Hawaiian

The restructure of Hawaiian through Chapter 11 and its return to profitability was led by current president and CEO Mark Dunkerley, who now runs an airline operating 18 Boeing 767-300s, mainly to 10 US West Coast destinations but also to Sydney, Manila, Samoa and Tahiti, and 15 Boeing 717s operating a network of no fewer than 160 inter-island flights a day linking the Hawaiian islands. Compared to the US majors Hawaiian is a minnow, with its fleet of 33 aircraft, 3700 employees and revenues last year of US$1.1bn (A$1.7bn). But following the Aloha collapse Hawaiian now has a 75 per cent marketshare of inter-island Hawaiian traffic, while it operates more nonstop flights to the US mainland than any other carrier, and in passenger numbers is the second biggest airline flying to the state after United. Longer term it has ambitious growth plans, with new Airbus A330s and A350s on order.

“We sell Hawaii as a destination. That’s what we do, we’re not focussed on being all things to all people,” Dunkerley told Australian Aviation in a recent interview in the airline’s Honolulu offices. From there he and his executive team run one of the world’s more interesting airline businesses – a destination focussed, full-service leisure airline that also operates an extensive inter-island network that as well as serving the tourist trade also provides an important public utility for locals. Dunkerley too is perhaps not the typical airline CEO – the 45 year old Briton is a also a keen pilot who keeps and flies his own Giles 202 aerobatic aircraft from the GA section of Honolulu Airport.

“About two-thirds of our business is our long haul business,” Dunkerley explained. “The inter-island short haul business is a tough business and a lot of people think of us in terms of inter-island, but the reality is the centre of gravity of our business is long haul.”

Interestingly, Hawaiian has only been flying to the US mainland since the mid 1980s following deregulation of US domestic airline industry (using leased Lockheed TriStars that were later replaced by DC-10s). Today from Honolulu it flies daily nonstops to Los Angeles, San Francisco, Oakland, San Jose and San Diego, all in California, Seattle, Washington; Portland, Oregon; Las Vegas, Nevada and Phoenix, Arizona; while from Maui it also flies direct to Seattle and Portland.

Other markets in the US are served through codeshares with Continental and American Eagle, while American, Continental, Northwest, United and US Airways all codeshare on certain Hawaiian flights. Dunkerley says Hawaiian doesn’t serve more US cities in its own right as for markets beyond the West Coast, he has to compete with airlines able to hub passengers through major ports. “Transcontinental competition has been so severe in the United States that they’ve been selling the add-on fare (to Hawaii) for very little more than the fare to the West Coast, so we’re sitting there going ‘are we going to fly twice the distance to get an extra hundred dollars more?’,” Dunkerley observed. “It’s not feasible at the moment.”

Competing in that land of giants means that what Hawaiian lacks in scale against the US majors, it tries to make up for in product differentiation and a better understanding of its core markets. “Hawaiian is a fraction of the size of the big US airlines, and that gives us a whole bunch of competitive disadvantages chiefly associated with size, and it gives us a few advantages,” Dunkerley, a 10 year British Airways veteran said. “We don’t have a business market so we’re very heavily focused on leisure and that’s great at other times. Our home community isn’t particularly large, the (population of the) whole state of Hawaii is barely over a million inhabitants, many of our competitors are based in cities that have several millions of inhabitiants, so we don’t have a lot of local traffic to draw from, and we can’t connect people all over the world.”

“What’s really important is that we take full advantage of the few advantages that we have and they’re principally around being focused on our niche, which is Hawaii,” said Dunkerley, who argued, “we understand this marketplace better than our competitors do.”
The airline has also been quiet effective in playing to the strengths of warm and relaxed popular image of Hawaii, and while Dunkerley says the airline’s long haul market is “very price sensitive”, conversely he contends visitors to Hawaii aren’t necessarily after a “cheap” experience. “For most people coming to Hawaii on vacation, be they Australian, be they American, be they Japanese, wherever they come from their Hawaiian vacation is likely to be their second or third largest household expenditure in a year, … they deserve to be treated by the service providers in a way that recognises the kind of sacrifice they’re making to travel.”

