Hawaiian Holdings Inc. (HA) Q1 2022 Earnings Call Transcript

Hawaiian Holdings Inc.  (NASDAQ: HA) Q1 2022 earnings call dated Apr. 26, 2022

Corporate Participants:

Ashlee Kishimoto — Managing Director, Investor Relations

Peter Ingram — President and Chief Executive Officer

Brent Overbeek — Senior Vice President and Chief Revenue Officer

Shannon Okinaka — Executive Vice President and Chief Financial Officer

Analysts:

Conor Cunningham — MKM Partners — Analyst

Michael Linenberg — Deutsche Bank — Analyst

Helane Becker — Cowen and Company — Analyst

Andrew Didora — Bank of America Merrill Lynch — Analyst

Daniel McKenzie — Seaport Global — Analyst

Catherine O’Brien — Goldman Sachs — Analyst

Presentation:

Operator

Greetings. Welcome to Hawaiian Holdings, Incorporated First Quarter 2022 Earnings Call. [Operator Instructions] Please note this conference is being recorded.

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

Ashlee Kishimoto — Managing Director, Investor Relations

Thank you, Sherry. Hello, everyone, and welcome to Hawaiian Holdings’ First Quarter 2022 Results Conference Call.

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

Peter will provide an overview of our performance. Brent will discuss revenue, and Shannon will discuss costs and the balance sheet. At the end of the prepared remarks, we will open the call up for questions. By now, everyone should have access to the press release that went out at about 4 o’clock Eastern Time today. If you have not received the release, it is available on the Investor Relations page of our website, hawaiianairlines.com.

During our call today, we will refer at times to adjusted or non-GAAP numbers and metrics. A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found 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. These include 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, Ashlee. Aloha, everyone, and thank you for joining us today.

We updated our first quarter outlook at the end of March, reflecting better than previously expected results due to strong demand throughout our network. With the effects of the pandemic more muted now than at any point since the beginning of 2020, we are enjoying a period of strong demand for travel to, from and within Hawaii. COVID restrictions for the — for travel to the State of Hawaii were lifted at the end of March. And restrictions on travel in our key international geographies are appreciably reducing. Looking ahead, we expect record domestic revenue in the second quarter, and a steady recovery of international demand as the year progresses.

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

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

Based on what we’ve seen in Australia and South Korea, we know that there is pent-up demand for travel to Hawaii in our international geographies just as we have seen domestically. And we are preparing for our service to return to full scale. We continue to see strong demand for our domestic business and our premium leisure model remain successful with strong PRASM performance relative to our U.S. mainland competitors. Especially, strong performance of our front cabin and Extra Comfort products shows the continued willingness of leisure travelers to pay a premium for superior products and service. And we can market and distribute these products more effectively than ever before because of our technology investments over the past few years.

On the technology side, our new revenue management system launched successfully at the end of March. Work on the implementation of our PSS is underway and on track to launch in the spring of 2023. The revised delivery date of our first 787 has not yet been determined. The delay in 787 deliveries is affecting all of Boeing’s customers, and we are working closely with Boeing to bring more certainty to the timetable.

There’s so much to be encouraged about right now that it’s almost difficult to remember that the first quarter began with the Omicron variant suppressing demand and affecting our staffing and operations. I’m very encouraged by how we’ve started an important year of continued recovery after a bumpy first couple of weeks. I could not be prouder of our wonderful team on the front lines and throughout the company, who are committed to connecting people with aloha. The progress we have made on our goals for 2022 sets us up well for the remainder of the year and for years beyond.

As passenger volume returns, we’re actively hiring and training throughout the business. Recently agreed labor contracts ensure our competitiveness as an employer. The ratification of our IAM contracts with our mechanics, airport operations and cargo employees was an important milestone. And our dispatchers represented by the TWU just last week ratified a five-year contract.

Combined with the agreement we reached with our flight attendants union in 2020, these contracts demonstrate a commitment to look forward and do right for our employees. Our pilot agreement with ALPA becomes amendable on July 1. But for the moment, we are rather uniquely positioned in the industry with no amendable collective bargaining agreements.

