Hawaiian Airlines shifts focus to tap into Pacific Rim potential
In a U.S. airline industry where capacity constraint is pursued with almost religious fervor, ' double-digit growth rate makes it something of a heretic. But the carrier is not pursuing expansion for its own sake—rather, it is following a deliberate plan to transform its business model and set itself up for long-term success.
During the past five years Hawaiian has morphed from a carrier that was primarily reliant on domestic routes to the U.S. West Coast to one that has a major presence in international markets around the Pacific Rim. In the nine months through July, the carrier added five new overseas destinations. And underlining its shift in focus is the fact that it has more points on its international network—12—than it has on the U.S. mainland.
Now, the airline is taking a breather from its rapid expansion. It plans to launch flights to Beijing in April, which will be its first new addition in nine months. This hiatus is allowing Hawaiian to consolidate the changes it has already made and plan for its next phase of growth.
CEO Mark Dunkerley tells Aviation Week that Hawaiian's era of transformation really began in 2005, when it exited bankruptcy protection. That is when “we set about plotting what we thought made sense for our company for the next 10-15 years.”
At that point, Hawaiian had two basic elements to its operation. Flying between the islands of Hawaii accounted for about 30% of its business, and almost all the remainder was service from Hawaii to the U.S. West Coast.
The inter-island market is quite different from any other in the U.S. airline industry, Dunkerley notes. In addition to the usual leisure and business traffic, residents take flights for routine trips that would use ground transportation elsewhere. Healthcare providers fly patients for treatment, and high school athletics associations must also transport teams to neighbor islands for some sports meets.
But this market is not growing, as the population of Hawaii is fairly stable. Hawaiian's share of the inter-island market when it emerged from bankruptcy was 64%, and the only thing that could have changed that dramatically would be the exit of main rival Aloha Airlines—which did eventually happen, although that was “hardly a sensible strategic expectation at the time,” says Dunkerley.
The second—and largest—part of the airline's business in 2005 was flying to mainland U.S. destinations. This has long been a highly competitive and price-sensitive market, and at the time Hawaiian saw that the major trunk routes “were all fully occupied and unlikely to grow,” Dunkerley says.
Another possibility was opening direct routes from the mainland to Hawaiian islands other than Oahu, but this did not seem attractive for two reasons. These thinner routes would have required narrowbody aircraft, but the unit costs offered by the current generation of single-aisle aircraft would have been too high, the CEO notes. Also, such a move would have meant Hawaiian was “doubling down” on the Hawaii-West Coast market, which already accounted for two-thirds of its total revenue.
So in order to find untapped demand for travel to Hawaii, and to diversify the markets it relies on, the airline looked west instead of east. “It didn't take much thought to recognize that the macroeconomic tide was running in favor of Asia,” says Dunkerley. With Hawaii enjoying strong brand awareness in Asian countries as a destination, the carrier saw that it was well-suited to expand into Asia.
Once Hawaiian settled on this strategy, in about 2007, the next step was to select the right aircraft for the mission. It ordered 22-200s in three lots between 2008-11, and these aircraft began arriving in 2010. The carrier now operates 14, with the remainder to arrive by 2015. They are being used for fleet growth and to replace as they are retired.
The airline's first major international route was to Sydney, in 2004. It added a Manila flight in 2008, but withdrew service to the Philippines earlier this year.
However, the main wave of expansion into Asia began with routes to Tokyo and Seoul, South Korea, in 2010, and the number of international destinations has quickly increased since then. Japan is a major focus with five destinations, and Hawaiian also serves Australia, New Zealand, South Korea, Taiwan, Tahiti and American Samoa.
Dunkerley says people are often surprised to learn Hawaiian now has just as many international as domestic destinations. “People think of us as a domestic carrier, but the complexion of what we do is changing quite dramatically.”
The full benefits of the strategic shift have yet to be seen. The carrier has weathered the recent downturns better than most U.S. airlines, and has only recorded one annual loss—in 2011—in the past six years. But it aims for stronger, and more sustainable, profitability.
Hawaiian's new international routes are still in the “maturation” stage, although they are generally performing ahead of expectations, Dunkerley says. He acknowledges that results will vary; some new routes will prove very successful, but others may lag. So far, Hawaiian has “lots of reasons for early optimism.”
Despite an overall capacity increase of 18% in the first three quarters of the year—and 22% in 2012—Hawaiian has not abandoned the capacity discipline philosophy, Dunkerley argues. The carrier has been strict in keeping a lid on growth in the mature markets it serves such as the West Coast cities, even as some of its rivals have boosted capacity on these routes.
So while Hawaiian has been “adhering to the conventional wisdom [regarding] capacity growth” in domestic U.S. markets, it has taken a different approach in its international operation, Dunkerley explains. The overseas markets have much larger growth potential—not just in terms of routes to Hawaii but for air travel in general.
Launching flights to a new destination is often the easy part of opening a new market, Dunkerley says. Learning the unique characteristics of sales and distribution in each country can take a lot longer.
This is one of the reasons Hawaiian is pausing its rapid network expansion for the latter part of 2013 and into 2014. This will give it time to “come down the learning curve” in its new markets, and fine-tune these services.
International growth will resume again, but probably at a slower rate. Dunkerley believes 2-3 new destinations a year will be a good pace for the near future. And many of the international destinations recently added have less-than-daily frequency, so there is also scope to add more flights to those routes. In the long-term, the system-wide seat total is expected to rise by an average of 4% a year.
