, seeking increases in capital returns. I think we've got a variety of options and we'll continue to be balanced in our approach to how we execute against that.

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Yeah, usually, Helene, when we talk about the sources and uses, mostly uses of cash, we usually have a third bucket as well, in addition to shareholder returns and investment in the business, which is strengthening our balance sheet. I think our balance sheet is at a really good point right now. So -- and that's why I think Peter mentioned only the other two and I think that is where our focus is. We've got a lot of facilities and technology investments that we're continuing to make, but we're always balancing that and looking at the shareholder returns as well.

Helane Becker -- Cowen & Company -- Analyst

That's all. Great, thanks team. I really appreciate the help there. Have a nice day.

Peter Ingram -- President and Chief Executive Officer

Sure.

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

Thanks, Helane.

Operator

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

Rajeev Lalwani -- Morgan Stanley -- Analyst

Hi, thanks for the time. Brent actually an international question or two for you. At a high level, could you just talk about how does supplies were looking there. I know there is always talk about A380 is coming through. Just wondering if that's already in the past now, and it's more of a benign setup going forward and then relating to that, it would be great to get an update on FX and surcharge impacts and if we're at sort of a steady state on that?

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

Yes, so I'll cover your second question first. We didn't have any comments around forex and fuel surcharge in the quarter here because it was -- frankly it was pretty benign and so we've -- in 3Q we had relatively equilibrium in terms of that from a year-over-year perspective, as we look out in the 4Q at this point. We don't anticipate a material change to that right now. In terms of capacity on the international side, specifically around the 380, some of that capacity has come in and some of it has been offset by reductions in capacity in other parts of Japan. There has been some reductions in capacity in Osaka and some other carriers have trimmed a little bit of Tokyo capacity. So there is a bit more to go, I think in terms of what ANA has committed to and obviously we've got our own capacity growth in Tokyo, at the end of the first quarter in 2020. On the rest of the international franchise, there has been a little bit of capacity continues to come out of Australia, New Zealand, more specifically in New Zealand where capacity had ramped up a bit more in previous years and so we see some of that coming out of the marketplace.

Rajeev Lalwani -- Morgan Stanley -- Analyst

That's great and then Shannon, if I may, a quick one for you. I appreciate you're not giving CASM guidance for next year, but is there anything wrong with us assuming that with the big growth into next year, that's above trend that shouldn't lead to a tailwind on the unit cost side or is there some investments that would have to be made with all that capacity, whether it's on the labor side or elsewhere in the system?

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Yeah. Thanks, Rajeev. The only -- I think real big difference in our business next year that would affect cost is obviously the AFA negotiation. We're pretty -- we'll start up 787 fleet transition. So there'll be some costs there, but frankly we had some strange [Indecipherable] with the 767 and A321 transition this year. I can't, off the top of my head, think of any other really big differences in the business other than the AFA as well as the ASMs that Brent mentioned and our cost transformation. So, yeah...

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

And just follow on that, I think Shannon's got it absolutely right. We have the unknown. We have right now is where the AFA negotiation is resolved. I share Shannon's comments from the call that we hope that gets resolved sooner rather than later. But aside from that, we have normal inflationary increases. There are some step increases in existing labor contracts, but those are the normal sort of year-on-year increases that we have to deal with as a business. The capacity growth does provide us a good opportunity on the cost side next year. And as we go through the budget, we expect to make sure that we're realizing all the benefits of that that we can.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Thank you, guys.

Operator

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

Mike Linenberg -- Deutsche Bank -- Analyst

Yeah, hey, two quick ones here. I guess just to Brent, you talked about a lot of introductory fares in the inter island market, how would you characterize the extent of maybe the stimulation that you're seeing, if any? Is it really truly a mature market or we're just seeing share shifting around? Are we seeing some meaningful sort of pick up in number of people flying between the islands?

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

So Mike, if I just look at some of our own traffic -- if I look at our own traffic that we generated in Neighbor Islands over the course of the quarter, our passengers more than they round were roughly flat year-over-year. And so any change to that in terms of the competitor having some traffic on that would have been stimulative and overall the market size, I think in 3Q, would have grown. Again, some of that is off of a base of a little more challenging quarter last year with some weather events we had here in the state.