We’re managing through the challenges of recruiting in a competitive labor market. The hiring challenges are most pronounced for our airports and maintenance teams. I know there is a lot of interest in pilot hiring. And for this group, we continue to see good supply. But training is a constraining factor in getting the right pilots into the right classification to support our operations.

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

Also, importantly, we will be deploying it with a simple interface and free of charge to all our guests for however many devices they are accessing on board. We’ve deliberately trailed the industry in deploying in-flight connectivity because current and previous generations of products performed below our standards over the Pacific, where most of our time in flight is spent. Until now, there was no offering that provided a superior product to match the rest of our in-flight experience. Starlink changes this, and we think our guests will be delighted when they have the chance to experience it. We expect to begin aircraft deployment in 2023. And we’ll provide an update later in the year with greater detail as we build out our timeline more discreetly.

Next month, we will reinforce our commitment to sustainability with the publication of our third annual Corporate Kuleana report. As part of an island community, we have a profound responsibility to contribute to the environmental, economic and social well-being of this place. I’m incredibly proud of the contributions our team has made through corporate action, employee volunteerism and charitable giving to support our community through these difficult times.

We’re actively engaged in dialogue around some of the most difficult challenges facing our community, including managing the impact of tourism and addressing issues of social justice and inequality. We’re also looking inward to ensure our own very diverse workforce feels valued and heard, and that Hawaiian remains a great place to work and build a career.

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

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

Brent Overbeek — Senior Vice President and Chief Revenue Officer

Thank you, Peter. Aloha, everyone.

Our first quarter revenue performance was better than expected throughout our network and in line with the updated guidance we provided at the end of March. Passenger revenue was down 33% from 2019 as we operated 118% of our domestic capacity and just 25% of our international. Our premium products are performing particularly well. We saw continued strength in demand for front cabin, with North America premium cabin PRASM up 8% for the quarter.

Extra Comfort revenue in North America also exceeded 2019 levels for this quarter. Other revenue continues to be a bright spot, up 32% this quarter from 2019. Cargo recorded the highest quarter of revenue as we benefited from strong yields from Asia. And we generated the highest first quarter of revenue ever for our HawaiianMiles co-branded MasterCard, on strength of card member acquisition and strong portfolio net retail sales.

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

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

The revenue environment is improving, and we anticipate our second quarter RASM for North America to be above 2019 levels, and a greater than 20 point sequential improvement from the first quarter. We expect to fly a similar schedule to the first quarter at about 115% of our 2019 schedule. We remain well positioned and based on the latest data from the DOT, we continue to materially outperform our competitors on PRASM in North America. This demonstrates the strength of our North America network, focus on the Hawaii premium leisure traveler, award-winning service and optimally configured aircraft.

In the Neighbor Islands, we’re encouraged as load factors are approaching 2019 levels, as we expect to fly about 80% of our 2019 capacity in the second quarter. The pace of recovery has been tempered by the increase in direct flights to the Neighbor Islands, the lack of international connecting traffic and some sectors of the local market that have remained persistently down during the pandemic. However, we are seeing some recent improvement in these sectors such as travel associated with in-person events, including sporting tournaments and annual festivals.

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

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

Moving to Japan. We’ve seen incremental progress towards reopening with an increase in daily arrival caps and the removal of government quarantine requirements for vaccinated Japanese nationals. We remain uncertain on when Japan will fully reopen. But no, there is substantial pent-up demand for travel to Hawaii. We are now expecting to fly about 30% of our 2019 international schedule in the second quarter. We remain well positioned with our brand and quality of experience to capitalize on demand for Hawaii vacation when it materializes in each international markets. Rolling all that up, we anticipate our overall system capacity for the second quarter to be down 11.5% to 14.5% from 2019 levels.

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

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

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

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

And 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.

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

Turning to the P&L. We finished the quarter with an adjusted EBITDA loss of $106 million. While reflecting the impact of the Omicron variant and pandemic-related restrictions in much of our international network, these results were better than we originally expected, given the strong domestic revenue results that Brent discussed.