That means Hawaiian is committed to its full service model, with long haul economy class amenities including free meals (designed by well known Maui restaurateur Bev Gannon), a generous baggage allowance of two 32kg bags/items per person, and movies and entertainment on big screens in each cabin (with ‘dig-e-player’ digital entertainment units available for hire). Hawaiian’s 767s and even the 717s are fitted with business class cabins, and the airline also operates its own frequent flyer program.

“Our focus is around value for money, we think people travelling long haul are interested in having something to eat, we think they want a range of inflight entertainment to help them occupy their time, and we think that in any service business the quality of the interaction with the employees is of the upmost importance,” Dunkerley said.

Still, the airline applies low cost carrier principles where appropriate – most interisland flights operate on a 20 minute turnaround time window – and Dunkerley says a focus on efficiency was a key driver behind the airline’s emergence from bankruptcy protection. “What we did to get through Chapter 11 wasn’t a single silver bullet, it was actually working on both our revenues and on our costs, and did at least half a dozen significant changes in our operation … to turn ourselves from making unsustainable losses to profits.”

Hawaiian entered Chapter 11 – a US legal instrument where a corporation is protected from its creditors while management, under bankruptcy court supervision, is allowed to restructure the company – in March 2003, not quite two months after Dunkerley had joined the airline. The airline emerged from Chapter 11 two years later in March 2005, during which time labour and aircraft lease agreements were negotiated, and revenues increased in part by focussing on developing internet booking levels (now at over 50 per cent, high by US ‘legacy’ carrier standards)

“What was interesting about Hawaiian, and unique, was that we paid of our creditors completely, normally creditors get something like 10 cents or 20 cents in the dollar. Our Chapter 11 was really different from everybody else’s, and when you think of the negative aspects of Chapter 11 it’s generally around somebody taking an 80 per cent or 90 per cent haircut – that was not the case in our Chapter 11.”

Chapter 11 has undoubtedly put Hawaiian on a stronger, but it has left one issue unresolved (at least at press-time) – negotiations with the airline’s 385 or so pilots over a new pay deal which are now being mediated by the US government’s National Labor Relations Board.

Their current pay deal was negotiated while the airline was in Chapter 11. Pilots say they want some the benefits giving before and during bankruptcy protection, while the airline said in a recent statement: “Hawaiian has offered was to further raise the pay of its pilots without worsening what is already a competitive disadvantage for the company.”

More happily, another outcome from its time in Chapter 11 was that the airline’s 2008 profits were boosted by a US$52.5m (approx A$74m) payout settlement from Mesa Air Group. Hawaiian had alleged that “Mesa breached a confidentiality agreement by retaining and misusing confidential and proprietary information that had been provided by Hawaiian to Mesa in 2004”. In 2004 Mesa, which operates over 180 turboprop and regional jet airliners under its own name and for US Airways Express, United Express and Delta Connection, had looked into investing or buying both Hawaiian and Aloha while they were both in Chapter 11. Mesa decided against buying into either of the Hawaiian airlines, and instead in 2006 launched its own Hawaiian inter-island airline, go!, which sparked both Hawaiian and Aloha to sue Mesa.

Go! launched inter-island services in June 2006 using five Bombardier CRJ200s, sparking an intense airfare war which Aloha later blamed as a key factor in its collapse. Today go! is the second largest Hawaiian inter-island carrier (interestingly it failed in a recent attempt to acquire and use the Aloha brand), while the latest entrant to the market is Mokulele Airlines. Mokulele until recently was a small operator flying Cessna Caravans around the Hawaiian islands, but in November 2008 began operating inter-island jet services with Embraer E-170s operated on its behalf by Republic Airways Holdings (whose three operating divisions Chautauqua, Republic Airways and Shuttle America between them fly over 200 regionals for AmericanConnection, Continental Express, Delta Connection, United Express and US Airways Express). With Mokulele experiencing financial difficulties earlier this year Republic took a 50 per cent stake in Hawaii’s newest jet carrier.