Peter Ingram -- President and Chief Executive Officer

And Mike, this is Peter, just to add on to that, I've been around the Hawaiian market now for almost a decade and a half. And I think the way we have characterized it in the past and I think this is reflected now is that, it is a mature market. The price elasticity is less than one, but the price elasticity is not zero. So we do see some stimulation, but with an elasticity of less than one.

Mike Linenberg -- Deutsche Bank -- Analyst

Okay. That's great color. And then Peter, I want to ask you about the decision to start service to Honolulu, Fukuoka, I realize it was a market that you're in some time ago, you backed away, obviously, the world has changed a little bit, but I suspect that the decision to go into that market was probably with the view that you would probably see an antitrust immunized deal in place by the time that you either started or soon thereafter. And I'm just curious with the the absence of ATI in your JAL agreement, how does that change the calculus on maybe your appetite to do additional secondary markets down the road? it would seem like that ATI would almost be an essential, whether it would be -- I don't know, I think you had -- at one point you either in Sendai, to go into some of these other markets. I just -- your thoughts on that because I feel like it is maybe a bit of a game changer here, any elaboration would be great? Thanks.

Peter Ingram -- President and Chief Executive Officer

Sure. Let me talk about it in general and then talk about Fukuoka in specific. In general, I think one of the great public benefit opportunities we see from the ATI application is greater opportunities for growth in the long term. And I think there are -- on the margin, there are going to be opportunities that would make sense only with an ATI immunized partnership with JAL that may not be possible if we don't end up getting the ATI immunized partnerships. So I think the premise of your question is accurate.

Let me sort of step back and talk about Fukuoka in particular, because this is one, we obviously announced without certainty about ATI and so obviously we had a level of confidence that either way this would be a good opportunity for us and I think you're right that it's a very different circumstance than we were operating before. When we were operating before, we had our 767 aircraft on the route, we know from putting that the 330 into Sapporo a while ago that the performance of that was positive even with a slightly larger airplane and so I think that's a tailwind to the Fukuoka opportunity. When we were operating Fukuoka before, there were 14 frequencies a week in the market and we are launching this in November with initially four frequencies per week. So that's a different circumstance and a different hurdle in terms of demand, we need to realize to make it successful.

And we do have -- even without ATI, we do have the benefits of some of the JAL co-operation that is available today, which is a different circumstance. So I think all of that is a accrues to give us confidence about that opportunity with or without ATI. I would add in that our commercial execution over the last few years and how we've performed in Japan is -- has -- we've move the bar higher on that. So I think Fukuoka is going to be a good opportunity, but that doesn't detract from some of the merits of the logic of your question that on the margin, what we can do with ATI in terms of growth is different than what we can do without ATI in terms of growth.

Mike Linenberg -- Deutsche Bank -- Analyst

Okay, great, thanks for that.

Peter Ingram -- President and Chief Executive Officer

Thanks, Mike.

Operator

Our next question comes from Susan Donofrio with Macquarie Capital. Please state your question.

Susan Donofrio -- Macquarie Capital -- Analyst

Yes. Hi, everyone. My question is for Peter. Just wondering how to think about basic economy, obviously, it just rolled out in select markets? Are you thinking of rolling it out fully or are you just really in testing it to see how it responds? Obviously there, the markets were -- obvious why you selected those particular ones, but just how should we think about that going forward?

Peter Ingram -- President and Chief Executive Officer

So we launched it with three specific non-stop routes in late September. That was really part of a plan to have a phased rollout, so that we could do testing and make sure we weren't rolling it out to comprehensively before we had made sure that everything was working in terms of our technology and our process. When I referred in the prepared remarks to the subsequent rollout over the following weeks was actually, there have already been a number of phases and at this point, we are pretty comprehensively rolled out across our North American network, including in connecting markets and so that is something that is in place today. When we announced we were going to do Main Cabin Basic, what we said was that we were focusing on North America and that remains our priority right now. And I think we're going to see how everything works and then think about whether there are opportunities down the road to consider some of the -- either Main Cabin Basic or using some of that technology in other geographies to give us a little more product variety.

Susan Donofrio -- Macquarie Capital -- Analyst

Got it, OK. And then would you ever consider that in -- I know some of the Asian markets. I know some of the LCCs had try to make a splash, but I did notice some retrenching of that. Would that make sense to do it, like in some of the Japanese market to further have more product offering there or does that not make sense, because I didn't notice like AirAsia X like some of them, it looks like they retrenched?