One of the biggest opportunities for further growth is China, Dunkerley predicts. Visitors to Hawaii from China are increasing very quickly, albeit from a low base. A lot of this traffic is connecting to Hawaiian Airlines flights via code-share partner. Hawaiian already has two sales offices in China, and on April 16 will launch direct service to Beijing.
As an illustration of the potential of this market, the top 10% of income earners in China is roughly the same as the population of Japan. And there are currently about 20 flights a day between Japan and Hawaii on all carriers. “So you could extrapolate to a view where China can be every bit as large—if not larger—than Japan” in terms of inbound traffic to Hawaii, Dunkerley points out.
Hawaiian's flight to Beijing could potentially be the first of many new services to China for the carrier. But the CEO stresses that Hawaiian “is taking it one step at a time” regarding the China market, and the airline will “see how [demand] grows” before progressing.
Aside from China, Dunkerley says, growth prospects in Australasia and in parts of northeast Asia are being eyed.
In the longer term, new opportunities will be opened up by the arrival of-800s in the Hawaiian fleet. The airline has six on order, with deliveries due to begin in 2017. Because they have greater range than the A330s, they would allow Hawaiian to access destinations like Bangkok, Kuala Lumpur and Singapore.
Although its main expansion has been international, the airline has not been entirely dormant in the U.S. market. Its major move was launching a flight to New York's John F.in June 2012, which is its first East Coast destination.
The success of the Honolulu-New York route will determine Hawaiian's appetite to add more East Coast routes, says Dunkerley. He notes that any point on the East Coast is within range of the A330s—and these routes would still not be as long as some of the carrier's Asian flights.
The major population centers in the U.S. interior are “fairly unattractive,” as they tend to be fortress hubs for the larger U.S. carriers.
Another aircraft type that is destined to enter the fleet will create new opportunities on domestic routes. Hawaiian has ordered 16, which it will use for routes to Western U.S. cities. Deliveries are due to begin in 2017.
In the past, Hawaiian has avoided ordering narrowbodies to service its West Coast markets because the current generation of aircraft could not match the unit costs of widebodies on these routes. However, this has changed with the advent of next-generation narrowbodies, says Dunkerley. The new engine technology being offered will provide these aircraft with “unit operating costs that are roughly on a par with widebodies, and this gives us the opportunity to look at some smaller markets that we have previously eschewed.”
The A321s primarily will be used to introduce new direct connections between Hawaiian's West Coast destinations and points in Hawaii other than Honolulu, such as Maui, Kona, Lihu'e and possibly Hilo. They will also allow more flexibility in adjusting capacity on existing routes. Currently, if the carrier wants to increase seats on a West Coast route it can only add another twin-aisle, but in the future it could add a smaller increment by switching to two narrowbodies.
Hawaiian operates a fleet of 18717s on its inter-island network. This will be the next fleet Hawaiian will have to eventually upgrade or replace, with an average age of 11.9 years. However, Dunkerley says that the 717 is “the perfect aircraft for [this] mission,” and there is no aircraft either in production or on the drawing board that would be as suitable.
This means Hawaiian is “in no hurry to look a replacement for the 717s.” But around the end of this decade the aircraft will be at a point in its life cycle where Hawaiian will be forced to make a decision on its future.
With this timeline in mind, the carrier “anticipates sitting down with [Boeing] and with other operators of the type to see about extending [the 717's] life,” says Dunkerley. The airline is also open to any manufacturer demonstrating it has another aircraft that could produce better operating economics, but “the 717 sets a very high bar.”
The carrier is establishing a subsidiary to fly turboprop aircraft on routes too thin for the 717s, and has purchased three-500s for this purpose. However, its launch has been delayed several months by the 's inability to certify this operation due to funding constraints. The agency has recently said that it can begin certification work, and Hawaiian expects to debut turboprop services in early 2014. They will be operated under contract by Empire Airlines.
One of Hawaiian's strengths is its very simple business plan. The carrier remains focused on bringing visitors from all parts of its network to the Hawaiian islands. This gives the airline a unique model among U.S. carriers—it is not a network carrier or a point-to-point carrier, but a “destination carrier,” Dunkerley says. In all its marketing efforts, “we wrap ourselves in the flag of Hawaii.”
This focus on inbound leisure traffic means that point-to-point flying between U.S. mainland cities is unlikely to become part of the airline's business plan. “We recognize that our USP [unique selling proposition] is really tied to Hawaii, and flying between cities where we don't have that USP would represent a fairly tall leap,” says Dunkerley. “At some point there may be some kind of narrow commercial [or] operational reason why it makes sense, but that is not our strategic intent.”
Similarly, Hawaiian will not be diverting its attention to becoming a connecting hub for the points on its Pacific Rim network. Hawaii is too far south to be a good connecting point between most of Asia and North America. There are just a handful of destinations—including Taipei and New Zealand—where the carrier can realistically market connecting flights to the U.S. mainland.
So far, Hawaiian has remained outside the three global alliances. The carrier prefers instead to forge bilateral commercial relationships with a wide range of airlines—including almost all of the U.S. majors. “We don't have a religious conviction against the alliances,” says Dunkerley. Remaining independent provides the greater benefits at the moment, but “if that equation changes, then our approach would be different.”
Hawaiian has also not been caught up in the current wave of U.S. airline consolidation. “We would never rule out consolidation,” Dunkerley says. But he also stresses that it is the company's goal to run “as good a standalone business as possible,” with strong prospects as an independent carrier.
Tap the icon in the digital edition of AW&ST for a look at Hawaiian Airlines' new—and future—fleet types, or go to AviationWeek.com/hawaiian
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|Source: Hawaiian Airlines|