When Hawaii bellwether Hawaiian Airlines held its conference call last week to discuss annual results, there were few financial surprise. But what came into far better view was the airline’s strengths, weaknesses, direction and competition.
Regarding financials, the company reported 2022 results in which it lost about $240M, although the end of the year started to improve. Hawaiian’s capacity compared with 2019 was +15% domestically, -21% interisland, and -56% internationally. Obviously, two of its three primary business units remain challenged by the lack of returning international visitors and competition with Southwest.
CEO Peter Ingram acknowledged that while a lot has returned to normal, there’s a good part that has not. Some things are in their control, while many more are not. Here are six examples.
1. Ongoing interisland blood bath.
Acknowledging fierce competition at far-below-cost tickets, Peter said, “Low fares in the Neighbor Island market have stimulated traffic, and we continue to materially outperform our competitor on all these routes. We continue to succeed in earning a disproportionate passenger share with higher average fares than our competitors, and the gap is substantial.
BOH: Hawaiian has twice the number of flights interisland than Southwest. They don’t compete on every fare and can eke out higher fares, especially when Southwest doesn’t have similarly timed flights. On the other hand, Southwest has extremely deep pockets for this prolonged fight. They did a ten-year battle of a similar nature before withdrawing from Newark. So this is nothing new. For Hawaiian, where interisland is a significant portion of the overall revenue, it’s a bigger deal, albeit not back-breaking at this time. Remember that when these airlines sell tickets for $39, that actually represents just $26, with the rest being taxes and fees. That might be between 1/2 and 1/3 of their actual cost of providing the service.
2. International return simply hasn’t materialized.
Peter said that “Australia, New Zealand, and South Korea have all seen strong demand recoveries over the course of 2022.” But, “Japanese travelers have not yet resumed international travel at a pace comparable to pre-pandemic levels. With the timing of Japanese demand recovery still uncertain, we will need to be nimble.”
BOH: This is a huge problem for Hawaiian. It means they only have one leg of their normal three to lean on fully. And that is the mainland, where while traffic is still great, there remain concerns about a potential downturn later in 2023. All-important to Hawaiian’s success is Japan, and it is coming back, but at a seeming snail’s pace.
3. Spiraling costs.
Peter pointed out that costs have escalated, especially labor.
BOH: Their tentative agreement to raise pilot pay up to $448/hr will be very costly, among other things. Hawaiian doesn’t face these problems alone, as they are industry-wide. At the same time, Hawaiian lacks scale compared with its competitors. It also faces Hawaii cost of living issues for its employees that could prove undermining. Near-term financial performance, based on Hawaiian’s own words, is challenged and uncertain.
4. Lack of reliability.
Ingram said, “Over the past few months, we have not performed to our standards operationally. The root causes are not a function of our decisions, but it is our responsibility to overcome external forces and deliver the level of service and reliability our guests expect. Since October, on-time performance at our Honolulu hub has been undermined by construction on a primary arrivals runway and the air traffic control programs that constrain arrivals into the airport.”
BOH: The runway at Honolulu is just one of the issues. Inadequate staffing is another one. The problem has been going on for nearly a half-year, and no one seems to know or want to say when the Honolulu Airport mess could be over. Hawaiian has suffered far more than most airlines at the hands of the inept Hawaii Department of Transportation/Airports.
Hawaiian says they’ve adjusted their schedule to try to improve Hawaii airport performance. Yet, while their operations are improving overall, Flightware said 60% of all Hawaiian Air flights at Honolulu were delayed Saturday, while Southwest’s delay factor was 28%.
5. Amazon freighter business starting.
Hawaii is excited to enter a new freighter operations venture with Amazon later in 2023. That will use an Amazon fleet of A330 aircraft rather than Hawaiian’s passenger planes. As a part of that, Hawaiian will be handling maintenance and is moving some of its previously outsourced work in-house for greater efficiency and cost-effectiveness.
BOH: We’d give the company high marks for bringing this to fruition. It’s a much-welcome diversification, set to provide a meaningful revenue stream over an 8-year contract. Hawaiian will be Amazon’s largest airline partner thus far.
6. Premium market focus.
Hawaiian said that in the last quarter of 2022, their premium cabin revenue was up 30% compared with the prior year. Next, they have the Dreamliner fleet with 34 business-class suites, compared with the current 18 nice albeit quirky business-class suites. Hawaiian still refers to their business class as first class, which it is not.
BOH: Their strategy of being a versatile yet premium-focused airline seems to work quite well. It is an area in which they have a unique, well-differentiated premium product. They have not, however, figured out premium economy, which is a highly desirable offering in the industry, found on American, Delta, and United. Hawaiian has not announced its version yet, but we remain certain it will arrive at some point.