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Hawaiian Airlines drops weak long-haul routes, returning to more familiar North American markets

21st March, 2014

Hawaiian Airlines has opted to axe two long-haul markets – Fukuoka and Taipei – in favour of adding service to the US mainland, an area where the carrier has recently seen strength as Hawaiian’s long-haul markets have languished throughout most of the last year.

Of course the danger in pumping capacity back into North American routes is reaching a state of oversupply. That was the scenario not too long ago before capacity between Hawaii and the US mainland reached equilibrium, and carriers once again began to record positive results in those markets.

Hawaiian is cutting two of its international routes as it has steadily fielded questions over when its long-haul markets will turn the corner to profitability. Given the continuing pressure on Japan’s currency and the AUD depreciation against the USD, it could be quite some time before Hawaiian’s long-haul strategy reaches fruition. 

Warnings of weakness in Fukuoka were issued in mid-2013

In some respects Hawaiian’s doubling back to the US mainland is not surprising given unit revenues on its North American routes grew 13% year-on-year during 4Q2013 compared with a 10.6% drop on long-haul routes to Asia and Australia.

See related report: Hawaiian Airlines' long-haul routes deliver weak results, challenging rapid expansion strategy

Fukuoka and Taipei are two of 10 long-haul routes that Hawaiian has introduced since 2010. Its long-haul push during the past four years has largely centred on Japan, where Hawaiian serves Fukuoka, Tokyo Haneda, Osaka, Sapporo and Sendai.

Around mid-2013 Hawaiian started warning that its service from Honolulu to Fukuoka, which was launched in Apr-2012, was ramping up slower than the carrier expected. Previously, Hawaiian has stated that the typical spool-up period for long-haul markets is upwards of three years. But during the time it introduced service to Fukuoka, the yen went on a free-fall, which affected point-of-sale demand in Japan. Hawaiian was doubly hit with attempting to build its brand-awareness as demand likely became soft due to the yen’s devaluation.

Hawaiian also introduced service from Honolulu to Sapporo during 2012, but it faces no competition on the route, so even as it continues to battle currency headwinds, its monopoly status does give it small advantage in attempting to make the market viable.

Delta is Hawaiian’s competitor on service between Honolulu and Fukuoka, and based on CAPA and OAG data (for the week of 17-Mar-2014). Delta represents a 46% share of the roughly 3,400 one-way seats deployed in the market. Hawaiian has a 54% share.

Honolulu International to Fukuoka (seats per week, one way): 18-Mar-2013 and 17-Mar-2014

Are any of Hawaiian Airlines' other Japanese markets vulnerable?

Hawaiian is also the only operator on service between Honolulu and Sendai, a route launched in 2013. So its calculation in determining if that service is meeting internal targets is likely different from its service to Osaka, which is served by Delta and Japan Airlines. With JAL’s brand recognition in point of sale from Osaka and Delta’s overall larger brand awareness, it will be interesting how long Osaka will remain in Hawaiian’s network.

Given Delta’s sheer scale, it can likely absorb a negative performance in Osaka more adeptly than Hawaiian, which has negative free cash flow of USD300 million to USD310 million in 2013, and doesn’t expect positive results until 2015.

Honolulu-Tokyo is also a crowded market, served by JAL, All Nippon Airways and Hawaiian. But Hawaiian secured coveted slots at Haneda for its service to Tokyo, and so that service will persevere. Based on Hawaiian’s own guidance of a three-year spool-up period for long-haul routes to become viable, Tokyo should be making a positive revenue contribution to Hawaiian’s network. Previously, carrier CEO Mark Dunkerley described Hawaiian’s Haneda flights as a commercial success.

Hawaiian Airlines opts to add capacity in Seoul as Taipei ends less than a year after launch

Hawaiian is cutting service from Honolulu to Taipei after less than a year. It launched flights in Jul-2013 and is eliminating the route in Apr-2014. Just prior to Hawaiian’s launch in Jul-2013, China Airlines introduced its own service from Honolulu to Taipei in Jun-2013, and subsequently China Airlines and Hawaiian entered into a codesharing pact covering certain day of week services offered by each carrier on the route and other points beyond Honolulu and Taipei in each airline’s respective network.

The official reason for Hawaiian’s departure from the market was that demand it expected from Taiwan’s inclusion in the US visa waiver programme did not materialise. The carrier also declared there was insufficient awareness of Hawaii among residents of Taiwan for the route to be successful. Hawaiian is now opting to place the Airbus A330s widebody used on service to Taipei on its flights to Seoul (launched in 2011), which are presently operated daily with Boeing 767-300 widebody aircraft.