But despite the Aloha collapse, with the emergence of go! and Mokulele, Hawaiian’s Dunkerley still contends the Hawaiian inter-island market is over served.

“Capacity is down (since the Aloha collapse),” said Dunkerley of the inter-island market, “but it’s still too much. One of the reasons Aloha went bust was because there were too many seats in the market and competition eroded fairs to below the point which would cover their costs, and eventually they went bust. This is a very competitive market, we’ve had new entry in November with Mokulele, and they are trying to work their way into the market, Hawaiian is defending its territory, other competitors are defending theirs, and at least for the time being we have too many seats.”

To some degree, but on a smaller scale, Aloha’s collapse has parallels to the Ansett demise in the domestic Australian market – just as the arrival of Impulse and Virgin Blue on the Australian domestic scene led to fare war that contributed to Ansett’s demise but bolstered Qantas, the arrival of go! in Hawaii led to a fare that drove Aloha to collapse and ultimately benefitted Hawaiian the most. “Just like Ansett was really a household name in Australia, had a very loyal following from its ciustomers, it had employees that a had passion for business, so Aloha had all of those same features,” Dunkerley observed. “We competed like hell with Aloha, but to see the personal consequences of the collapse was really unfortunate.”

Some 1900 Aloha employees lost their jobs in the collapse (others continued working for Aloha Cargo, which continues to fly under new owners). Of those Hawaiian Airlines employed about 300, 50 or so joined Mokulele.

At the time of its collapse Aloha had a 40 per cent market share of inter-island traffic, and also flew from Honolulu six ports on the US West Coast using 737-800s. So, just as the Ansett failure was for Qantas, the Aloha collapse presented a huge opportunity for Hawaiian to consolidate its share of the Hawaiian inter-island market. “Obviously from a business perspective it gave rise to an opportunity for us. And I could not be more delighted in the way our employees rose to the challenge and took care of business when we really needed to.”

The aftermath of the Aloha failure, plus the collapse of ATA – which flew 11 flights a day to Honolulu from the mainland – was a tumultuous time for Hawaiian, although Dunkerley said the process was made easier by the fact that Hawaiian had developed contingency plans for Aloha falling over. “We had a binder where we had already prepared what schedules we would operate, the bones of the press releases we would put out, the rules we would for the acceptance of tickets, a list of people for me to call to know what was going on, so that was all pre-prepared.”

On the first day after the Aloha collapse Hawaiian flew 6000 extra seats on inter-island routes by flying its operational spare 767 and 717 aircraft.

“We divided what we had to do into short term and long term objectives. Our long term objective was to fill the void, to take care of Aloha’s customers in the long term. And in order to do that we had to provide enough lift to take care of their customers, we secured leases for an additional four 717s, three of which were formerly operated in Australia. We had to train our crews in order to fly these aircraft, we had to find ways of reaching out to Aloha’s loyalty base and getting in touch with them, putting in front of them some propositions that would attract them to come and fly us. We had to look at where Aloha flew and decide which of those markets where we thought opportunities lay.

“In the short term what you have to do is you’ve got to lift the customers. That seems blindingly obvious. But in a place like Hawaii when an company like Aloha, and subsequently ATA fail, during the peak booking period leading into the summer, as an institution in this state that cares about tourism to Hawaii not just from our own business perspective but as a source of economic activity for the entire community, we understood very quickly that we could not afford to have happen was to see lots and lots of people stranded, having to spend the night on the airport bench, then to see CNN showing people crying because they’re can’t to get a wedding of a loved one – the tableau there has been played out many times. So in the short term we were very focused on what we had to do to act to move everybody.

And I think the big decision that we made that day was accepting that we were going to move some people who weren’t going to pay us – just getting people to where they needed to be.”

For Hawaiian that meant squeezing greater utilisation out of its then 11 strong fleet of 717s, and even pressing its 767 operational spare into service to operate flights from Honolulu to Maui, a flight time of just 18 minutes! As the additional 717s entered service from October 2008 the 767 flights to Maui were no longer necessary.