Peter Ingram -- President and Chief Executive Officer

So what I would say is, we're going to continue to be open-minded and one of the things that is a truism in this business is that the markets we operate in, continue to evolve over time with different products and services and airline business models. I would agree with your premise that some of the international markets are a little bit more traditional, and it may not make sense in the near term, but I would also say if you look at some of the products that are available from our competitors in places like Australia and New Zealand already incorporate many of these concepts. So I think it will be a sort of market-by-market, country-by-country, or geography-by-geography look that we take about where we see opportunities.

Susan Donofrio -- Macquarie Capital -- Analyst

Got it, OK. And then just a follow-up to an earlier question, and that was growth opportunities. When we think about international, Japan is clearly a growth area. When we think of the other countries, I know that China had been tried and obviously not the time to go back now. But in terms of when we think about your international would it be new markets or do you think you can additionally, add to Australia, New Zealand, etc.? How would we think about that in terms of the growth?

Peter Ingram -- President and Chief Executive Officer

Sure. It's a terrific question. It is something we spend a lot of time talking about. And I think it is another thing that we expect to evolve over time. A year ago we withdrew our three time a week service to China, coming to the conclusion that this was not the right time for service from China to Hawaii and that is something that -- as we suggest in the near term, we're probably not going back to, but I still believe that China is a market with massive potential and there will come a time again where it, China will become an important source of visitors for Hawaii and we may return to that market. I think in terms of the international places we serve domestically are currently including Australia, New Zealand and Korea.

We see additional opportunities, I would say, again, you have to keep in mind the evolution of the macro environment. And right now we're in an environment where the US dollar is very strong and has been strong for a while. The point of sale for flights to Hawaii is always going to be tilted toward the international end of the flight and so that may suggest that this is not the moment in time to really be doubling down on an international expansion. But, I will remind people that currency markets change over time and that will present opportunities over time and we're well positioned because of the network that we have built and selling structure and the market infrastructure and the evolution of our commercial execution to take advantage of those opportunities when they present themselves.

Susan Donofrio -- Macquarie Capital -- Analyst

Great, thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Catherine O'Brien with Goldman Sachs. Please state your question.

Catherine O'Brien -- Goldman Sachs -- Analyst

Hi, everyone. Thanks so much for the time. So, as we go into the next year, how should we think about the ranking of the size of the contribution of some of your 2020 revenue initiatives between Main Cabin Basic, JAL partnership, some of the other ancillary as you mentioned, and then improved merchandising on the premium cabin and I think it's kind of like a follow up to that one? And how would that look if the DOT decides to reverse the initial ruling or if they don't decide to reverse that? Thanks.

Peter Ingram -- President and Chief Executive Officer

So well, we've shared some details around kind of Main Cabin Basic and our estimates evaluation in terms of $15 million to $25 million annually. And I think that's probably a pretty solid number for 2020 as we look out into that. We've got -- we'll have a little bit of a booking curve impact from when we started and so first quarter will take a little bit of time to ramp up, but I'm pretty confident with where we're at on that. As we think of JAL, we continue to work with them, we continue to get benefits from the partnership today. Clearly, the importance of ATI and thinking that the value of those benefits grow materially if we're granted ATI and we can make the network choices and create the consumer benefit that we envision that we see exists frankly in terms of our proposals. We haven't put a number on that, and that's something that I think as we look forward into 2020 will firm up, but we think there is benefits there as well as when we look out into 2020. I think when I look at kind of credit card, when I look at extra comfort, there is continued run rate in those products as well.

And just one thing I would add to that specific to the JAL partnership, I think one difference we have relative to three months ago with the the show-cause order having now being delivered is that even, if we are successful or if we are successful in convincing the DOT to reconsider it's tentative quarter, the timing of when we start because of the elongated regulatory process is probably going to be a little later into 2020, than what we would have been thinking a few months ago.

Catherine O'Brien -- Goldman Sachs -- Analyst

Understood. And then maybe just two quick ones for Brent, I know you gave the break out on PRASM between domestic and international, but could you give us maybe what North America and Neighbor Island is below that. And then maybe just a follow-up to Rajeev's question earlier. Could you give us a feel for what International industry capacity has looked like and what that looks like into year end, maybe 1Q, 2020? Thanks a lot.

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

So in terms of 3Q performance in North America and Neighbor Island were quite similar in terms of RASM performance. And so they were quite close if we look at the two entities, the two sub entities that make up the entity. So I think again pretty consistent between those. If we look at the international side of the business. We've got international capacity down about 5% year-over-year in 4Q and down about 4% in 1Q. And that's just based on currently published schedules.

