Hawaiian Holdings, inc (HA) Q2 2021 Earnings Call Transcript

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Hawaiian Holdings, inc (HA)
Q2 2021 Earnings Call
Jul 27, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Hawaiian Holdings, Inc. Second Quarter 2021 Earnings Call. [Operator Instructions]

It is now my pleasure to introduce your host, Alanna James, Managing Director of Investor Relations. Thank you. You may begin.

Alanna James -- Managing Director, Investor Relations

Thank you, Doug. Hello, everyone, and welcome to Hawaiian Holdings Second Quarter 2021 Results Conference Call. Here with me in Honolulu are Peter Ingram, our President and Chief Executive Officer; Brent Overbeek, our Senior Vice President of Revenue Management and Network Planning; and Shannon Okinaka, our Chief Financial Officer. We also have several other members of our management team in attendance for the Q&A.

Peter will provide an overview of our business, including the continued impact of COVID-19 and an update on our priorities for 2021. Brent will provide an update on our commercial performance and trends, and Shannon will provide an update on our cost performance and liquidity. At the end of the prepared remarks, we will open up the call for questions. By now, everyone should have access to the press release that went out at about 4:00 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 financial and operating performance.

Management may also make additional forward-looking statements in response to your questions. These statements are subject to risks and uncertainties and do not guarantee future performance, and therefore, undue reliance should not be placed upon them. We refer you to Hawaiian Holdings' recent filings with the SEC for a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statement. This includes the most recent annual report filed on Form 10-K as well as subsequent reports filed on Forms 10-Q and 8-K.

I will now turn the call over to Peter.

Peter Ingram -- President and Chief Executive Officer

Mahalo, Alanna. Aloha, everyone, and thank you, as always, for joining us today. During the second quarter, we continued to make strides toward recovery. Our financial results were better than we expected at the beginning of the period and well ahead of what we would have predicted at the beginning of 2021 propelled particularly by strong demand on our U.S. mainland routes. International recovery in the Pacific is clearly lagging, but we have every belief that when the rebound occurs, it will be robust.

My appreciation goes out as always to our team who continue to do an outstanding job of rebuilding our network and caring for our guests in an ever-changing environment. They embrace our purpose to connect people with Aloha and reflect our values every day in spite of the challenges facing them. As passenger volume has returned, we have moved from downsizing to hiring in many parts of our business. In fact, by the end of the year, it is likely that we will have swung to hiring mode for virtually all major work groups in the company. It is encouraging to us all to see a path toward growth even as the recovery still has some ways to go in parts of the business.

The pace of recovery remains different in each of our three geographies. When we last spoke, our North America routes were leading the recovery, and that remains the case today. Notably, in June, our North America traffic exceeded 2019 levels. This, in turn, provided conditions for material recovery in nonfare revenue categories like Extra Comfort, baggage and Hawaiian miles. Neighbor Island demand continues to grind back closer to prepandemic levels, albeit at a slower pace than we have seen from the U.S. Mainland, aided by the relaxation of travel restrictions.

We remain the carrier of choice for residents and visitors to the islands. International passenger volumes, meanwhile, remain in the low to mid-single digits relative to prepandemic levels, as lower vaccination rates in Japan, South Korea, Australia and New Zealand have thus far stunted any meaningful prospects for border reopening. While we don't expect any significant improvement in these trends to be reflected in our third quarter results, there are encouraging signs to note as the pace of vaccinations has accelerated more recently in both Japan and South Korea in particular.

And while we can't precisely forecast when these trends will be reflected in an inflection in demand, the robustness of the U.S. leisure demand response to reopening continues to inspire our confidence in a vibrant international lead to a recovery. And we are focused on being prepared from an asset and staffing perspective to seize this opportunity when demand rebounds. Since we last spoke, we have seen a meaningful easing of travel restrictions in Hawaii through several positive changes to the state's Safe Travels program. Travel restrictions have been completely eliminated for Neighbor Island travel as of June 15.

As of July 8, anyone fully vaccinated in the U.S. traveling on a domestic flight can bypass testing and quarantine with proof of vaccination. And one 70% of Hawaii residents have been vaccinated. The governor has indicated that the Safe Travels program will end. Like all of you, we are keeping an eye on the spread of the Delta variant and its impact on the geographies we serve. To date, we have seen no discernible impact on demand that we can attribute to this. But as we have been throughout the crisis, we are prepared to be nimble.

On July 1, we reinforced our commitment to sustainability with the publication of our second annual corporate Kuleana report. Along with many other carriers, we are committed to achieving net-zero carbon emissions by 2050. Unlike the rest of our peers, we are based on an island Archipelago in the middle of the Pacific, which reminds us every day of the importance of really delivering against carbon reduction goals. Our carbon emissions have benefited substantially from our fleet renewal, particularly the introduction of the A321neo, and we expect to see continued benefit with the introduction of the 787 next year.

But there is much more for us to do and the Kuleana report will help to keep us accountable to achieving intermediate milestones along the way. As part of an island community, we also have a profound responsibility to ensure the environmental, economic and social well-being of this place. I'm incredibly proud of the contributions we have made through employee volunteerism and corporate giving to supporting our community through this difficult year. We are engaging in dialogue around some of the challenges facing our community, including managing the impact of tourism and addressing issues of social justice and inequality.