“I’m enormously proud to say no customer of Aloha’s failed to travel on the day they were booked. Sure some people had to wait four or five hours, but if they had a booking for Tuesday they got out on a Tuesday. And then trans Pacific we probably failed to carry about 100 or 150 people on the first day out of all of their customers and by day or two or three we put on extra section, we flew a 767 twice off hours in the middle of the night we just cleared the backlog, in fact one of the flights only had about 100 customers. We wanted to be ahead of the problem and stay ahead of the problem.”

In all Hawaiian increased its inter-island flying from about 120 flights a day in March 2008 to approximately 170 a day today, while the airline added Oakland in California to its long haul network, a port that had been served by both Aloha and ATA.

“One of the reasons I’m so pleased with our operational performance in 2008 is that you (usually) have spares to provide backup, but from April for nine months we had no spares, and if something went awry we had to wear it until we could get it fixed,” Dunkerley said.

Of the four new 717s acquired, three we were ex QantasLink (and before that Jetstar and Impulse) aircraft – VH-NXB (ex VH-VQB) which became N489HA, VH-NXC (ex VH-VQC) which became N490HA, and VH-NXF (ex VH-VQA) which became N488HA. All three had been in storage at Adelaide having been withdrawn from National Jet operated QantasLink service as they approached their 10 year maintenance checks. This maintenance work was undertaken by National Jet in Adelaide with the aircraft repainted by TAE in Richmond before delivery to Honolulu (one in October, two in December) where Hawaiian refurbished there interiors before entry into service.

“National Jet did a nice job,” Charles Nardello, Hawaiian’s senior vice president of operations, told AA. “They were super people to work with, very nice, very cooperative.”

The fourth 717 Hawaiian acquired was an ex AirTran aircraft. This aircraft in fact had been built for Hawaiian but Hawaiian did not take delivery of it as the airline was restructuring under Chapter 11 at the time, and instead it was acquired by AirTran.

With now 15 in the fleet Hawaiian is particularly fond of the 717. “The 717 really does not mind going up and down 15 times a day,” said Nardello. First entering service in 2001 to replace DC-9-50s, Hawaiian’s 717s operate on average 15 inter-island sectors a day. With the very short sectors they operate and 20 minute turnarounds, some of the Hawaiian 717s have already clocked over 30,000 sectors, despite only flying 12 or 13,000 flight hours. Hawaiian doesn’t expect to need to replace the 717s until late next decade.

A 717 operational spare is kept of Honolulu in case an aircraft becomes unserviceable, and a reserve crew of pilots and flight attendants are kept on standby so schedule disruptions can be minimised. All the 717s are leased, with the three ex QantasLink aircraft seating 118 passengers (eight in a domestic first class and 110 economy), the remainder 123 (eight first and 115 economy.) All the 717s begin and end their flying days from Honolulu’s inter-island terminal (which Hawaiian previously shared with Aloha).

In contrast most of the 767s start their flying day on the US West Coast before they fly to Honolulu or Maui, and returning to the US mainland in the afternoon. These flights generally take five to six hours, and all operate under 180 minute ETOPS rules. Flights typically depart the West Coast for Hawaii about 8 or 9am, while the return flights to the mainland typically depart Hawaii late in the morning or in the early afternoon.

Most of Hawaiian’s 767s are relatively young, with 14 new 767-300ERs delivered over 2001-02, replacing ex American Airlines DC-10s. In 2006 they were supplemented by four older ex LTU 767-300s (not ERs) purchased from German operator LTU. These aircraft were refurbished with Hawaiian’s two class interior and were modified for ETOPS operations, but lack the range of the ERs(they are designated 767-300EMs). Hawaiian owns the four 767-300s and three of the -300ERs, with the remainder leased. The airline has two or three 767 seating configurations – 252, 259 or 265 passengers.

