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Hawaiian Holdings, Inc. (HA) Q4 2018 Earnings Conference Call Transcript

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Hawaiian Holdings, Inc. (NASDAQ: HA)

Q4 2018 Earnings Conference Call

Jan. 29, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Closing Remarks
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to Hawaiian Holdings Fourth Quarter Full Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Daniel Wong, Senior Director, Investor Relations. Thank you. You may begin.

Daniel Wong -- Senior Director, Investor Relations

Thank you, Sherri. Hello, everyone, and welcome to Hawaiian Holdings Fourth Quarter and Full Year 2018 Earnings Call. Here with me in Honolulu are Peter Ingram, President and Chief Executive Officer; Shannon Okinaka, Chief Financial Officer; and Brent Overbeek, Senior Vice President of Revenue Management and Network Planning. Peter will open the call with an overview of the business. Next, Brent will share an update on our revenue performance and outlook. Shannon will then discuss our cost performance and outlook. We'll then open the call up for questions, and Peter will end with some closing remarks.

By now, everyone should have access to the press release that went out at about 4:00 Eastern Time today. If you have not received a release, it is available on the Investor Relations page of our website, HawaiianAirlines.com. During our call today, we will refer at times to adjusted or non-GAAP numbers and metrics. A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found in our press release or on the Investor Relations page of our website.

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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 FCC 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 subsequen t report s filed on Forms 10-Q and 8-K.

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

Peter Ingram -- President and Chief Executive Officer

Mahalo, Daniel. Aloha, everyone. Happy new year and thank you for joining us today. We had quite an eventful year in 2018. Through it all, our team has done an incredible job taking care of our guests, and as we total up the financial results for the year, adjusted in that income of $275 million, adjusted earnings per share up $5.44, an adjusted pre-tax margin of 12.6%, and more than $126 million returned to shareholders stand out as highlights.

Given the increased competitive capacity we faced entering 2018 and higher fuel prices for much of the year, I'm not sure many expected us to be able to deliver results like this and remain in the top tier of the industry from a profit margin perspective. Thanks for this goes to the 7,200 people with whom I have the honor of working everyday at Hawaiian. Their tireless effort, selfless dedication, and passion for this company is truly inspiring. I cannot be prouder of what they continue to achieve every day.

I spent time on each of our earnings call s in 2018 speaking to the headlines of the moment. The competitive capacity growth, weather events, and aircraft delivery delays were top of mind at various points throughout the year, but we shouldn't lose sight of the fact that our team once again delivered in spite of the obstacles that came their way. We also produced strong operational results. We carried a record 11.8 million passengers in 2018, our 14th straight year of passenger growth, and we did this while leading all U.S. carriers in on-time performance through October 2018, the period most recently reported by the DOT. We expect to remain on top when the full year's tally is complete, which will mark our 15th straight year of leading all U.S. carriers in punctuality.

On top of this, we delivered on our key priorities for 2018. In early January 2019, we flew our final 767 flight. With 11 A321neos now in our fleet and seven more to come, we are well under way on a multi-year fleet transition that unlocks new opportunities for our route network. Back in March, we selected the Boeing 787-9 as the flagshipped aircraft for our future, and the preparations for its arrival in early 2021 are right on track. We extended our partnership with Barclays, Bank of Hawaii, and Mastercard for our co-brand credit card and enhanced the customer value proposition for this product. Finally, we launched a successful partnership with Japan Airlines, which we will build upon even further once we receive approval for our antitrust immunized joint venture from U.S. and Japanese authorities.

On our Second Quarter 2018 Earnings Call, I remarked how the year was shaping up like a road with more curves than straightaways. And while that certainly remained the case throughout the year, the fact is over the past several years, we have developed great resilience here at Hawaiian to see us through these times of challenges. Let me expand on that for a bit. We knew that 2018 would arrive with more competition, but we also know that competition makes us stronger and that our formula is a winning one. In 2018, we generated 52% of our passenger revenue between North America and Hawaii. In this geography, industry capacity increased nearly 11%. Unsurprisingly, this created a difficult environment to generate revenue growth. Nonetheless, for the time periods that we have competitive data from the DOT, we have not only held onto our revenue premium, but we've grown it. And as we sit here today, we're still talking about posting the second highest pre-tax margin in the industry for the full year.

People ask me why I remain steadfast in my confidence about our prospects in the face of potential future competition. We have become the carrier of choice to, from, and between the islands of Hawaii by relentlessly focusing on delivering authentic Hawaiian hospitality to our guests and executing our specific network missions better than any of our competitors. This is what we will continue to do, and we expect to continue to be successful.

As we look at our business in 2019, we're focused on a number of priorities that we believe will bring value to our customers, our employees, and our shareholders. The first is building on our successful history of delivering products that our guests value. In 2019, this will include introducing new service to Boston starting in April and introducing Main Cabin Basic to expand the range of options available to our guests later in the year. Second is making it easier for our guests to navigate the complexities of modern air travel. Most visibly, this will include investments in airport facilities and digital interaction channels, areas where we know we have room for improvement. Behind the scenes, it also includes investment in tools and practices that will improve our ability to deliver more efficiently the authentic Hawaiian hospitality that has become synonymous with Hawaiian Airlines. Third is improving our cost structure. Strong cost discipline and high productivity is critical to our long-term success. It's an important part of delivering value to our guests as well as our shareholders while ensuring we maintain our competitive edge. Fourth and finally is building a foundation for the future. This pulls together the priorities I listed in a way that ensures the improvements we are making in the business are sustainable for the long term. This also means ensuring we position ourselves to grow more efficiently going forward so it can continue to deliver value to our guests, our employees, and our shareholders.