We're also looking inward to ensure our own very diverse workforce feels valued and heard and that Hawaiian remains a great place to work and build a career. As we look out to the second half of 2021, we are prioritizing initiatives that will accelerate our recovery from the pandemic and position us to be even more competitive in our market niche. We will continue to rebuild our network with a focus on our international network as conditions improve. We are investing in technology and facilities to seize market opportunities.

And we are doubling down on our commitment to award-winning hospitality and service to differentiate ourselves from the competition. Underscoring all of this is our dedication to our purpose to connect people with Aloha and our commitment to our values of Malama, ho'okipa, lokahi and Po'okela. This is a winning formula that positions us for success in 2022 and beyond.

Let me now turn the call over to Brent to provide more details on our commercial performance and outlook.

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

Thank you, Peter. Aloha, everyone. Our second quarter revenue performance was better than expected across all of our geographies. Total revenue was down 42% compared to the second quarter of 2019 and at the favorable end of our updated guidance on a 30% decline in capacity. Passenger revenue was down about 45% year-over two years, while other revenue was down only about 7% driven by continued strong performance in cargo and loyalty. Our revenue performance reflects significant sequential improvement compared to the first quarter of 2021, with quarter-over-quarter revenue increasing 12%.

Not surprisingly, this was driven primarily by the substantial rebound in demand that we experienced in North America. By the end of the second quarter, our North America capacity and traffic volumes were back to 2019 levels, albeit at lower average fares given elevated industry capacity. During the quarter, we launched our Austin-Honolulu and seasonal Phoenix-Maui routes, returned the Las Vegas-Maui to our network and now have restored all of our prepandemic North America routes. Our premium products are performing particularly well. We continue to see strength in our front cabin with front cabin PRASM favorable versus 2019 in each of May, June and for the quarter overall.

We expect this trend to continue in the months ahead as front cabin book load factors and average fares are very strong for the remainder of the year. Extra Comfort revenue is also on a positive trajectory, improving relative to 2019 each month during the quarter. Our other nonfare products are performing well. We saw meaningful sequential improvement in bag fee revenue for the quarter. And by the end of the quarter, our co-brand credit card revenue had reached prepandemic levels.

Our credit card revenue performance was driven by a continued recovery in spend engagement as well as the strong resurgence in travel demand matched with our best-ever consumer offer during the quarter. We continue to see strong spend and card acquisitions so far in July. Looking ahead, we're encouraged by the booking activity we've seen for the second half of the year. Our book load factor for the third quarter is roughly in line with 2019, and our fourth quarter booking levels are ahead of 2019. The changes to the Safe Travel program to allow vaccinated arrivals to bypass testing and quarantine went into effect on July 8.

And while it's still early, we're not expecting that to drive material acceleration in our third quarter bookings, given that demand was already quite strong. In any event, we view this as a positive development as it reduces both the cost and complexity of a Hawaii vacation for our guests. In our Neighbor Island geography, we continue to build back our network in the second quarter. We operated about 57% of our schedule compared to 2019, ramping up to about 70% in the month of June.

We saw travel restrictions initially eased for vaccinated Hawaii residents in mid-May, and then ultimately end for all Neighbor Island travel in mid-June. We saw steady progress in demand recovery from both local residents and visitors throughout the quarter in response to the loosening of restrictions leading to the better-than-expected revenue performance for the quarter. Going forward, our near-term pace of recovery will be tempered by the increase in direct Neighbor Island and direct to the Neighbor Island markets and the lack of international connecting traffic.

In spite of these factors, we are encouraged by the recovery of our North America -- sorry, Neighbor Island market, both on an absolute and relative performance and expect to fly approximately 77% of our 2019 schedule in the third quarter, and we expect load factors to continue moving in the right direction. On the international front, we operated just 11% of our network in the second quarter. Looking ahead to the third quarter, we anticipate only marginal improvement in our capacity recovery driven by one incremental frequency in South Korea, the reinstatement of our once-weekly Tahiti service starting on August 7, and likely some scheduled service to American Samoa later in the quarter.

In Japan, we've not seen any easing of travel restrictions and do not expect any changes, at least until after the Olympic Games and Paralympic Games conclude in early September. As of now, we're not planning any incremental frequency in Japan for the third quarter, but we are preparing for when restrictions are lifted. As for Australia and New Zealand, we do not expect to resume our operations for the remainder of the year due to their ongoing restrictions. Overall, despite the ongoing travel restrictions in much of our international markets, we are confident about the level of pent-up demand for Hawaii travel and expect a positive response when restrictions are eased.

Rolling it all up at a system level for the third quarter, we expect capacity will be down between 20% to 23% and the system revenue will be down between 28% and 33% compared to 2019. Looking further down the road, we've announced our intent to replace our legacy revenue management system with PROS RM Advantage, which will be a meaningful driver of revenue improvement over the long term. We have a ways to go to implement the new system and expect to begin using it sometime in the first half of 2022. We're excited to implement this world-class solution, which will enhance our revenue management and forecasting capabilities and provide long-term value to our business.

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

Shannon Okinaka -- Executive Vice President and Chief Financial Officer

Thanks, Brent, and thanks, everyone, for joining us today. For the second quarter, we reported an adjusted net loss of $73.8 million or $1.44 per share. We closed the quarter with $2.2 billion in cash and short-term investments, which includes the receipt of an additional $205 million in PSP funding during the quarter. Our adjusted net debt as of June 30 was $758 million, an improvement of $255 million compared to the beginning of the quarter, driven by cash generation from operations as well as the incremental PSP funding. It also represents an improvement of $220 million when compared to prepandemic levels at the end of 2019.