Hawaiian’s move to upgauge and bolster capacity on service to Seoul runs counter to comments the carrier made in late 2013 indicating that it would take the Seoul market longer than three years to reach maturity.

In mid-2012, Asiana matched Hawaiian’s daily service between Honolulu and Seoul, which increased the overall supply in the market. But Hawaiian expected industry capacity between Honolulu and Seoul to fall 10% year-on-year in 4Q2013.

Based on CAPA and OAG data for the week of 17-Mar-2014, Korean Air’s one-way seats in the market dropped from 4,025 to 2,394, a 40% decrease year-on-year. Asiana’s capacity measured in one-way weekly seats fell from 2,030 to 1,450, a 29% decline.

Hawaiian’s upgauging to A330s on Honolulu to Seoul adds about 30 one-way seats on the route daily, so a favourable interpretation is that Hawaiian now sees an opportunity to accelerate Seoul’s maturity. Previously, the carrier has declared South Korea’s growing middle class creates opportunities for the carrier.

Honolulu International to Seoul Incheon International  (seats per week, one way): 19-Sep-2011 to 7-Sep-2014

Hawaiian has some established brand awareness in Seoul since entering the market in 2011, so its seems as if its calculus was the gamble on dedicating resources and spending to establish a strong presence in Taipei was ultimately too risky.

See related report: Hawaiian preps for a new phase of slower growth after rapid international expansion

Will Hawaiian’s mainland additions trigger a state of oversupply?

As it slightly shrinks its long-haul network, Hawaiian is adding capacity to the US mainland through the re-introduction of flights from Honolulu to San Jose, adding daily year-round service from its Maui hub to Los Angeles and upgauging Honolulu-Oakland flights from 767s to A330s. It is also launching nonstop seasonal flights from Los Angeles and Oakland to Lihue and Kona.

Hawaiian is re-igniting competition with Alaska Airlines on the flights to Hawaii, while becoming the fourth carrier on service from Maui (Kahului airport) to Los Angeles, joining American, Delta and United on the pairing. All three of those carriers also serve Los Angeles-Kona and Los Angeles-Lihue. Alaska also offers flights from Oakland to Lihue and Kona.

Los Angeles International to Kahului Airport (seats per week, one way): 18-Mar-2013 and 17-Mar-2014

Los Angeles International to Kona Keahole (seats per week, one way): 19-Sep-2011 to 7-Sep-2014

Los Angeles International to Lihue (seats per week, one way): 18-Mar-2013 and 17-Mar-2014

Hawaiian plans to operate 767 widebodies on the reinstated service to San Jose, which will add roughly 1,800 one-way seats to the market (based on a single daily flight seven days per week). Presently, Alaska operates approximately 1,100 seats on the pairing. So Hawaiian is adding a raft of capacity into a market that it cut in Jan-2014.

The planned capacity increases by Hawaiian from the islands to the mainland occur shortly after the carrier emphasised a restoration of rational capacity levels in those markets.

Alaska made adjustments in 2013 after its unit revenues on routes to Hawaii fell by 6% in 1Q2013. Hawaiian’s capacity in those markets grew slightly less than 1% in 3Q2013. Previously, Hawaiian has estimated that industry capacity from Hawaii to North America would fall 3% in 4Q2013 and 1% in 1Q2013.

For Hawaiian Airlines, adding service back to the US mainland is only a temporary fix

Even as Hawaiian is introducing capacity back into US mainland markets during the high season, its moves are not guaranteed to bear fruit. While the carrier had little choice but to redeploy supply back to mainland domestic routes, it is not a viable option over the long term if other long-haul markets fall by the wayside.

Hawaiian appears to be downplaying the two cuts in its long-haul network, but scrutiny continues to grow as to whether the carrier can properly absorb the rapid international growth it instituted between 2010 and 2013. It is slowing its capacity growth during 2014 to single digits after 18% average capacity growth for 2011 to 2013.

As it shifts capacity into markets where it can possibly turn profits faster than on long-haul routes, the stakes are now somewhat higher for Hawaiian to prove that its rationale for rapid international expansion remains sound. With currency headwinds stretching out for the foreseeable future, Hawaiian’s challenges within its long-haul network are not likely to blow away quickly.

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