Our success in 2018 reinforces my confidence that the Hawaiian Airlines team is positioned for even greater things in 2019 and beyond. Our employees will continue to deliver authentic Hawaiian hospitality, unmatched by any of our competitors. Our fleet is better positioned than ever with fuel-efficient aircraft ideally suited to our network missions. This, in turn, opens up new network opportunities in North America, just as our partnership with JAL will open new opportunities in Japan. Our team is ready for 2019, and I'm sure they will continue to deliver results.

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

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

Thanks, Peter. And aloha, everyone. Total revenues for the fourth quarter grew more than 2% year-over-year to a record $697 million. Fourth quarter RASM was down 3.3% year-over-year on capacity growth of 5.6%. These results reflect about 130 basis points of benefit from fuel surcharges and foreign currency in the quarter. Our results came in a bit better than the midpoint of our final guidance revision as yields came in a bit stronger on international routes as did holiday traffic in North America.

Turning to each geography, domestic PRASM was down 7.6% year-over-year in the fourth quarter with challenges for both North America and neighbor island routes. An increase in domestic stage length also impacted the overall decline as a result of each of the North America and neighbor island entities was more than a point better than the collective total. The fourth quarter represented the high point of our capacity growth in North America with Hawaiian capacity increasing nearly 11% year-over-year due to the timing of our A320neo deliveries. For the full year, our fleet transition enabled us to grow North American capacity by more the 9% year-over-year and launch year-round service to four new markets.

As we've previously discussed, the competitive pricing environment in the North America market remain challenging on the year-over-year basis as we worked our way through the latter half of the year. Not surprisingly, declines in main cabin average fares had the most material impact on this entity's results. On our neighbor island network, we continue to see demand softness, most notably for Hawaii Island, and in response, we've trimmed capacity on our neighbor island network and now forecast First Quarter 2019 neighbor island year-over-year capacity to be down roughly 6%. We've also been increasing our marketing and promotional activities to support the weaker conditions, and overall, we'll continue to evaluate the market and respond accordingly.

Our international routes continued their strong performance. International PRASM was up 3.3% year-over-year in the fourth quarter. This was the 10th consecutive quarter of year-over-year PRASM improvement for this geography. Business class PRASM continued to perform well, especially in Japan and Korea where we saw year-over-year business class PRASM increases in the high teens. However, currency and softer market conditions in Australia pulled the entity results down a bit.

Shifting to our value-added products, fourth quarter was another record setting period for Extra Comfort product, which produced $23 million in revenue, up 31% year-over-year. Revenue from sales of miles was also strong, reflecting our new Barclays agreement, improving nearly 40% year-over-year. Finally, our cargo team capped a record year eclipsing $100 million in annual revenue for the first time. Consistent with industry trends, our cargo revenue growth slowed sequentially and was down a bit more than 2% year-over-year in the fourth quarter and a slight reduction in freight volume. The replacement of some of our wide-bodied flying with A321neos, the suspension of our Beijing route, and slightly softer volume from our international business led to this slight decline. But despite the softer fourth quarter, we closed the year with revenue up nearly 10%.

Reflecting back on our performance for the full year, system revenue came in at $2.8 billion, up 6% year-over-year. 2018 system RASM was flat year-over-year, matching our record setting performance in 2017. We accomplished this despite significant industry capacity increases, most notably in North America, Osaka, and New Zealand, as well as the other challenges Peter referenced in his opening remarks. Our investments in the front cabin and Extra Comfort continue to reap dividends. Full year front cabin PRASM outperformed the main cabin by roughly 7 points, and Extra Comfort had another great year growing revenue by 33% year-over-year.

With 2018 in the books, our attention is squarely on 2019. I'll start with capacity. We expect our capacity to be up between 1.5% and 3% year-over-year in the first quarter and between 1.5% and 4.5% year-over-year for the full year 2019. As I mentioned at our Investor Day last month, our 2019 capacity growth is more in line with our historical average over the latter part of the decade. From a product perspective, the large majority of our 2019 capacity growth will come from Extra Comfort as product inventory grows with each A321 delivery.

We expect first quarter RASM to be down 3% to 6% year-over-year, which includes a couple of notable headwinds. First, we have a difficult comparison with the first quarter of 2018 that benefited from strong performance, a favorable Easter calendar, and a profit sharing payment from our co-branded credit card. Second, industry pricing pressure on our North America routes that I mentioned earlier will continue to pressure yields in the quarter that has traditionally been our seasonal trough period.

That said, we're still quite positive about 2019 and ready to compete and win regardless of the environment. Underlying demand for the Hawaii vacation remains solid. Our product investments are paying off, and our fleet and network optimization efforts are positioning us well for the future. Later in 2019, we expect to start realizing the benefits of our JAL joint venture pending regulatory approval, and we will also add Main Cabin Basic to our product portfolio. Overall, there's a lot to be optimistic about. And with that, I'll now turn the call over to Shannon.