For the second quarter, our total operating expenses, excluding special items, were down about 23% compared to the same period in 2019 on a 30% decline in capacity, which is at the favorable end of our expectations. Our solid cost performance for the quarter was driven by favorability across various cost categories as well as a few onetime credits. These offset slightly higher-than-expected fuel cost which was $1.89 per gallon. We expect our third quarter total operating costs, excluding special items to be down about 10% to 14% compared to the third quarter of 2019 on 20% to 23% lower capacity.

These figures do not include any assumptions related to our amendable contract with IAM with whom we have recently resumed contract negotiations. The IAM represents our mechanics and airport employees, among others. The sequential increase in costs quarter-over-quarter is driven by the variable costs associated with operating a bigger schedule, higher fuel prices, higher airport rates and costs related to preparing for the resumption of more international flying. So let me focus for a moment on that last item. As we rebuild our business, we're focused on ensuring we have staff readily available, resulting in a higher-than-normal level of training activity.

Even with the ramp-up costs, we expect our third quarter unit cost ex fuel and special items to be lower than the second. And if our international business, particularly to Japan and Korea resumes in the fourth quarter, we expect further unit cost improvement. Based on current conditions, we are preparing for the international schedule recovery to begin in the back half of the fourth quarter and continue into early 2022, and we planned our resourcing for that outcome. If our international recovery materializes in the fourth quarter, we expect our CASM ex to continue to improve both in absolute terms and relative to 2019.

If our international business does not return as planned, it is possible that we may have some surplus labor in the near term, but we believe accepting this risk is appropriate to ensure we are positioned to capitalize on the international leisure demand recovery when it happens. Looking further ahead, we expect our CASM ex levels to be similar to 2019 once we're operating in comparable levels of capacity, excluding any impact from our 787 transition costs. We're forecasting a fuel price per gallon of $2 for the third quarter, which does not include any impact from fuel hedging.

At this time, we do not have any fuel hedging in place but are prepared to resume hedging should market conditions warrant. Despite the increase in fuel costs, we expect our adjusted EBITDA to improve from negative $29 million in the second quarter to a range of negative $20 million to positive $20 million in the third quarter. We're encouraged that we have line of sight to positive EBITDA generation and we're focused on improving our margins further as demand conditions improve throughout our network. As returning to profitability remains a short-term focus, we're also investing in the long-term strength of our business.

As Brent mentioned, we're investing in a new revenue management system, which will drive revenue improvement in the years to come, supplementing the continuous enhancement of our distribution, product and service. We also have numerous cost initiatives in progress, including the transition of 717 training to a dedicated simulator at our Honolulu training facility and modernizing technology to gain efficiency and flexibility.

We're also excited about the opening of a new gate complex in Honolulu that will benefit our operations and guest experience. It's encouraging to have the continued improvement in domestic demand this quarter. And while the timing of our international recovery is still uncertain, we're excited about what the future holds. We're confident that we are on the road to recovery, and our focus is on the long-term success of our business.

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

Questions and Answers:

Operator

Thank you. Ladies and gentlemen at this time, we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from the line of Hunter Keay with Wolfe Research. Please proceed with your question.

Hunter Keay -- Wolfe Research -- Analyst

Hey, everybody. How you guys doing?

Peter Ingram -- President and Chief Executive Officer

Hey, Hunter.

Hunter Keay -- Wolfe Research -- Analyst

Hey, Peter, I know you talked about the 717 replacement for a while. But is there a scenario where it's replaced by an electric aircraft? I mean, these eVTOLs that we keep hearing about, all these different airlines are investing with eVTOLs. But if you think about it, it really fits with Hawaiian better than any other airline I can really think of, given the stage length and the weather and how much you've been talking about ESG on this call. Is there a scenario with the 717s, just leap ride over any other potential CO2-emitting aircraft and go straight to electric?

Peter Ingram -- President and Chief Executive Officer

It's an interesting question, Hunter. As we think about it, the Neighbor Island routes really do provide an interesting application for electrification of aircraft because one of the challenges that the machines that are currently in design are limited on their range. And we've got a lot of traffic that flies between 100 miles and 250 miles. And that is certainly the prospect of replacing that with an electric aircraft at some point in the future is a lot more foreseeable than the prospect of replacing an airplane that has to fly 2,500 miles across specific ocean to get to the West Coast from here.

That said, I think the technology is still a ways off. The eVTOL equipment that is being envisioned and designed today by a number of manufacturers is typically more for urban mobility, and it is four to six passenger applications. And when you think about the six million people that travel between the Neighbor Islands each year, we really require bigger aircraft than that.

But I think the answer to your question is, yes, I can see it, but it may be a generation or two of replacement removed before we get there. It's probably the middle of the 2030s before we have an electric aircraft of the appropriate size to be a suitable -- suitably considered as a replacement for the 717. But certainly, those are things we're starting to look at a little more and trying to understand the landscape and understand the direction that some of the producers of that technology are going.

Hunter Keay -- Wolfe Research -- Analyst

Okay, cool. Thanks. And then that's interesting. And then on the 787s, I know we've also talked about that, too. But just -- I mean, do you really need these planes? I mean you can probably, I would imagine, walk away without much penalty given Boeing's issues. But have you done an analysis on how much opex you might save granted in exchange for more capex. Just to switch to an all 330 -- A330 widebody fleet. I mean is there a scenario where you decide that the complexity is just simply not worth it in this new world that we're in?