Like the 717s the Hawaiian 767s too have a local connection – Air New Zealand undertakes heavy maintenance on the Hawaiian 767s in at its Auckland base. “Air New Zealand do a terrific job for us,” Dunkerley said. A 767 headed for maintenance with Air New Zealand operates a scheduled Hawaiian flight from Honolulu to Sydney. From Sydney the aircraft flies a scheduled Air New Zealand flight to Auckland, while a 767 fresh from maintenance rejoining the Hawaiian fleet flies the reverse pattern.

In September last year Hawaiian announced it had ordered Aviation Partner Boeing blended winglets for fitment to eight 767-300ERs, with options on seven winglet kits. The 3.5m high winglets can reduce fuel consumption by up to five per cent, “resulting in savings of more than 300,000 (US) gallons (1,135,600 litres) of jet fuel annually per aircraft”, the airline said at the time. The first winglet installation will begin this September and continue through 2010.

The investment in winglets is consistent with the airline’s plans to grow its long haul flying, following Hawaiian’s January 2008 order for six Airbus A330-200s and six A350-800 XWBs (with options on six more of each after a competitive evaluation that also looked at the Boeing 787. Then in October last year Hawaiian reaffirmed its commitment to the A330 in signing a lease agreement for three additional A330-200s, allowing the airline to introduce the Airbus into service from 2010 – whereas the first two A330s it is buying direct from Airbus are not due to enter service until 2012.

“The A330 has some better characteristics than the 767 for what we do, and the 787 and A350 were actually available (to us) at the same time, largely because of the success of Boeing in selling the 787, curiously,” Dunkerley explained of the Airbus decision. “And so we found ourselves in a situation where because we could get an improvement in the short term by bringing the A330 in and we were looking at the same situation long term whether we went with Boeing or with Airbus (with the 787 or A350), the pendulum swung in Airbus’s favour.”

Dunkerley is enthusiastic about the growth potential the A330s will bring. “The A330 really has a couple of characteristics that will improve our situation. Hawaiian Airlines is the airline with highest load factor of any airline flying in the US and so going with an aeroplane that’s about 15 per cent larger is quiet helpful to us as it allows us to sell more seats. And it’s also more fuel efficient per seat, providing you can fill those seats, and again having a high load factor gives us the confidence that we can.”

He says the A330’s payload range performance will make it well suited for existing routes like Sydney and Manila, and while, “Pretty much the entire of the US continent is within existing range, but with the 330 we’ll certainly be able to look at other destinations in the continental US, as well as looking at Asian destinations further afield.

Exactly where, not surprisingly, Dunkerley won’t say. “But we are intent on expanding our network, bringing in a new international destination on a once every 18 month to two year time period, and we have list of places that we’d like to go to and expand to.”

But it’s the A350 XWB’s very long range that opens the most intriguing possibilities for new routes for Hawaiian, even if the first is not scheduled to be delivered until 2017. “We sort of titillate people with the idea that we could fly nonstop from here to Europe,” remarked Dunkerley.

But that’s on a long term horizon in an industry that is volatile in the extreme with an uncertain near term future, with airline’s worldwide in survival mode cutting capacity and pulling out of markets.

“Our capacity reduction measure is we didn’t replace Aloha in total, so that’s effectively the same thing as a capacity reduction, which has put us in good stead,” Dunkerley said of the airline’s current situation. “We’ve shelved our plans to grow in 2009, and then we’ve got the new Airbuses coming early next year and that will prove to be unbelievably clairvoyant or unbelievably stupid, frankly! You make these decisions long before the aeroplanes show up.”

For now, “It’s obviously not good times, and we’re not pretending to suggest that they are. I think people were hoping that the good times would last forever, but we have over the last few years worked pretty hard to be prepared for a downturn. We didn’t know when it would happen, we didn’t know what it would look like or how deep it would be – so in that sense we were as surprised as everybody. But I think one of the things that we did do is we worked really hard to prepare for it, and our focus on costs, our focus on efficiency, is something that didn’t started last year or this, and it didn’t end when we came out of Chapter 11, we had a kind of continual improvement philosophy around our business, and that means that every single year we need to have our costs coming down.”