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Thanks, Brent. Happy new year, everyone, and thank you for joining us today. As Peter noted, we delivered a 12.6 adjusted pre-tax margin and an adjusted EPS of $5.44 in the face of significant competitive capacity increases, aircraft delivery delays, and numerous weather events. Some of these were expected at the beginning of the year, but many were not. In the fourth quarter, we rounded out our year with adjusted net income of $49 million, or $1.00 per share, and adjusted pre-tax margin of 9.3%. In addition to generating profit margins in the top tier of the industry, since 2015, we have bought back more than 7.4 million shares of our common stock and including the 10.9 million shares we avoided issuing through the buyback of our convertible note, we have reduced our shares outstanding by about 27%. And as Peter mentioned earlier, we returned more than $126 million to shareholders in 2018 through $102 million in share repurchases and $24 million in dividends.

Our announcement of a new $100 million share repurchase program authorized through December 2020 underscores the confidence that we have in our business and our people and reaffirms our commitment to growing long-term shareholder value. As discussed at Investor Day, cost control is at top of mind. Technology, labor productivity, and process efficiency are the key levers we will utilize to bend the cost curve, and we will always focus on ensuring we get good returns on our investments in the business. Our fourth quarter and full year 2018 CASM ex-fuel and special items were in line with the guidance that we provided earlier in the month. Fourth quarter CASM ex-fuel declined 1.9% year-over-year, and for the full year was up 1.8%, which is consistent with the expectations we laid out in April after adjusting our plans for A321neo delivery delays. We delivered on the expectation we laid out in early 2018 at the back half of the year, which show improved cost performance.

Similar to 2018, our 2019 non-fuel unit cost story will have a number of moving parts. Compared to 2018, we expect full year 2019 CASM ex-fuel and special items to be in the range of flat to up 3%, and we expect the first quarter to be up 1% to 4% year-over-year. Note that the year-over-year changes in 2019 CASM ex-fuel and special items will not be steady throughout the year due to the timing of ASM growth, the impact of our fleet transition, and the differing maintenance costs for each fleet type, the timing of non-recurring A321neo maintenance related credits received in 2018, and the timing of cost-savings initiatives that we expect to realize during the year.

Consistent with how we have previously guided CASM ex-fuel, these ranges exclude any assumptions relating to the amendable contract with our Flight Attendants Union. Notable cost headwinds for the first quarter as compared to 2018 include maintenance costs which drive half a point of the year-over-year increase, wages and benefits which drive about 1 point due to contractual rate increases for various labor groups as well as labor costs related to our investments in technology, and about half a point due to our freighter business which has contributed to our cargo success but does not generate related ASMs.

Our non-fuel unit cost trajectory is moving in the right direction. At the midpoint of the range, our full year 2019 guidance is the lowest year-over-year cost growth we will have delivered in the last five years. As we focus on cost control, we're continuing to invest in the business. Our investments include technology to support revenue-generating initiatives such as Main Cabin Basic as well as initiatives to enhance the guest experience which simultaneously allow us to improve our efficiency. For example, facilities improvements at our airports and enhancing our self-service capabilities will increase labor productivity while providing a better experience for our guests. Our new mainland technology center and our JAL partnership are other examples of 2019 investments that we are confident will deliver long-term value to our guests, employees, and our shareholders. We have a track record of delivering returns on invested capital that far exceed our cost of capital, and we expect 2019's investments to continue that success.

While we normally focus on CASM ex-fuel, this particular metric ignores the benefit we expect to see in what has historically been the first or second largest expense line on our income statement: aircraft fuel. Holding 2019 fuel rates steady with what we saw in 2018, nearly all of our 2019 unit cost pressures are offset by fuel efficiency gains we'll see from transitioning from 767s to A321neos.

Now, turning to other notable points in our 2019 outlook, we expect our full year 2019 capex to be in the range of $380 million to $430 million. This includes taking delivery of six new A321neos in 2019, which will bring our A321neo fleet to 17 aircraft, and it also includes 787-9 predelivery payments as well as non-aircraft investments mainly in facilities and technology. The current forward fuel curve shows a year-over-year decline in 2019. At current rates, we expect our 2019 fuel hedges to settle at a loss of just under $7 million using the curve as of January 18th. This compares to the 2018 gain of nearly $26 million. Consistent with past practice, we've hedged about 45% of our projected fuel consumption for 2019. Lastly, we expect our effective tax rate in 2019 to be between 25% and 27%.

In closing, I'm encouraged with our performance in 2018. We've returned record amounts of cash to our shareholders. We're continuing to invest in the business and expect our track record of generating strong returns to continue unabated. We have a management team committed to improving our cost competitiveness, and we're building a foundation that will allow us to grow more efficiently in the future.

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

Daniel Wong -- Senior Director, Investor Relations

Thank you, Peter, Shannon, and Brent. I'd also like to thank all of you for joining us today and for your continued interest in Hawaiian Holdings. We're not ready for questions from the analysts first and then the media if time permits. As a reminder, please limit yourself to one question and if needed, one follow-up question.

...

Sherri, please open the line for questions.

Questions and Answers:

Operator

Thank you. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question is from Hunter Keay with Wolfe Research. Please proceed with your question.

Hunter Keay -- Wolfe Research -- Managing Director & Senior Analyst

Hi, everybody. Thanks for getting me on. Peter, what is your long-term philosophy on the importance of market share?