Peter Ingram -- President and Chief Executive Officer

Hunter, anytime you go through a fleet transition, it requires a period of transition, and that adds complexity and it does add a little bit of cost. But it also positions you to benefit from the benefits of the modern technology and the 787 remains the most advanced generation of new aircraft incredibly fuel-efficient and environmentally efficient. And it is destined to be the flagship of our network. We're still very excited to get it. There will be, as you suggest, some transition as we go through that, but that is part of the evolution of working through fleet transitions, and we're prepared to manage through that as effectively and efficiently as we can.

Hunter Keay -- Wolfe Research -- Analyst

Got it. Thank you, Peter.

Operator

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

Catherine O'Brien -- Goldman Sachs -- Analyst

Hey, good afternoon, everyone. Thanks for the time. Maybe the first one for Shannon. So like the rest of the industry, you're holding on to a higher liquidity balance than typical due to COVID, very understandable. As we look forward to next year, any thoughts on what would trigger you to deploy that cash? And should we assume the first priority would be to use it to pay down debt, including perhaps prepayments? Or how are you thinking about that?

Shannon Okinaka -- Executive Vice President and Chief Financial Officer

Yeah. Thanks, Catie. Yeah, we do -- I mean, obviously, our first focus last year and earlier this year was obtaining enough liquidity to feel comfortable for the rest of the pandemic, however, long it lasts. And that's where we stand from a cash perspective. We are working through what we can do with the balance sheet and delevering. And I think I mentioned this before, but we've kind of got two buckets of debt. We've got some really, really cheap debt that doesn't make sense pay off early because it's so cheap. And then we've got the more expensive debt that frankly have some prepayment penalties that make it expense a little expensive to retire early. So we're working through that. But our bigger challenge is the negative carry associated with the amount of the gross debt because like I said in the prepared remarks, our net debt is actually better than where we were pre-pandemic.

So we're working through different analyses and ideas of what we can do to reduce that negative carry, one from just how can we manage the balance sheet, but also looking at areas to invest. And we've got -- we've had a lot of ideas in the past, and we continue to have a lot of ideas of initiatives with positive ROI. So we're trying to be creative about how we can use the cash both on the balance sheet but also to position us well for greater profitability when all of our network returns.

Catherine O'Brien -- Goldman Sachs -- Analyst

I guess as a quick follow-up, maybe to the idea of allocating that cash between the balance sheet, investing back in the business. And we were talking about these ROI projects, are those outside of aircraft investments? Or you're also looking at potential incremental aircraft investments with the cash on the balance sheet? And there's a couple of more quick follow-up after that. Thanks.

Shannon Okinaka -- Executive Vice President and Chief Financial Officer

Yeah. No, I'm -- I mean, I think for now, at least in the short term, we've got our aircraft plans with the 787 deliveries. We're looking a little bit more outside of that. We've got a bunch of technology projects. We have some facilities projects we're working on, and we're just looking at different ways to deploy the cash.

Catherine O'Brien -- Goldman Sachs -- Analyst

Okay. Got it. Makes a lot of sense. And then I guess in your current bookings, are you seeing anything unusual in leisure demand for the fall perhaps less of a seasonal drop off in some of the shoulder periods or anything interesting further out to Thanksgiving or Christmas break period. I think you said in the prepared remarks, 4Q book load factors currently running ahead of where you were at this point in 2019. It would be great to hear what fares look like, too? Thanks so much for the time.

Peter Ingram -- President and Chief Executive Officer

Sure. Thanks, Catie. So we have -- I think when we talked earlier in the year, we had a really compressed booking curve and as we were working through 1Q and 2Q, in particular, it was actually quite compressed. It has really elongated now and kind of looks in many respects like our historical booking curve and in some cases, even out further in advance, we're seeing kind of stronger advanced book outside of 60 days. So a real, kind of, 180 from where we were unsurprisingly early in the year in terms of North America.

No, I think overall, we continue to evolve in terms of both booking curve and customer demographics similar to back -- closer to what we were before. So demographics of our customers are getting a little bit older than where they were in the second quarter, where we had tended to look a little bit younger. We still continue to see a lot of larger groups in terms of family size, traveling as opposed to individuals and as business traffic and convention traffic comes back a little bit later than some of the leisure travel.

We see more people traveling in larger parties and that is certainly pushed out the booking curve a bit. And in terms of the holidays themselves in the fourth quarter, they're off to a really good start, and we're encouraged both in terms of the main cabin performance, but particularly in the front cabin, we continue to see really, really strong performance over those holiday periods.

In terms of pricing environment, there continues to be unsurprisingly, a fair amount of discounting that's available and pervasive in the market as we get into the fall. Industry capacity for the quarter is up, I think it's 125%, 128% of third quarter of 2019. So we have seen some pressure there in North America as we get a little further outside of the summer. But overall, things are holding up pretty well for the period. And over the long-term there, we think we've got the right formula to compete in terms of good value for our guests and having the right products.

Catherine O'Brien -- Goldman Sachs -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Conor Cunningham with MKM Partners. Please proceed with your question.

Conor Cunningham -- MKM Partners -- Analyst

Hi, everyone. Thank you for the time. So curious to get your thoughts on just what your international network is going to look like in 2022. It seems like you expect Japan and South Korea to be back in the fourth quarter, which is good. But I know a lot of the stuff is out of your hands, but just wanted to get your expectations for sizing of that market when we think about next year, assuming that things continue to reopen and so?