Catherine O'Brien -- Goldman Sachs -- Analyst

Thanks so much.

Operator

Thank you. Our next question comes from Hunter Keay with Wolfe Research. Please state your question.

Hunter Keay -- Wolfe Research -- Analyst

Hi, everybody. Thank you. So the Main Cabin Basic, I understand this is probably created defensively again saver fares and Southwest product, but they both have WiFi and you're going to have to do that at some point. So I would imagine that product gap is going to get worse as Main Cabin rolls out and people understand that. So when do you have to make a decision on that and how much is going to cost? And is it going to run through the P&L or is it all going to be capitalized?

Peter Ingram -- President and Chief Executive Officer

So Hunter, first of all I wouldn't concede that we have an overall product deficit when you consider all of the other attributes that go into our on-board experience. I think we've got, we are the only ones with authentic Hawaiian hospitality on our flights and we've got some other attributes like complimentary meals in the Main Cabin that others don't have. But having said that I would accept the premise that WiFi is becoming more common for Airlines in general.

I think we are obviously a bit of a late adopter to Wi-Fi as we having not adopted it yet. And the reason for that candidly is, one, it was initially more of a business-oriented product. I think that has definitely changed. Number two, the technology, the satellite technology for over water service, particularly over the Pacific is even today quite spotty. And I think there were some providers that have better coverage over the Pacific than others. We are continuing to evaluate what the options are. I have been on some airplanes with really very poor -- a very poor experience in terms of the WiFi flying over the Pacific, and that is something that we want to make sure that by the time we think about doing that we are in a position to deliver a product that is up to the standards of our overall experience.

So it's premature for us to say that, but I do think over time, the technology is going to get there and it is going to become sort of more of a table stakes expectation for the overall in-flight experience. So I think that is something we will likely do in terms of how it's going to run through the income statement of the balance sheet. We're not even to the point of making a decision yet. So I'm not going to sort of get into answering that part of it, but I do think that eventually, it is something that we are likely going to invest in. I think it will give us an enhanced overall experience. I think we'll make sure we have a great product for over the Pacific Ocean. And that will be something that I would look to have an opportunity to use to improve demand for travel to Hawaii over time.

Hunter Keay -- Wolfe Research -- Analyst

Okay. And then another CASM, ex-question. Shannon, I'm a little bit surprised that you guys aren't giving us more guidance on 2020 CASM given back in July, 2018, you said it would be flat to down in the years ahead. So you hardly talked about it and capacity growth is going to be substantially higher. So the question is -- is the reason why you're hesitant to talk about it entirely because of the flight attendant negotiation or is there other inflationary costs in the business. Peter, what you kind of alluded to earlier as well, but really the main question is, what has changed since you gave us that flat to down in the years ahead middle of last year?

Peter Ingram -- President and Chief Executive Officer

So Hunter, I think the real reason we're hesitant to give you more specifics on our CASM ex for next year is that we're not prepared to give 2020 guidance yet today. This is earlier than we normally give guidance for the upcoming year and so we're still as Shannon said in the middle of the planning process, it's going to inform what that is. And when we have some guidance to give you, we will give it. I think we've talked about the puts and takes and there were certainly opportunities there, including very importantly the capacity growth that we have planned for next year.

Hunter Keay -- Wolfe Research -- Analyst

Okay, thanks Peter.

Peter Ingram -- President and Chief Executive Officer

Thanks, Hunter.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. So, I will now turn the call over to Peter Ingram for closing remarks. Thank you.

Peter Ingram -- President and Chief Executive Officer

Mahalo again to everyone for joining us today. We appreciate your interest and are excited about our future prospects. And I look forward to talking to you again in a few months. Aloha.

Operator

[Operator Closing Remarks].

Duration: 66 minutes

Call participants:

Alanna James -- Managing Director, Investor Relations

Peter Ingram -- President and Chief Executive Officer

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

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Stephen O'Hara -- Sidoti & Company -- Analyst

Helane Becker -- Cowen & Company -- Analyst

Rajeev Lalwani -- Morgan Stanley -- Analyst

Mike Linenberg -- Deutsche Bank -- Analyst

Susan Donofrio -- Macquarie Capital -- Analyst

Catherine O'Brien -- Goldman Sachs -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

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