Peter Ingram -- President and Chief Executive Officer

Market share is not one of the metrics that we use as a guiding principal for the business. We certainly are aware of what our market share is, and it can be a reference point for relevance in the market, but I look at market share in some ways as more of an outcome than something that you need a philosophy for. And if you are positioned as a strong competitor, you are superior at generating revenue, you have a more competitive cost structure, then inherently, you'll be more successful, and that will tend to equate to being able to grow your market share over time.

Hunter Keay -- Wolfe Research -- Managing Director & Senior Analyst

Gotcha. Thank you for that. And then what's been the response to the Main Cabin Basic announcement from the travel agency community, and how are you planning on selling that through JALPAK? Thank you.

Peter Ingram -- President and Chief Executive Officer

So, I think that our focus with Main Cabin Basic is North America initially as we announced that. That's where we're initially going to roll it out. And in North America, of course, more of our focus is on direct channels, one, and two, I would say there is a familiarity with the concept of Main Cabin Basic because all of our competitors to Hawaii have it, and most of the competitors within the U.S. are using it, so it is something that people are familiar with. We've thought internally, but we haven't really gone forward with thinking about where that product would sit internationally or in the neighbor island geography. That is something that we will certainly look at over the long term, but we understand that both of those places are a little bit different, and the way we apply the principles of Main Cabin Basic to those are likely gonna be different than how we apply it in North America where the ground is largely killed already by others.

Hunter Keay -- Wolfe Research -- Managing Director & Senior Analyst

Thanks, everybody. Appreciate it.

Operator

Our next question is from Susan Donofrio with Macquarie. Please proceed with your question.

Susan Donofrio -- Macquarie Capital -- Head of US Aviation and Aircraft Leasing Equity Research

Hi, everyone. So, the question I have is related to Japan. Could you just expand on what is going on in that market? It does look like you've had a little bit of a pulldown by AirAsia, Asiana, but it does look like some other competitors are increasing. So, could you just talk a little bit about what's going on there from a competitive standpoint?

Peter Ingram -- President and Chief Executive Officer

There are some moving pieces. Maybe I'll let Brent go ahead and walk you through some of those.

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

Susan, I think you appropriately characterized it. There's a lot of moving pieces within Japan. So, on the puts-and-takes, Osaka from a market perspective has had a fair amount of capacity added over the course of 2018 based on forward looking schedules. That stays in place until the end of 1Q. As we get through 2Q, that moderates a bit year-over-year as the second frequency that JAL had in the market comes out. And then as we get into the latter part of the quarter, Scoot has announced that they will be exiting the market, so you'll see a fair amount of capacity come out of that. There's some gauge movement around in Tokyo to Honolulu, specifically probably the most noticeable is ANA's addition of the A380s beginning in late May of 2019 and then ramping that up over the course of the summer. But if you look at overall puts-and-takes across many of our Japan markets, in 1Q, they're generally down a little bit with the exception of Osaka, like I mentioned, and then Tokyo has a little bit of growth in 2Q but not a whole lot. Osaka remains relatively flat and then the visibility in the 3Q has Osaka capacity moderating a bit more.

Susan Donofrio -- Macquarie Capital -- Head of US Aviation and Aircraft Leasing Equity Research

Great. And then just as a follow-up, unrelated, but with the government shutdown before, did you notice any softness just because the national parks were closed. I'm just wondering if you saw anything intra-island?

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

There wasn't a discernable impact in terms of any of the traffic that we saw as a result of the government shutdown.

Susan Donofrio -- Macquarie Capital -- Head of US Aviation and Aircraft Leasing Equity Research

All right, great. Thank you.

Operator

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

Michael Linenberg -- Deutsche Bank -- Managing Director & Senior Company Research Analyst

Hey, good afternoon or good morning, everyone. Brent, I guess two questions to you. The neighbor island softness and I know you indicated I think in the March quarter, you were taking capacity down 6%, what's driving that? Is that the Hawaiian economy or is it the fact that now you're flying nonstop from some of the other islands rather than Honolulu to the mainland? Is it all the above? What's behind that?

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

Michael, it's predominantly a local story, so we have seen a nominal decline as we anticipated with traffic from North America going to the neighbor islands. That was largely forecasted, and we knew that was coming with the addition of our own ads with the 321s as well as OA capacity adds into that market. So, that's probably impacted by I'd say about a quarter or so of the overall decline, but that is explainable clearly by capacity. Frankly, the more frustrating piece for us or disappointing piece for us as we poured through the data is the local traffic decline there. As we peel back the onion, we're seeing no real impact for our top tier in Hawaiian Miles guests. It is really guests who we have the least amount of information on and a lesser relationship with that we've seen the decline, and again, most notably to the big island. In response to that, as you mentioned, we cut capacity 6% in the first quarter. We'll continue to monitor the situation and adjust capacity as needed. We've also stepped up some of our marketing efforts here within the state in terms of ensuring proper awareness of attractive price points that we've got in the market for discretionary leisure travel to get some of that back in further out booking periods.

Michael Linenberg -- Deutsche Bank -- Managing Director & Senior Company Research Analyst

Great. And just my second question, when you look at March Q RASM, you listed it was a litany of headwinds that you're dealing with and you called out Easter, you called out the profit sharing piece to the credit card company from a year ago. Can you break down those impacts, like that Easter impact? Is that 1-1.5 points a RASM? Just walk through it. It sounded like there were three or four different pieces that are impacting the March quarter, just so we can kinda discern what -- well, the benefit would be in the June quarter with the Easter bounce back of it.