Peter Ingram -- President and Chief Executive Officer

Yeah. Conor, it's Peter. Let me start and then I'll turn it over to Brent to add a little bit more color. Our thinking right now is that the end state at some point in 2022 of the international portfolio is actually quite similar to the pre-pandemic international portfolio. All along, I think we have viewed or at least for a while, we've considered that Japan and Korea are likely to recover first among the four major geographies we serve. I think we still believe that. And as Brent said, we expect to see some of that coming in, in the fourth quarter is the working assumption we have, although we won't act on publishing schedules and that reflect until we actually get closer to the realization of the policy changes that are necessary before we can embark on a recovery.

And then we expect Australia and New Zealand to lag and unlikely to have any revenue impact in the back half of this year, but to recover next year. But we really do think that the pent-up demand that is a very real feature of what we have seen for leisure travel in North America is a great harbinger of what's likely to happen internationally. And the fact that we're having to wait a little longer for it really just means that it's that much more pent-up by the time people are able to start traveling again.

And we know there's a voracious appetite for travel to Hawaii from Japan. We know that Australians are some of the most eager global travelers in the entire planet. And I think the same rebound in travel desire that we've experienced over the past several months in North America is going to repeat itself when Hawaii is once again available to international visitors from around the Pacific rim.

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

Yes, I think the only thing I would add to Peter's comments is we really do believe in everything that we've kind of seen and heard in the market. So leisure traffic is going to be back. It may look a little bit different in terms of how it books, but we're really looking forward to that. In terms of our network overall, I think Peter mentioned it will likely be pretty similar to what it was before. We're a little bit larger now in North America than where we were, and so we will get a little more constrained on aircraft.

When that happens in 2022, and we'll take a critical eye to that as to how we place some of those trade-offs as well as keeping a keen eye on some broader market changes that will likely occur in some of the markets that we compete in as there's apt to be some changes there in terms of market participation by some of our competitors.

Peter Ingram -- President and Chief Executive Officer

And just one final thought I'll add. One of the other benefits we have when the conditions for recovery are present is the fact that from the standpoint of managing the spread of the virus, Hawaii has done a good job, and that has positioned us in good stead as a safe place to visit for North America visitors as the reopening occurred. And I think that will also be important to international travelers as they begin to think about leaving the confines of their own country later this year or early next.

Conor Cunningham -- MKM Partners -- Analyst

Okay, I appreciate all the color. That was great. And then I think, Shannon, you may have talked about this a little bit, but I may have missed it. But just on cost, as you -- there's been a lot of discussion about network restart costs and so on throughout this whole quarter from everyone. So, your maintenance expense continues to track like pretty far below -- not far below, but below 2019 levels. So, I would imagine that there's some sort of deferral on the widebodies a lot or maybe not, but like there's I'm just curious on a potential maintenance bubble that may happen as you do start to restart international again? Like what is left that's been deferred that may need to be made up at a later point?

Peter Ingram -- President and Chief Executive Officer

Conor, let me start on that one. I think likely the biggest driver of the maintenance costs being lower is the fact that a lot of our maintenance expense, particularly on the engine side for all our fleets is based on power by the hour contracts. And so as we fly less, we have lower maintenance costs in that period. And as we begin to accelerate our flying those maintenance costs come back. So that's probably the biggest driver.

You've seen we have not deferred a lot of heavy maintenance costs. We have -- most of our airplanes are operating now on their normal maintenance cycles. We had a couple of 717s that we deferred some checks and we actually have that work back underway to get those aircraft back in the fold now, but that's not enormously material. We are taking advantage of some of the downtime of aircraft here over the next several months to get some paint events done. But it's really not a huge snapback in costs that we're expecting on the maintenance side at this point.

Shannon Okinaka -- Executive Vice President and Chief Financial Officer

Yes, Conor, if you remember, we really didn't do any kind of long-term parking of our aircraft. So there's not a lot of work that needs to be done to bring aircraft back. Really, we may be put down a few 717s, but really not a lot of cost to bring it back on the maintenance side. As a matter of fact, to Peter's point, we took advantage of the downtime to do more work on airplanes that we had been deferring.

Conor Cunningham -- MKM Partners -- Analyst

Great. Appreciate all the color. Thank you.

Peter Ingram -- President and Chief Executive Officer

Sure.

Operator

Our next question comes from the line of Mike Linenberg with Deutsche Bank. Please proceed with your question.

Mike Linenberg -- Deutsche Bank -- Analyst

Hey, good morning everyone. Hey Peter, I want to go back to this July 8, I guess, where the state dropped testing and quarantine rules. And I guess that was what, for all fully vaccinated domestic passengers, not international?

Peter Ingram -- President and Chief Executive Officer

That's correct. It's for domestic at this point. And I think the distinction there, you may recall, Mike, if you were following it, the -- initially, the vaccination exemption was only in place for people who were vaccinated in Hawaii and then that was extended to anyone in the United States. It's really more of an administrative thing than some belief that our vaccinations are better than other people's vaccinations. It's really a sense of being able to recognize and understand the documentation. And I would certainly hope that the goal of the state government would be to extend that to people vaccinated elsewhere, and it's just a matter of them sorting through how they're going to handle that administratively.

Mike Linenberg -- Deutsche Bank -- Analyst

Yes. Okay. That makes sense. I just -- I'm hopeful that we're close because when you look at the number or the percent of Japanese that are now fully vaccinated it in fact, rivals some US states. And I guess -- and in some cases, they're vaccinated with US vaccines. It just seems odd, so it does sound like it's an administrative issue. So is this something that we're very close on? Or does it feel like it's just because of the administration issues that this could just go on for some time?