On the cost side, our first quarter non-fuel costs and non-recurring items totaled $472 million, with unit costs up 12.2% compared to 2019. These results are at the higher end of our expectations, as the higher wages resulting from the ratification of our IAM contracts in mid-February were not included in our original guidance. As a reminder, our IAM contracts primarily cover our mechanics, airport operations personnel and cargo employees, as well as certain administrative positions.

Upon ratification, we paid a signing bonus totaling $2 million that was adjusted as a one-time expense. And we also recorded a one-time increase to our vacation liability for higher pay rate. As Peter mentioned, coming to negotiated agreements with our unions is critical to our success, and we are well placed in the industry in this respect. Fuel costs rose in the first quarter to $2.83 per gallon, up approximately 12% from our original outlook in mid-January.

Our consumption was outside of our range, with higher than expected fuel burn as we flew our A330s a little harder and heavier. About 55% of our fuel was purchased, based on Singapore jet fuel prices, 35% on U.S. West Coast jet fuel prices, and 10% on other jet fuel prices. We have limited exposure to New York Harbor Crack Spreads that exploded in recent weeks.

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

Lastly, we are incurring costs to adequately train and position our crew as we go back our network. For the second quarter, we expect our unit costs, excluding fuel and special items, to be up 16.5% to 19.5%, compared to the second quarter of 2019 on a capacity decrease of 11.5% to 14.5%. Sequentially, our unit costs are expected to be consistent with the first quarter on a capacity increase of about 5.5%.

In addition to higher selling and other variable costs associated with the expected increase in revenue and continuing ramp-up of our network, cost increases from the first to second quarter include a full quarter of new IAM wages versus half a quarter in Q1, other contractual wage rate increases and one-time maintenance costs. We are suspending our full-year guidance for capacity and chasm ex fuel as the uncertain timing of Japan’s reopening impacts our ability to predict ASMs and therefore, unit costs.

Although we don’t know the exact timing, we believe the impact of steady-state flying in Japan will reduce CASM ex by a double-digit percentage. We expect our fuel consumption for the second quarter to be down 14.5% to 17.5% as compared to 2019. And we’re forecasting our fuel price per gallon for the second quarter to be $3.59, based on the forward curve as of April 21. It is worth noting that the forward curve includes a substantial increase in the refined margin and a widening differential between the geographic indices.

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

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

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

Questions and Answers:

Operator

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

Conor Cunningham — MKM Partners — Analyst

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

And then is — I’m trying to figure out like the Neighbor Island flying, it seems correlated with the international. So, I’m just curious on when you talked about how you’re doing a lot better than your competitor there, but is there a maximum that you’ll be flying in terms of Neighbor Island flying until you have a full recovery on international side? I know there’s a lot there. So, I guess I’m sorry about that.

Brent Overbeek — Senior Vice President and Chief Revenue Officer

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

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

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

Conor Cunningham — MKM Partners — Analyst

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

Brent Overbeek — Senior Vice President and Chief Revenue Officer

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

Conor Cunningham — MKM Partners — Analyst

Great. Thank you.

Operator

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

Michael Linenberg — Deutsche Bank — Analyst

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

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

Brent Overbeek — Senior Vice President and Chief Revenue Officer

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

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

Michael Linenberg — Deutsche Bank — Analyst

Okay. Great. That’s helpful. And then just another question to you on the Japanese market. You said earlier that, presumably, as Japan, starts to relax some of these COVID restrictions and I know they’ve been already starting to relax, that you expect to maybe see a similar response as what you’ve seen with Australia, New Zealand and Korea. Historically, though, I always thought, and I know this has passed and things probably have evolved, but that a large portion of Japanese trips to Hawaii, the consumer discretionary element. Was a large portion of it was done through the travel agencies and the Japanese being planners would book those six months to nine months out in advance.