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

Right now our analysis has Easter at about a point, shifting from 1Q to 2Q, and disproportionately in March where Easter was early last year. On the profit sharing piece, that's roughly a half a point of headwind that we won't [webcast cuts out] here.

Operator

And our next question is from Joseph DeNardi with Stifel. Please proceed with your question.

Joseph DeNardi -- Stifel Financial Corp. -- Managing Director

Good morning. Brent, normally you break down North America between I guess the U.S. piece and the neighbor island piece. Are you willing to do that now for fourth quarter?

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

I don't have that right in front of me. I can dig it up real quick, but in 4Q, I think neighbor island PRASM was down. Looking real quick in our binder, I think neighbor island was down.

Peter Ingram -- President and Chief Executive Officer

I think they were in similar ranges in this period. And as Brent mentioned in his comments, there was also a stage length impact in there as we've grown North America more which is much longer length of haul, lower stage length. So, that stage length impacts are to drag the overall domestic total down as well.

Joseph DeNardi -- Stifel Financial Corp. -- Managing Director

Got it. And then, Peter, I'm just wondering if you could kind of clarify something on how you think about the JAL JV. Do you see the bigger opportunity as allowing you guys to grow more in Japan or to enhance the profitability of your current business there?

Peter Ingram -- President and Chief Executive Officer

Well, I think they're related, and it actually ties a little bit into what I said in response to Hunter's initial question. To the extent we have a better customer proposition broadly, and we think the combination of the long-standing Japanese carrier and Hawaiian carrier really is the best of both worlds on either side of the Pacific. We'll be that much more competitive. That will enhance our profitability, and that will create opportunities for growth, so services that may not have made sense before will make sense in that environment, and we think that'll manifest itself in the ability to grow over time, and add service, and add benefits to guests traveling between Japan and Hawaii.

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

Joe, to get to your first question, neighbor island was down in the mid-5%, North America was mid-6%, and the total was mid-7%.

Joseph DeNardi -- Stifel Financial Corp. -- Managing Director

Got it. Thank you very much.

Operator

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

Helane Becker -- Cowen and Company -- Managing Director & Senior Research Analyst

Thanks, operator. Hey, everybody. Thanks for the time. Just a couple of questions here. Is there a way from a technology perspective you could introduce basic economy quicker than toward the latter half of the year?

Peter Ingram -- President and Chief Executive Officer

Helane, that's something I ask people every day, and we're working on a pace to get it out in the latter half of the year as you noted. We do wanna make sure that we roll it out well and don't stumble into it, and so it's important to make sure that we've got the process and the technology, and we're not confusing people as we roll it out. So, part of me wants to tell the team to go faster, faster, faster all the time. The other thing I always say is, "But we gotta get it right."

Helane Becker -- Cowen and Company -- Managing Director & Senior Research Analyst

That's a fair thing. And then on the government shutdown, I think you or Brent mentioned that you hadn't really seen any impact, but there were some reports last week that TSA agents in some of the Hawaiian airports were actually handing in their resignations. And I was just kind of wondering if security issues hampered your operations at all, and if we should be mindful of that, and if that's included in the first quarter RASM guidance?

Peter Ingram -- President and Chief Executive Officer

To be honest, Helane, I didn't see those reports in the context of Hawaii. We did not see any disruptions here. We were obviously concerned that if the government shutdown had continued, that some of the effects we were hearing about elsewhere in the country would've manifested themselves in the places we fly, but it really wasn't something that hit our day-to-day operations. There were a couple of things administratively that we couldn't accomplish because the people at the FAA that do those approvals weren't there to do those approvals, but there was no moment where I felt the safety or security of the system was in danger, and obviously, that would have been a much more serious problem than the administrative burdens we had to deal with.

Helane Becker -- Cowen and Company -- Managing Director & Senior Research Analyst

Gotcha. Well, thanks very much.

Peter Ingram -- President and Chief Executive Officer

Sure.

Operator

Our next question is from Rajeev Lalwani with Morgan Stanley. Please proceed.

Rajeev Lalwani -- Morgan Stanley -- Executive Director

Brent, I just wanted to follow up with some of the comments you made earlier on demand softness. I think previously you noted that you saw it on the North America side as well, not just on the neighbor island side. How is that looking now? Has it stabilized on that part of your network?

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

Sorry, Rajeev, can you repeat the question?

Rajeev Lalwani -- Morgan Stanley -- Executive Director

I think previously you said that demand was a bit soft, not just on the neighbor island side but also going to North America. How is that demand looking now? Has that softness dissipated?

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

When we look at overall traffic levels in North America, they remain, I would say, pretty good. Load factors are generally still relatively high. The industry pricing environment that we've seen to get to those levels has really been the bigger strain in terms of generative demand, Rajeev.

Rajeev Lalwani -- Morgan Stanley -- Executive Director

And then, Peter, a question for you. There's obviously some concern out there about the environment getting tougher. And to the extent that it does, what are some of the levers that you can pull to keep your health in margins and maybe stabilize topline trend? Is it capacity? Is it maybe buybacks? Cost cuts? What are the things that are at your disposal, if you will?