Peter Ingram -- President and Chief Executive Officer

Well, I think one of the challenges that we face with the international geographies is it's not just a question of what the restrictions are here in Hawaii, which is currently requiring a COVIDFILE9 test within 72 hours of travel for an international visitor, but it's also the fact that someone returning to Japan would have to have a COVID test before they go back, another one after on arrival and enjoy a period of quarantine at home despite paying for those three tests in the course of their travel. So it's not just about the Hawaii restrictions, which we will try and influence to the extent that we can as appropriate, but it's also about the international restrictions.

And I think particularly in the case of Japan, as Brent pointed out, we're somewhat focused on what happens after the Olympics because we do know that, that has been something that has really been a focus of Japan and getting the preparations in place for that and making sure they can execute that as safely as possible for their people, and that's probably made them that much more conservative in terms of how they view their policies toward COVID-19.

Mike Linenberg -- Deutsche Bank -- Analyst

Okay. That's helpful. That makes sense. And then just a quick one for Shannon. Shannon, the fact that you are carrying all these widebodies, they're clearly underutilized. Many are idle. What is the CASM headwind on that? I know you sort of talked through some numbers earlier. But is there any way -- can you give us a feel that like a five, six, seven-point CASM headwind. I'm just -- I'm throwing that out there because a couple of other carriers talked about these grounded or underutilized international widebodies. And I know that you are prepared to carry them to carry the people and the aircraft into next year. There's got to be some additional cost there that's pretty sizable. Any estimates that you can help?

Shannon Okinaka -- Executive Vice President and Chief Financial Officer

Yes. Thanks Mike. Sorry, no, I don't have that number at the top of my head. We do -- I mean, we -- what we did during the past year, those to -- because we couldn't optimize aircraft utilization. Brent and his team created a schedule to optimize labor costs. And as our flying is ramping up, we're kind of switching that over. Now I think Brent had mentioned come mid to end of 2022, depending on how international ramps up, we'll have to figure out how to best utilize the aircraft from a profitability standpoint. But I'm sorry, I don't have that number right now as far as 2021 CASM impact of the lower utilization -- aircraft utilization.

Mike Linenberg -- Deutsche Bank -- Analyst

Okay. Okay. Thanks for the color. Thank you.

Peter Ingram -- President and Chief Executive Officer

Thanks Mike.

Operator

Our next question comes from the line of Helane Becker with Cowen. Please proceed with your question.

Helane Becker -- Cowen -- Analyst

Thanks very much operator. Hi everybody and thank you very much for the time. As you think about growing in North America, could you just talk about how you're thinking about markets that might be available to you that makes sense for you to fly to maybe before international comes fully back?

Peter Ingram -- President and Chief Executive Officer

Yes. I'll talk a little bit about how we're thinking about it and again, see if Brent wants to add any color on top of this. Obviously, the beginning of this year in March and April, we added some new flying -- a couple of new cities with Austin and Orlando and Ontario that had been on our list for consideration for some time that we were considering. We also added extra service into Long Beach by adding a Maui connection. And that was really a follow-through of a lot of our 321 initiatives over the last several years of adding extra lines on our route map between points that we already served.

One of the challenges we think about, how to take advantage of the aircraft availability we have and crew availability we have, while we are waiting for the eventual international recovery that we're very enthusiastic about is, we want to be careful about, not adding a lot of new cities for which we're not going to be able to serve them, when we want our aircraft to swing back into markets like Tokyo that are obviously core to our fleet in Osaka and Seoul.

And so we're trying to balance the desire to take advantage of near-term opportunities and chase a little bit incremental revenue in the short term, but not incurring those long-term start-up costs associated with new cities. And so, we've done a couple. But more so, I think if we were doing something short term, we would probably be thinking more about points that are already on the network.

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

Yeah. I think it would be kind of potential upgrades to some markets that were 321s. We've done some of that this summer. We had a few markets where we were planning on operating 321s. We looked at the economics, thought it would be sensible to fly some 330s in their stead. So we've done that. We'll continue to kind of revisit those into the fall as well as what Peter mentioned, in terms of connecting existing dots more efficiently.

Helane Becker -- Cowen -- Analyst

That's really helpful. Thank you. The other question I had was on fuel on the West Coast. Or I don't think you fly into any airports that aren't served by pipeline. But are you having any issues getting fuel on the West Coast?

Peter Ingram -- President and Chief Executive Officer

We're not having any issues at this point with fuel supply.

Helane Becker -- Cowen -- Analyst

Yeah. Okay. Yeah. And then, my last question is related to Ohana by Hawaiian. I saw the $9 million -- maybe, Shannon, this is for you. I saw the $9 million charge and a $2.6 million impact from the termination of the CPA agreement.

Is there any meaningful revenue impact we should think about, as we think about modeling first quarter of next year, which is far away, I know. But just sort of thinking about the impact on revenue from the shutdown of that, if it's not...

Shannon Okinaka -- Executive Vice President and Chief Financial Officer

So Helane, I'm going to pass it over to Brent to talk about the revenue impact. But really, we haven't been flying Ohana by Hawaiian for a while.

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

Yeah. And while Ohana was an important part from a network perspective to be able to connect all the major islands within the chain, it was not a significant portion of our overall Neighbor Island revenue portfolio.

I mean, we had what amounted to call it about seven ATR round trips a day total between the markets of Lana'i and Moloka'i to Honolulu. So from a revenue modeling perspective, I wouldn't expect a material impact to that going forward.

