Sapporo Chitose Airport

Hawaiian Airlines endures short-term pain to secure, it hopes, successful longevity

Hawaiian Airlines faces a challenging time during 1H2013 as its efforts to diversify outside of the Hawaii-US west coast market during the last few years need more time to bear fruit. Its ambitious long-haul expansion is accompanied by the introduction of a new inter-island subsidiary and the reworking of other portions of its inter-island network.

All of the changes Hawaiian is undertaking or planning to introduce are intended to bolster efforts to preserve its profitability, which has been fairly consistent during the last few years. But in the near future the carrier is facing pressure as its new long-haul Asian markets spool up and increases in competitive capacity create pressure in its trans-Pacific service to the continental US.

While the strategy Hawaiian is adopting to persevere in the long-term is solid, the airline might be attempting to accomplish too much too fast, which in the shorter-term is creating pressure on yields and unit revenues.

Hawaiian Airlines looks to rebound from tough competitive market conditions in 2H2013

Hawaiian Airlines believes industry-wide capacity cuts and decreases in its own unprofitable supply will allow the carrier to post a stronger performance during 2H2013. This is after currency pressures, a somewhat too ambitious expansion into inter-island markets and competitive pressure on its routes to the US mainland dulled the carrier’s 4Q2012 performance.

The company recorded a USD3.4 million loss during the last three months of 2012 compared with a USD21 million profit for the year prior.

Despite the decline in profits Hawaiian recorded a 14% increase in top-line revenues to USD493 million during 4Q2012; but a 20% jump in operating expenses to USD481 million drove operating income down 64% to USD12 million.

China-Japan traffic bottoms out but faces massive challenge; Spring Airlines to launch new routes

Several political actions sparked extreme anti-Japan sentiment in Sep-2012 that saw the air traffic market between the two nations lose nine years of growth as 31%, or 175,000 monthly seats, were taken out of the market. The situation lasted longer and more profoundly than airlines initially expected as they planned for about half of the lost market to rebound by the end of 2012.

Instead, that may not occur until the middle of 2013 at the earliest. Since capacity fell in Nov-2012, the market has regained 1ppt of the lost traffic, indicating a likely bottoming out. Yet further effects have expanded beyond mainland China, slightly impacting Hong Kong-Japan traffic as well.

So it is all the more significant that China's only LCC, Spring Airlines, is planning a fairly aggressive growth campaign for mid-2013 between China and Japan, opening new cities on either end, including the under-served secondary cities that have much growth to be unlocked.

Hawaiian Airlines tops off rapid expansion with plans for a new inter-island subsidiary

Fast-growing Hawaiian Airlines has broadened its significant expansion to include the establishment of a new inter-island subsidiary to operate smaller turboprop aircraft to destinations not viable for its current inter-island workhorse the Boeing 717. The recently unveiled plans occur as Hawaiian is working to reverse negative revenue performance it experienced in its inter-island network during 1Q2012 after it launched a new hub in Maui.

As Hawaiian is crafting its new regional strategy its likely rival in some of the smaller markets Island Air is planning to upgauge its fleet to higher-capacity ATR aircraft, which could create unsustainable levels of capacity on the smaller inter-island routes. All this shuffling is against a backdrop of Hawaiian’s aggressive push into long-haul markets from its Honolulu hub into Asia, joined by new expansion into Australia and New Zealand.

LCCs to hold one-fifth domestic market share in Japan by Oct-2012 and possibly 50% by end of decade

The previously unfathomable scenario of a strong role for low-cost carriers in Japan is quickly becoming reality following government liberalisation. LCCs in Oct-2012 will account for the largest percentage yet of available seats in Japan's domestic market with a 19% share, or nearly one-fifth. Based on current capacity forecasts, CAPA expects that LCCs could account for half of all domestic seats in Japan by the end of the decade. This represents rapid growth in a market that had single digit LCC penetration rates for the last decade.

These seismic changes will not be absorbed without significant ramifications to the incumbents. All Nippon Airways (ANA) and Japan Airlines (JAL) are planning to reduce their domestic capacity, but only by a fraction. Skymark, the largest LCC in Japan, may position itself upwards as a hybrid carrier to combat its higher operating cost and also to better feed its forthcoming long-haul flights. Some of the remaining incumbents, largely high-cost but low-fare carriers, may pursue alignment or consolidation with others.

ANA – and Japan's transport system – appears oblivious to coming LCC impacts, which will be vast

All Nippon Airways (ANA) has reported a very strong financial result for the past year, despite severe headwinds in the wake of the Mar-2011 tsunami and nuclear disaster. This augurs well for the short term as new Boeing 787s arrive and international partnerships are forged with the carrier's Star Alliance partners.

But in its forward vision there appears very little to suggest management fully comprehends the likely impact the three new LCCs (as well as an expanding Skymark) will have on Japan's domestic and regional short/medium-haul markets. And, in Japan's carefully managed transport system, embracing its world class shinkansen high-speed rail and high quality toll roads, pricing instability is about to disrupt travel behaviour in ways seemingly not apparent to Tokyo's planners.

A quick look at what has happened elsewhere in the world, once truly low-cost airline operations arrive, should be enough to make any observer aware of the potential of adding three new LCCs to Japan's slumbering domestic market in the space of six months. But apparently not in Japan. As has been observed many times in this context: once this egg is scrambled, it does not go back in its shell.