Peter Ingram -- President and Chief Executive Officer

Well, I think that our focus is really on making sure that we continue to execute very well at the things we're doing. I went through some of the priorities for the year and the things that we know that we can get better at and improve our own effectiveness at. And if we do that, it will position us even better. Right now, the competitive environment is very similar to what we saw throughout 2018. First of all, I should say that. We are aware of the prospect of changes in the competitive environment going forward, but we're coming into 2019 from a position of strength. We are a leading competitor in all of the geographies we've served. We've got a great product that people love interacting with. Our employees do a terrific job taking care of people. And all of those things are strengths that we think position us to be very competitive going forward.

Rajeev Lalwani -- Morgan Stanley -- Executive Director

Thank you.

Operator

Our next question is from Adam Hackel with Imperial Capital. Please proceed with your question.

Adam Hackel -- Imperial Capital -- Vice President, Equity and Industry Research

Hi, team. Thanks for sneaking me in here. Just a couple of quick questions from me. First of all, just on fuel surcharges, just curious where those are. Have those gone back to zero? I know those had obviously been at zero for a while up until maybe last year, and with fuel moving up, that was a bit of a tailwind for you guys. I'm just curious where those are now and how the comps are for that as you get throughout the year?

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

Adam, I'll talk a little bit about where we're at in 1Q and then it gets a little choppy on that as you've got things moving around last year and uncertainty around this year's base. In 1Q, it will actually be a bit of a tailwind. The primary market where we collect fuel surcharges is Japan, and the mechanism is lagged. And so, with the lookback mechanism, fuel surcharges are going to be at 11,000 yen effective February 1. Certainly, what's happened to fuel in the last little while, we anticipate that those are likely to moderate as we get further out.

Adam Hackel -- Imperial Capital -- Vice President, Equity and Industry Research

Gotcha. And I guess it's just sort of a secondary question on the RASM as you get past 1Q. Obviously, you guys have a lot in terms of comps from this past year, as you guys mentioned, between the weather, and the volcano, and some of the delays and all that. But just looking at it compared to where the street had you guys for '19, which is basically down $1.00 in earnings year-over-year and just based on what you gave out to that in terms of the guide, it's sort of implied the street's anticipating this level of decline between the fourth quarter and what you got for the first quarter as you get throughout the year. So, I'm just curious just how we should think about it from a modeling perspective instead of the comps as you get past really the first quarter and you started to lap some of these one-time events from this past year.

Peter Ingram -- President and Chief Executive Officer

It's difficult to give guidance going out. I think certainly, there are a couple of things about 1Q that are uniquely challenging. One is it was, as Brent said, it was our toughest comp of the year generally. It was a period where the pricing environment in North America remained stronger than it did throughout certainly the back half of the year. And we've got the Easter shift and the unique aspect of the credit card payment that we received, the winter revenue. So, all of that is sort of unique about 1Q and would suggest that other parts of the year will be better. And certainly, we feel that way. There's a wild card in there, and that is we don't have a crystal ball about what changes there may be in terms of industry capacity as you go through 2Q to the end of the year. And so, it's hard for us to put a precise number to that, and certainly, it hasn't been our practice in any event to give guidance beyond the quarter we're in from revenue because of those factors that are out there. So, we feel optimistic about our ability to compete, but it's a little too early for us to be putting a precise number to it.

Adam Hackel -- Imperial Capital -- Vice President, Equity and Industry Research

I appreciate that, Peter. Thanks, everybody.

Peter Ingram -- President and Chief Executive Officer

Sure.

Operator

Our next question is from Dan McKenzie with Buckingham Research Group. Please proceed with your question.

Dan McKenzie -- Buckingham Research Group -- Research Analyst

Thanks, guys. Couple questions here, one on cost, one on revenue. But when I look at the capacity dashboard, if you will, for the first quarter, I'm seeing 2% more ASMs on 1% fewer departures, essentially 2% fewer seats. And when I look at that sort of a dashboard, I would've guessed that maybe the non-fuel costs would've been a little bit less for the first quarter, so it seems like there is some pressures maybe unique to the first quarter. And I guess I got the pressures for the full year. I didn't really understand what's really unique to the first quarter. I'm just wondering if you could elaborate maybe a little bit more on that?

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Hi, Dan. For cost for the first quarter, we just have a bunch of moving pieces throughout the whole year. Our maintenance costs this year have a lot of moving pieces because some of the shuffling that we had to do last year with the 321neo delays and then with the maintenance credits that we got, which were scattered throughout the year. They weren't necessarily consistent throughout the year. So, the maintenance piece for the first quarter drives half a point, and that just changes throughout the year. Some of the other pieces are probably a little bit more consistent throughout the year, but we also have differences throughout the year of our ASM growth that I had mentioned. So, unfortunately, the year-over-year changes throughout the year looking at the different quarters is pretty lumpy, and there's no one underlying message. It's just kind of a mixture of all different things moving in and out.

Dan McKenzie -- Buckingham Research Group -- Research Analyst

Okay, just seems a little bit conservative. I guess that's my only point. And then on the revenue side, if I could just circle back for a second, obviously, I caught the 1.5 point headwind from the things you guys have already mentioned, but when I look at capacity from the West Coast to Hawaii, it's flat. When I look at competitive capacity, I've got 55% of the capacity shrinking 4% to 6% United, American, Delta, so your toughest competitors shrinking between the West Coast and Hawaii. When I look at competitive capacity in the international side, it's essentially flat. So, again, on the revenue side, it just seems like a conservative revenue guide. So, maybe I can approach this a little bit differently than just saying it's conservative. I guess maybe, Brent, what's the average upsell that you're seeing in the marketplace from your competitors that you're missing out on? And so, I guess just to ask this a little differently, when you analyze the revenue landscape, you've obviously concluded you're missing out on some upsell revenue that your peer set is able to collect. Is that just simply $25.00 per passenger, or is that something closer to $50.00 or $75.00? What's that revenue opportunity that you're missing out on today that you're gonna be able to potentially capture later this year?