And so with summer upon us, assume, say the rules are relaxed in the next month or two, do we get that type of snapback? Or has that Japanese consumer already booked for his or her family a trip to, I don’t know, Okinawa, or somewhere else in Asia Pacific? I’m curious about how that has evolved and whether or not it will snapback as quickly given that historical trend?

Brent Overbeek — Senior Vice President and Chief Revenue Officer

So yes — so I would say, historically, we did have more Japanese point of origin traffic that would work through a travel agency partner and plan in advance, maybe not quite as much as you had indicated in your comments. But we had seen over time that continue to kind of narrow in terms of planning time relative to departure. I think what we’ve seen broadly across the pandemic is people are more interested — and I think this will apply in Japan as well. People are more interested in planning on their own and getting things done. So, they’ll continue to work with our key agency partners, but I do think we will see more direct sales, more OTA sales and people planning and shortening their planning horizon. So, well, it is perfectly analogous to what we saw in Australia, maybe not one-for-one, but I do think a lot of those same characteristics will continue to change as Japan comes online.

Peter Ingram — President and Chief Executive Officer

And, Mike, this is Peter. I would just underscore the point that over time, the distribution, the third-party distribution paradigm internationally is evolving. We are seeing more direct sales. We have, over the course of the pandemic, when sales were limited, the direct channel held up much better than third-party channels. And in fact, the pandemic itself has likely, has caused in some of these international markets where third-party is important a retrenchment in those businesses that are focused on that, at closing of some of their retail outlets. So, we expect that evolution to continue, but we also expect they’re going to remain important partners in those geographies in the coming years.

Brent Overbeek — Senior Vice President and Chief Revenue Officer

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

Michael Linenberg — Deutsche Bank — Analyst

Okay. Good to know. Yeah. Thanks, gentlemen. Thank you.

Operator

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

Helane Becker — Cowen and Company — Analyst

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

Shannon Okinaka — Executive Vice President and Chief Financial Officer

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

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

Helane Becker — Cowen and Company — Analyst

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

Brent Overbeek — Senior Vice President and Chief Revenue Officer

Yeah. So look, the 717 is a terrific aircraft for what we do, as we’ve said, for really, as long as I’ve been with the Hawaiian. It’s a pretty good size for the demand levels in the market. It is a low operating cost airplane from a cycle perspective, which in many cases, the cycle impacts on maintenance costs is a bigger driver on very short haul flying than fuel costs is. We do — we’re able to keep that airplane flying well through the middle of this decade. We’ve got a majority of our fleet that is owned with no outstanding debt on it. So that makes it an extremely low ownership cost fleet for us.

Eventually, we will be looking at replacements. I think a couple of things that we consider is whether an airplane slightly larger would be better. I don’t think it would be dramatically larger because at the — the fringes of the day [Phonetic] that would give us an airplane that was putting more seats in the market than we needed. But if we would — we’re going to continue to evaluate that over time, maybe a little bit bigger than what we have now would be better. But I don’t think it would be dramatically bigger. It wouldn’t be the size of our 321s with 189 seats. That’s just more than you need a lot of times of the day in the Neighbor Islands group.

Helane Becker — Cowen and Company — Analyst

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

Brent Overbeek — Senior Vice President and Chief Revenue Officer

Thanks, Helane.

Operator

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

Andrew Didora — Bank of America Merrill Lynch — Analyst

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

Brent Overbeek — Senior Vice President and Chief Revenue Officer

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

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

Andrew Didora — Bank of America Merrill Lynch — Analyst

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

Shannon Okinaka — Executive Vice President and Chief Financial Officer

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

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

Andrew Didora — Bank of America Merrill Lynch — Analyst

Understood. Thank you.

Operator

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

Daniel McKenzie — Seaport Global — Analyst

Oh, hi. Thanks, guys. Continuing on the international theme, and you’ll leave it to me to kick a dead horse here. I believe international revenue in 2019 was just over $700 million and I’m just sort of extracting that from the 10-K. So please correct me on that. But what percent recovered for you in the first quarter? And what recovery are you expecting in the second quarter in the guide here? So, I guess I’m just trying to get a more precise idea of what’s missing exactly.

