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Hawaiian Airlines faces a watershed year in 2018. The company has a new chief executive coming in. It’s forged a new long-term contract with its pilots. The bulk of a new fleet of Airbus jets is scheduled to roll in.
And the competitive landscape is shifting, with the demise of the interisland carrier Island Air and the impending arrival of Southwest Airlines, the low-cost carrier known for bringing ticket prices down in markets where it operates.
So what’s next year’s big story for Hawaii’s major airline?
“I think it’s pretty much all of the above,” said Mark Dunkerley, Hawaiian’s chief executive, who plans to step down in March. “What the team has done over the last half dozen years is we have established a kind of a business model, and we’ve got things absolutely on the right track.”
It is hard to overstate Hawaiian’s importance to Hawaii’s economy.
Some 92 percent of the company’s nearly 6,700 employees live in the state, Dunkerley said. And the company is Hawaii’s No. 1 air carrier, transporting approximately 25 percent of the nearly 10 million passengers who flew to Hawaii in 2016. Hawaiian’s investment in nearly 20 new Airbus A321neo airplanes to be delivered over the next couple of years is enormous.
“We can’t discuss individual prices of the airplanes,” Dunkerley said. “But I think what’s interesting about it is if you look at the total order book of Hawaiian Airlines over the last several years, it represents an investment in this community that exceeds any other private or public investment in our community.”
“We as a private enterprise will invest more in Hawaii’s economic well-being than the cost of the Honolulu rail, for example,” he said.
The new, smaller planes will let Hawaiian fly routes year-round that it now flies seasonally, said Peter Ingram, Hawaiian’s chief commercial officer who assumes Dunkerley’s chief executive mantle in March.
“We’ve got a couple of seasonal flights between Oakland and Los Angeles and the neighbor islands that we’re now capable of serving year round because we’ve got an airplane that’s the right size for the demand throughout the year,” Ingram said. “And there’s some stuff that we have planned for further into 2018 we haven’t announced yet.”
The company also recently announced daily non-stop service between Maui and San Diego in the new planes, starting in May.
With the new Airbus jets – 11 are scheduled for delivery next year – Hawaiian is also bringing new jobs. The company expects to add about 450 local jobs next year, a roughly 7 percent increase in its workforce, Dunkerley said.
The job growth is nothing new, Ingram said.
“Really the story is that that’s a continuation of a trend that has been going on here for well over a decade,” he said.
One of the first big challenges facing Ingram may be how to combat a new player. Southwest Airlines in October announced plans to start serving Hawaii. And although the Dallas-based carrier has been tight-lipped about its plans, one question is whether Hawaii travelers will benefit from generally lower fares — something known as the “Southwest Effect.”
According to an August 2017 paper by Alan Beckenstein of the University of Virginia’s Darden School of Business, average market fares are $45 lower when Southwest serves a market nonstop than when it doesn’t, and Southwest produces $9.1 billion annually in domestic consumer fare savings.
“A few industry writers have questioned whether the Southwest Effect still exists today, or has it been overtaken by the fares/traffic effect created by other low cost carriers,” wrote Beckenstein and his co-author, Brian M. Campbell. “The answer is clear. The Southwest Effect is alive and well.”
Still, Dunkerley and Ingram both said Southwest wouldn’t affect the Hawaii market much because Hawaii already is served by numerous airlines.
“The Southwest Effect occurs mainly in markets where prices are not competitive to begin with,” Dunkerley said. “It’s typically one carrier serving it. They charge very high prices. I think when you look at the Hawaii market, we have very competitive prices. Southwest is just going to be another airline amongst half a dozen or more that are going to enter the market.”
Southwest won’t share its plans beyond saying it plans to start flying from California some time in 2018, but Ingram said the carrier invariably will end up flying routes where competition is already stiff.
Scott McMurren, an aviation analyst and travel columnist for the Anchorage Daily News, isn’t so sure the Hawaii won’t see the Southwest Effect.
“To answer your question, Will Hawaiian reduce their fares? I promise they will,” McMurren said. “And I’ll give you $100 if they don’t.”
“I don’t think anybody thinks the current airport infrastructure is adequate to the needs of today let alone prospectively for tomorrow.” — Mark Dunkerley, chief executive, Hawaiian Airlines
As for the bankruptcy of Island Air, Dunkerley said Hawaiian seeks to serve Hawaii’s transportation needs at fares that cover its costs while staying competitive. And that isn’t likely to change much, he said. Dunkerley likened the current situation to periods when Hawaiian was competing for interisland business with carriers like defunct Aloha and Mesa Airlines’ short-lived Go!
“If you look back and see how our behavior has changed over all these different eras you’ll find there’s not been much change at all,” Dunkerley said.
Although Hawaiian’s stock has seen stellar growth over the past several years, 2017 has been something a roller coaster. Shares of Hawaiian’s parent, Hawaiian Holdings Inc., were trading at $40 on Tuesday, around 33 percent lower than its share price last December, when the stock reached an all-time high of about $60 per share. Hawaiian was trading at less than $6 a share in October 2013.
Adam Levine-Weinberg, an analyst with the Motely Fool investment news site, wrote in a recent column that Hawaiian has been punished recently because of worries about its ability to fend off competition from carriers like Southwest. But Levine-Weinberg said the stock is a good buy because of the company’s solid earnings.
Hawaiian reported net income of $191.9 million on operating revenue of just more than $2 billion for the first nine months of 2017, down from net income of $233.5 million on about $1.8 billion in revenue for the same period in 2016. Although the company increased revenue from passengers by 11 percent for the first nine months, the increase was largely offset by higher fuel and labor costs.
Hawaiian reported earnings per share of $3.59 for the first nine months of 2017 versus $4.37 last year.
As Dunkerley winds down his remarkable 15-year career at Hawaiian, which included turning Hawaiian around following a Chapter 11 bankruptcy reorganization in 2005, he said he plans to stay in touch with Hawaii. Dunkerley said he needs to care for family matters that he simply can’t attend to while running a large airline.
He said he has no regrets.
“Like anybody, you know, I wish we were faster to do all the things that were successful, and I wish we hadn’t done things that turned out not to be successful,” he said.
“But you know as a commercial enterprise we’re a for-risk enterprise, and I think we did things in a very sensible, organized, thoughtful way. Some of them didn’t work out. More did work out than didn’t. And I think that’s about as well as anybody can hope for.”
As for his future in Hawaii, Dunkerly said he plans to remain part of the community. “I don’t see myself sort of closing the door and walking away,” he said.
One area Dunkerley may stay involved with is a proposal to establish a public corporation to manage Hawaii’s airports.
“I don’t think anybody thinks the current airport infrastructure is adequate to the needs of today let alone prospectively for tomorrow,” he said. “So I don’t think that is an issue of controversy anywhere in this community at all.”
“The question really isn’t how we got here; it’s what we’re going to do about it going forward,” he added. “I think there is broad support for the notion that an Airport Corporation would be a more effective way of managing the infrastructure of the state’s airports.”
As for Ingram, he said a main priority for 2018 is to keep executing the plan that he and Dunkerley have laid out.
”I’m blessed that we’ve got a great frontline team that does terrific work every day keeping the airline on time but also making sure they serve our guests with care and hospitality that distinguishes us,” he said.