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

Well, Dan, I'm not gonna specifically answer because I don't know what our individual competitors are reaping in terms of percentages of buyout from basic economy if that's what specifically you're asking for. We haven't guided in terms of a basic economy number, and we'll do that later in the year around our expectations around that. In terms of the benign capacity environment in 1Q, as peter mentioned, last year we saw a similar thing with RASM performance being a bit lagged relative to changes in capacity, and we saw a big spike in industry capacity in 1Q. The pricing environment was generally a bit slower to react to that, and we saw pretty strong RASM results in Q1, and so there's a bit of a lagged impact, and I think we're seeing some of that now as well.

Dan McKenzie -- Buckingham Research Group -- Research Analyst

If I could just follow up one last one here, does the revenue guide factor in a Southwest entry into Hawaii sometime in the first quarter?

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

The revenue guide really doesn't. We don't see that in the market right now, and it'd probably be the very tail end of the quarter to the extent that anything could get in, so no, that's not really something that's factoring in our revenue guide.

Dan McKenzie -- Buckingham Research Group -- Research Analyst

I see. Thank you.

Operator

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

Andrew Didora -- Bank of America -- Senior Equity Research Analyst

Hi, good afternoon, everyone, and thanks for getting me in here at the end. Most of my questions have been answered, but I had one for Shannon. The effective tax rates for 2019, 25% to 27% seems a bit above certainly the run rate this year and much higher than what we were expecting in our model. What's the reason for that?

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Hi, Andrew. The 2018 effective tax rate includes the benefit that we got from a $50 million pension contribution that we are applying to our 2017 tax return, so we're getting that higher deduction rate for that, which is why 2018 is unusually low for the current tax regime or the current environment. Without that, we'd be a little closer to that normal 25% range, and at this point, we're still trying to work through the 2018 tax return and we'll do that throughout this year. So, I don't think we have anything unusual going on in our taxes in 2019. It's a little higher than 2018's because 2018's was a little unusual with that contribution.

Andrew Didora -- Bank of America -- Senior Equity Research Analyst

So, then the 25% to 27%'s just a good run rate over the next couple years as things stand right now?

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

As far as I can see, but of course, we're still going through a bunch of the changes, the tax policy changes, going through our tax policy changes on areas like revenue recognition. We had some big book changes there, which drive some tax changes. So, there are still some moving pieces in how we're looking at taxes, and we can probably give an update throughout the year on that.

Peter Ingram -- President and Chief Executive Officer

And I'd say even going back in the way-back machine to when I was CFO, the rule of thumb I used to use was it's the federal statutory rate and generally plus about five for state and local taxes, which is right in line with the guidance that Shannon's using for this year.

Andrew Didora -- Bank of America -- Senior Equity Research Analyst

That's helpful. Thank you.

Operator

Our next question is from Steve O'Hara with Sidoti & Company. Please proceed with your question.

Steve O'Hara -- Sidoti & Company -- Equity Analyst

Hi, good afternoon.

Peter Ingram -- President and Chief Executive Officer

Hey, Steve.

Steve O'Hara -- Sidoti & Company -- Equity Analyst

Hi. Can you just talk about competitive capacity growth in your markets maybe by quarter this year, what you're expecting right now?

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

So, in terms of North America based on published schedules right now, Steve, kind of flattish in 1Q, slightly down, up a little bit in 2Q, obviously subject to change based on what happens with industry dynamics, and published schedules are up mid-single digits as we get out into 3Q in terms of -- sorry, 2.5 in 2Q and 3.5 for the industry as we get out into 3Q. The international side, a bit lumpier. We talked a little bit earlier about some of the puts-and-takes in Japan. Incheon capacity is down a little bit sporadically in 1Q and 3Q as well as in Auckland being down a bit as we lap some of the competitive changes in that environment.

Steve O'Hara -- Sidoti & Company -- Equity Analyst

And does that include Southwest or not on North America?

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

That's only published schedules.

Steve O'Hara -- Sidoti & Company -- Equity Analyst

And then can you just remind me what the revenue benefit was in the first quarter that you talked about from the credit card or what the impact on RASM was?

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

About a half a point.

Steve O'Hara -- Sidoti & Company -- Equity Analyst

A half a point, OK. You said the fuel surcharge is kind of a tailwind in 1Q, and then that'll kind of trail off as that trails off throughout the year. And when do you expect to have a more firm timeline on the JV and when that's good to go, when you can start talking about the benefits?

Peter Ingram -- President and Chief Executive Officer

So, the JV, Steve, is in front of the regulatory authorities on both sides right now. Like a number of things over the past month, the good people at the DOT had a little bit of unplanned downtime over the last month and are now getting back in. We don't know exactly what the specific timing of our approval will be, but hopefully, we'll hear something in terms of feedback in the first half of this year, but it is not something that we can put a specific date on yet because they've gotta go through their process.

Steve O'Hara -- Sidoti & Company -- Equity Analyst

All right. Thank you very much.