Helane Becker -- Cowen -- Analyst

Okay. Thank you. Thanks everybody. Have a nice rest of your day.

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

Thanks, Helane.

Operator

Our next question comes from the line of Joseph DeNardi with Stifel. Please proceed with your question.

Joseph DeNardi -- Stifel -- Analyst

Hi. Thanks very much. Good afternoon all of you. Shannon, can you just talk to kind of when you think you get capacity, whenever that is capacity back to 2019 levels where you see CASM ex falling?

Shannon Okinaka -- Executive Vice President and Chief Financial Officer

Yeah. Thanks, Joe. We -- obviously, we've had costs moving in different directions. But as we've modeled it, -- once we get back to 2019 capacity in a normal operating mode, we expect our CASM ex to be very close, similar or same to 2019. What we haven't quite finished doing is modeling and figuring out our exact 787 transition funds. So that part hasn't been factored in. But we expect our CASM to be at 2019 levels when our capacity is the same.

Joseph DeNardi -- Stifel -- Analyst

Okay. Great. And then maybe a question for Peter or Brent. I would imagine that the vast majority of your credit cardholders are either Hawaiian residents or living on the West Coast and not much on the international side. When you all do route profitability and allocate earnings from that to the routes, I mean how impactful of a variable is that in terms of helping domestic or North America profitability and kind of hurting how profitable the international side is for you all?

Peter Ingram -- President and Chief Executive Officer

Sure. Let me start on that, and then we've also got Avi Mannis in the room, and he may want to add some comments or Brent. But you're right, our portfolio, our primary credit card portfolio is a US issued credit card. So the main geographies are the Western US. and Hawaii for the residents of folks in those programs. We have -- when we -- we do actually have a credit card that we issue in -- that is issued in Japan on which we have a co-brand relationship. It is a much, much smaller endeavor than our domestic credit card.

The sort of -- speaking more broadly than just credit card, we have more frequent flyer members travel on our either interisland flights or our flights to the U.S. mainland than we do on our international flights. And as we assess the revenue performance and the profitability performance of those routes to the extent that people are using mileage awards on those flights, there is revenue allocation that we make to account for that. So it's just -- in essence, you can think of it as revenue is still getting attributed to those routes, but with a different form of payment than cash.

Joseph DeNardi -- Stifel -- Analyst

Okay. Okay. And maybe just another one on co-brand. Peter, I think you said by the end of the quarter, spend was back to where it was or better than it was in '19. I would guess that the T&E spend on the card is still meaningfully lower and maybe that has to do with changes in customer spending patterns. But can you just speak to that? How big is T&E typically on the portfolio? And what does that suggest for I don't know, the spend on the card once T&E actually comes back? Thank you.

Peter Ingram -- President and Chief Executive Officer

Yes. We definitely -- when we looked at the spend on the current, it was fairly dramatically different at times last year. And I think things have largely normalized. But Avi, you're probably closer to that on a day-to-day basis than I am.

Avi Mannis -- Senior Vice President, Marketing

Yes, I think we are seeing the category mix start to normalize spend overall is looking very good and acquisition is looking very good. So certainly, we saw a shift in the mix over the last year, but we see it kind of moving as we're seeing a lot of our other customer behavior moving back where it was.

Joseph DeNardi -- Stifel -- Analyst

Thank you.

Peter Ingram -- President and Chief Executive Officer

Thanks, Joe.

Operator

Our next question comes from the line of Chris Stathoulopoulos with Susquehanna International Group. Please proceed with your question.

Chris Stathoulopoulos -- Susquehanna International Group -- Analyst

Good afternoon, everyone and thanks for taking my question. So Peter, could you give us some more color on the -- these various revenue and product initiatives that you alluded to in your opening remarks?

Peter Ingram -- President and Chief Executive Officer

You're talking about some of the things we're doing on the customer side. I think some of it is on the facilities front where we are continuing to make sure we improve our guest experience, particularly in Hawaii. We've got the new gates that we expect to come on in the next couple of months that are going to change our experience. We're going to be -- in the next several months we're going to be relocating to new gates in Los Angeles that will free up some opportunities and provide some benefits for our travelers.

We've made changes to eliminate the expiration of miles in our loyalty program. We're continuing to work on a number of innovation, some of which we haven't announced with in terms of our product and portfolio around tickets.

And so there's a variety of things, not all of which we have publicly disclosed yet, and this wouldn't be the right forum to do that. But I think it is broadly under the focus of wanting to make sure we are a great airline from the perspective of hospitality and service and putting the guests at the center of everything that we do because we do think that, that is a key differentiator, and we've got the right products and service to win the Hawaii traveler.

Chris Stathoulopoulos -- Susquehanna International Group -- Analyst

Okay. Thank you. And then, Shannon, you mentioned that you might be temporarily overstaffed in the second half if demand doesn't pick up as expected. Could you help us frame which labor or headcount categories that would come from? And then also, how should we think about labor productivity and full recovery specifically ASMs per FTE relative to 2019 on a full ASM base relative to 2019, could you run the network at two or three or perhaps 5% FTEs per ASM?

Shannon Okinaka -- Executive Vice President and Chief Financial Officer

Hi. Great. Thanks, Chris. Yes, from the potential near-term surplus of labor if international doesn't come back, it's primarily pilots. They've got a long training horizon. So we need to kind of plan that out months in advance of when we think we need them. So if we don't really hit the mark in that late fourth quarter time period, we could have some surplus pilots. We've been managing some of that with all of our labor groups throughout the pandemic through short-term voluntary leaves and things like that.