Dunkerley will be hoping that stands Hawaiian in good stead to weather the current downturn, and with A330s being delivered from next year that the airline will be well placed for when economic growth returns.

Hawaiian in Australia

Hawaiian Airlines is more than just an interested observer in the current air fare war on the Australia-US market, having launched services from Honolulu to Sydney in 2004. The initial four times a week schedule was later revised to a three times a week service (HA452 departs Sydney each Wednesday, Friday and Sunday evening at 9.20pm arriving mid morning the same day; HA451 departs Honolulu for Sydney in the early afternoon on Tuesday, Thursday and Saturday), but Hawaiian Airlines’s return to Australia (it briefly operated to Sydney in the late 1980s/early 1990s with DC-8s), and a stronger Australia dollar, helped drive a resurgence in Australians travelling to Hawaii.

The Pacific island state was a very popular destination for Australians stopping over on flights to the US until the late 1980s/early 1990s arrival of the 747-400 made Australia-US nonstop flying practical. Then in 2004 Australian visitor numbers to Hawaii leapt 40 per cent, in large part spurred by Hawaiian’s re-entry to the market.

“Sydney has done well for us,” Dunkerley observed. “One of the interesting things when we entered the market one of the things we looked at was that Qantas and Air Canada had this miserable schedule, they dropped you off in Honolulu in the middle of the night and you left in the middle of the night. We thought ‘we’re on to a good thing here, we’ll move the clock by 12 hours and arrive and depart here at lunchtime, and that will be better for everybody’. And it took Qantas, what, two months to copy that! Not believing it would work it took them two months! I think we brought some benefits, not just to ourselves but more broadly to the consumers.”

Still, given current economic conditions, the airline is seeing some softening demand.

“I think when you look at Sydney we are certainly seeing the effects of the economic downturn in Australia, that’s to be expected. I think probably a little bit more so. Most of our other markets are dollars in dollars out, but in Australia you’ve had the exchange rate effect, which has had a double effect on us.”

Qantas, through Qantas itself and its Jetstar subsidiary, is Hawaiian’s biggest competitor on the Australia -Hawaii route, with today Qantas flying 767-300s Sydney to Honolulu three times a week, and Jetstar A330-200s operating Sydney-Honolulu four times a week. In response to the economic climate in early February this year the Qantas Group cut two Sydney-Honolulu flights a week, one Qantas and one Jetstar frequency.

“The market is an important one for Jetstar, however it has been subject to some changes in demand levels as a result of the fall in the Australian dollar against the US dollar over the past six-nine months and changes in demand profile from the United States as a result of the global financial crisis and its residual impact,” Jetstar spokesman Simon Westaway told Australian Aviation. “It continues to appear that currency variations can impact levels of customer demand on the route.”

Interestingly, despite Honolulu being a predominantly leisure destination, the Qantas Group strategy is to continue using both the Qantas full service and low cost Jetstar brands to serve Honolulu.

“Where there is market demand for both flying brands the Group will always look to serve such markets with both Qantas and Jetstar services,” Westaway said, although a lack of Jetstar A330 capacity may be another factor behind that decision.

Meanwhile Hawaiian Airlines has an interline agreement with Virgin Blue covering VB domestic services linking into Hawaiian’s Sydney flights, which down the track could be extended to codesharing. “The issue around codesharing has been one of systems compatibility. As and when that gets sorted I think we’d be interested.”

The two airlines also participate in each others’ frequent flyer programs.

“We’ve got a close association with Virgin Blue which we enjoy, Dunkerley said. “I think both companies have a sort of informality of approach which at a business level makes us good people to do business with, and I think we enjoy that relationship.”

Caps

Aloha cargo

Hawaiian remains commited to the full service model as a point of differentiation from its competitors. Meals and drinks are free, but for an extra US$10 economy class passengers can elect to upgrade their meal selection to a choice of three?? ‘gourmet’ offerings