Operator

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

Catherine O'Brien -- Goldman Sachs -- Senior Equity Research Analyst

Hi, everyone. Thanks for the time. Can you give us an update on how much of your $100 million targeted annual cost cuts are built into your 2019 CASM ex guide?

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Hi, Katie. It's Shannon. I don't have a number for you because that plan goes out about two or so years, and so I don't know off the top of my head exactly how much of that was built into '19 versus just over the two years. So, '19 has a mixture of cuts initiatives that we started in '18 that will then finish up in '19, and we'll get some of those benefits. But again, too, we're continuing to put some of that money back into the business with initiatives such as the mainland technology center, which will get us a lot of benefits from a technology delivery perspective at a more efficient rate, as well as we have a lot of operations and process-type initiatives for labor productivity. So, we do eat through a bunch of the $100 million. I don't think it's half because we have a bunch of initiatives that we're working on this year that we won't get the full year benefit from. So, in 2020, you'd see a lot more of that full year benefit on those initiatives.

Catherine O'Brien -- Goldman Sachs -- Senior Equity Research Analyst

So, just one quick follow up on that one and then maybe one on revenue. So, you're saying, Shannon, that something less than half of the $100 million would find its way into this year's cost guide?

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Yes.

Catherine O'Brien -- Goldman Sachs -- Senior Equity Research Analyst

Got it. And then, Brent, can you give us some colors on the performance of Extra Comfort PRASM versus the system, maybe in the December quarter and then over the course of 2018? Thank you.

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

Katie, we don't calculate Extra Comfort PRASM as we don't treat it as a stand-alone cabin. In terms of revenue growth, in terms of revenue growth per Extra Comfort seat, it was consistent with our capacity growth, so if you wanted to back into it that way, it was kind of flattish in terms of per unit production with production growing in the neighborhood of about 30%.

Catherine O'Brien -- Goldman Sachs -- Senior Equity Research Analyst

Understood. And maybe just one quick follow up to that, it sounds like a lot of your capacity this year is driven by growth in that cabin, so do you think you'll be able to maintain about a flattish type RASM again, or do you think given growth there, that could put some downward pressure on that number?

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

No, I mean, I think we've got every intention of maintaining and growing it. I think we've got some initiatives that we believe we can grow it. We'll be introducing the product in some markets that haven't had it traditionally where we've had seven 6s, and we need to drive some awareness there, but we don't see any reason that we shouldn't be able to maintain that.

Catherine O'Brien -- Goldman Sachs -- Senior Equity Research Analyst

Thank you very much.

Operator

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

Joseph DeNardi -- Stifel Financial Corp. -- Managing Director

Hello. Peter, you mentioned that one of the wild cards for 2019 is what maybe other airlines do with capacity, so I feel like that's opening the door to my question a little bit. Based on your experience seeing capacity come and go from the U.S. to Hawaii, are the returns that you're seeing on the market still good enough to attract more capacity, or are we at a point where you think some of the nonstrategic capacity should start to come out just based on the returns that you're starting to see there?

Peter Ingram -- President and Chief Executive Officer

We don't talk about returns in specific geographies. What I will say is my best view is of our returns, and obviously, our pre-tax margins were, as we've said, in the top tier of the industry. Not the absolute highest, but very much qualifying in the top tier, so we're still doing very well. It is also the case that we know we generate a revenue premium in North America, so by definition, that means that our competitors have a lower revenue input, and we don't think that our competitors have particular cost advantages that mean they should be generating higher returns, but I don't know exactly what their returns are and what their decision criteria. I do know that it's a big competitive market. Water does find its level over time. There can be periods where capacity environment is very nice from the company perspective, and you can generate really good returns, but typically, that'll attract incapacity. And there were other periods when capacity growth exceeds some demand growth over time, and it may take a little bit of time. There's a bit of lag before carriers react to that environment, but we fully expect that over time, things find a balance. And the important thing for us is making sure that we're extremely competitive, and so to the extent we hit a point where capacity needs to be rationalized, we would look forward to that not being ours because ours is the most competitive and continues to generate good returns.

...

Operator

Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the call back over to Peter for closing remarks.

Closing Remarks:

Peter Ingram -- President and Chief Executive Officer

All right. Mahalo, again, for joining us today. We are optimistic about 2019 and look forward to speaking to you again on next quarter's call. Aloha.

...

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.

Duration:61 minutes

Call participants:

Daniel Wong -- Senior Director, Investor Relations

Peter Ingram -- President and Chief Executive Officer

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

Shannon Okinaka -- Executive Vice President & Chief Financial Officer

Hunter Keay -- Wolfe Research -- Managing Director & Senior Analyst

Susan Donofrio -- Macquarie Capital -- Head of US Aviation and Aircraft Leasing Equity Research

Michael Linenberg -- Deutsche Bank -- Managing Director & Senior Company Research Analyst

Joseph DeNardi -- Stifel Financial Corp. -- Managing Director

Helane Becker -- Cowen and Company -- Managing Director & Senior Research Analyst

Rajeev Lalwani -- Morgan Stanley -- Executive Director

Adam Hackel -- Imperial Capital -- Vice President, Equity and Industry Research

Dan McKenzie -- Buckingham Research Group -- Research Analyst

Andrew Didora -- Bank of America -- Senior Equity Research Analyst

Steve O'Hara -- Sidoti & Company -- Equity Analyst

Catherine O'Brien -- Goldman Sachs -- Senior Equity Research Analyst

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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