And then just related to that is the expectation that just given the pent-up demand — and I know you’ve talked about this in prior questions. But is the expectation that the international side of the business could ultimately be better than 2019 once things open up here?

Brent Overbeek — Senior Vice President and Chief Revenue Officer

Dan, on the international, I think you’re in the ballpark with the $700 million, I think. It was about 25% of our revenue pre-pandemic. In terms of the recovery, I don’t have at my fingertips what percent we recovered in the first quarter, but it was still pretty dramatically off through most of the last several quarters. Up until this one, we were probably between 90% and 95%. Still missing from the market. We did start to see the ramp up in the first quarter from Australia, but even that was held back a little bit.

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

Daniel McKenzie — Seaport Global — Analyst

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

Brent Overbeek — Senior Vice President and Chief Revenue Officer

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

Daniel McKenzie — Seaport Global — Analyst

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

Shannon Okinaka — Executive Vice President and Chief Financial Officer

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

Daniel McKenzie — Seaport Global — Analyst

Very good. Thanks for the time, guys.

Operator

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

Catherine O’Brien — Goldman Sachs — Analyst

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

Peter Ingram — President and Chief Executive Officer

Yeah.

Catherine O’Brien — Goldman Sachs — Analyst

Yeah. Thanks.

Peter Ingram — President and Chief Executive Officer

Yeah. Let me try to explain what the most significant restriction is, then I’ll let Brent or others chime in if they have more. So the removal of the quarantine is very helpful. What is most constraining for us right now is over the past couple of years, the Japanese government has had a policy of doing post-arrival testing for people coming back from international trips. And there have been limits at various points in time that are placed on the carriers in terms of the amount of traffic they can carry on their airplanes, basically, because of the constraints in doing those arrival testing. So the ability to do that testing at scale is limited.

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

Brent Overbeek — Senior Vice President and Chief Revenue Officer

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

Catherine O’Brien — Goldman Sachs — Analyst

Got it. And I guess on the governments. Just a quick follow-up on that before I bide. From the government affairs folks, is there any research on — that’s a pretty, I don’t know, it was like 7% of ’19 demand is where we are right now. Any timeline on when that gets raised? Or is it just really going to kind of depend day-to-day here?

Peter Ingram — President and Chief Executive Officer

Yeah. We’ve been hesitating to try and speculate on that. Because every time we’ve done that up till now, we’ve been wrong. And I feel confident that it will come back. We’re seeing most of the world, even in some of the places that had the biggest restriction, not just in our network with a place like New Zealand. But if you look at Singapore and some other places in Southeast Asia, these restrictions are being removed. Last year, there was a lot of speculation that after the Olympics, there would be a loosening of restrictions in Japan, then there was a question of, well, maybe it’ll be after the elections that were last fall.

I think the hope of those being the catalysts for removal of restrictions was dashed a little bit by the, first, the Delta wave, and then the Omicron wave of cases at the end of the year. It’s our understanding that, that problematically for us, some of these restrictions remain politically popular in Japan, which is in contrast to the attitude we see in this country around restrictions associated with COVID at this point.

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

Catherine O’Brien — Goldman Sachs — Analyst

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

Peter Ingram — President and Chief Executive Officer

Yeah. I think, Catherine, probably the biggest impact is that we talked about in our prepared remarks is really the amount of capacity that’s in the market right now. And while that continues to abate, if you look at, at our market, we’ve got 117% of North America capacity compared to 2019 in the second quarter. And I think if you took that for a big portion of some other folks, then I think that’s going to look a little bit worse than what it exists largely on the Mainland. And it’s headed

In the right direction in the short term. I think we’re doing all the right things and performing really well in a difficult competitive environment. But I think we still are at a unique position in terms of our domestic business in terms of the amount of competitive capacity relative to the comp period people are looking at.

Catherine O’Brien — Goldman Sachs — Analyst

Really fair. Thanks so much for that.

Operator

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

Peter Ingram — President and Chief Executive Officer

Mahalo again for joining us today.

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

Operator

[Operator Closing Remarks]