And we've been pretty successful. So we're not that concerned. We think as we get closer to knowing when international comes back, we can try and mitigate some of that surplus. From a long-term perspective, obviously, we're very focused on labor productivity. I don't have an exact comparison in my head on what labor productivity will be when we're fully back in operation with full capacity versus where we are now.

But we've implemented a lot of initiatives technology-wise, just process improvement wise and also with our unions and our contract negotiations. Obviously, rates -- labor rates continue to go up. And frankly, we want to pay people what -- a fair wage. But we also are working very heavily with the unions on efficiency and productivity and things like crew complement.

So -- and that's the way we fight or mitigate against the inflationary pressures of the wage rates. So I'm really sorry, I don't have a number comparison for you. But I think from a productivity standpoint, we're definitely going to be more productive going forward than where we are now.

Peter Ingram -- President and Chief Executive Officer

And Chris, just to clarify a little bit where we are right now. I would say -- I'm going to talk about everyone besides pilots and then pilots. For everyone besides pilots, I would not characterize where we are as overstaffed right now. We're able to fine-tune it fairly well. And in fact, on our ground operations, we're definitely in hiring mode. With pilots -- we are -- where we are is really spending a disproportionate amount right now on training to get people positioned in the right seat and fleet for the recovery.

So it's -- overstaffed is probably the wrong way to characterize it. It's a little bit more of a disproportionate emphasis on training, which doesn't generate as much revenue as flying, but it's still very important as part of making sure we're prepared to be in the right place when the revenue opportunities are there in 2022.

Chris Stathoulopoulos -- Susquehanna International Group -- Analyst

Okay. Thanks for the time.

Peter Ingram -- President and Chief Executive Officer

Sure.

Operator

Our next question comes from the line of Dan McKenzie with Seaport Global Securities. Please proceed with your question.

Dan McKenzie -- Seaport Global Securities -- Analyst

Hi, guys. Thanks for the time. A couple of questions here. If you can just remind us pre-pandemic, how far along or how far down the road you got with basic economy? And how far down the road you got with premium revenue? And I guess where I'm going with that is we spool up in 2022, is there more upside in those initiatives?

Peter Ingram -- President and Chief Executive Officer

So, yes, Dan, so we had rolled out basic economy in North America or in our domestic markets or really North America in the latter part of 2019. So that was kind of spooling in as we were working our way through the start of the pandemic there in 1Q, and that's fully implemented and we continue to work on that product.

And we continue to kind of understand, we're now in a place too where we can continue to understand how that's -- how customer behavior is changing around that product, how do we tweak and optimize and change that? And what does that mean going forward?

So I'm encouraged with what we're seeing there. It's an important tool that we've got to compete in the market, particularly given some of the price points that we've seen out there, and we'll continue to work and optimize it.

As you mentioned on the premium side, that's a great differentiator for us, and that's just a part of the business where we've seen a lot of strength. And frankly, the team had invested a fair amount of effort and time even before the pandemic on how do we continue to see improved performance there.

We've talked about at previous Investor Days. We won a really high paid first-class load factors, certainly well, well above the industry and well above our competitors. And how do we continue to kind of push the envelope, really more on improving yields in the cabin because frankly, we just don't have that much extra space given our existing layouts. And so I'm really encouraged with the foundation the team's laid over the last 18 months and we're starting to reap some of the benefits of that in the second half of this year.

Dan McKenzie -- Seaport Global Securities -- Analyst

Okay. So, I guess, I don't quite understand how far along you got on the premium story for just using baseball innings here, did you -- is it sort of second inning in that premium story, the fifth inning? I guess, I'm just trying to get a sense of what upside there is? And where I'm going with both of these questions is whether the thought is these are initiatives that can potentially partially backfill or fully backfilled some of the competitive challenges you may be seeing elsewhere across the network.

Peter Ingram -- President and Chief Executive Officer

So I would say on a relative basis, basic is probably closer to the earlier part of the game. And on the premium side, I think we're probably in the middle innings. We've done some things to really improve performance there, but I think there's certainly more that we can do as we think about that. And as we think about products like Extra Comfort and optimization of that product, I think we're -- we've got a long ways to go to be able to improve that as well. So I would say, overall, in terms of premium, we're probably closer to the middle innings there.

Dan McKenzie -- Seaport Global Securities -- Analyst

Okay. Thanks for the time, guys.

Operator

That concludes our question-and-answer session. I'd like to hand it back to Peter Ingram, for closing remarks.

Peter Ingram -- President and Chief Executive Officer

Hello again, to everyone for joining us today. We appreciate your interest and look forward to updating you on our progress again in a few months. Aloha.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Alanna James -- Managing Director, Investor Relations

Peter Ingram -- President and Chief Executive Officer

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

Shannon Okinaka -- Executive Vice President and Chief Financial Officer

Avi Mannis -- Senior Vice President, Marketing

Hunter Keay -- Wolfe Research -- Analyst

Catherine O'Brien -- Goldman Sachs -- Analyst

Conor Cunningham -- MKM Partners -- Analyst

Mike Linenberg -- Deutsche Bank -- Analyst

Helane Becker -- Cowen -- Analyst

Joseph DeNardi -- Stifel -- Analyst

Chris Stathoulopoulos -- Susquehanna International Group -- Analyst

Dan McKenzie -- Seaport Global Securities -- Analyst

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