Hawaiian Airlines: favourable revenue trends, but aircraft delivery delays add cost pressure


Hawaiian Airlines is maintaining a positive outlook for 2017, despite cost pressure and delays in delivery of the first Airbus A321neo aircraft to join the company's fleet. The airline is a huge proponent of the new generation narrowbody, touting the jet as the only aircraft that serves its mission of serving secondary North American markets at the right cost point. Because of the delays Hawaiian faces the undesirable situation of incurring the costs of adding the A321s to its fleet without enjoying any revenue benefit from their operation.

The delays may intensify the cost pressure Hawaiian already faces in 2017, and its current guidance does not include any effects from a potential collective bargaining agreement it could reach with its pilots. Hawaiian is not alone in facing cost pressure in 2017; nearly every US airline is bracing for non fuel unit cost challenges alongside rising oil prices.

But the unit revenue momentum Hawaiian enjoyed throughout most of 2016 is continuing into early 2017 as industry capacity to Hawaii remains rational, and its own growth is largely driven by new long haul routes introduced in late 2016. But it will be tough for Hawaiian, and the industry in general, to sustain a revenue performance that offsets the cost pressure that most US airlines, Hawaiian included, face in 2017.

Hawaiian enjoys a solid unit revenue outperformance vs the US industry

Hawaiian started countering the industry unit revenue underperformance in 2Q2016, posting a positive performance for 2Q2016 through 4Q2016 and for the full year.

Similarly to the large US airlines American, Delta, United and Southwest, Hawaiian revised its 4Q2016 unit revenue guidance from an increase ranging from 0.5% to 3.5% to a rise of 3% to 6%. The company's performance of a 6% rise hit the top end of its revised guidance.

Most of the larger US airlines attributed their better than expected 4Q2016 unit revenue results to improved close in corporate bookings, and the start of slow recovery of business yields. Hawaiian does not cater to a large corporate segment, and the company explained its better than expected domestic and cargo revenues were the drivers of its improved performance.

Hawaiian posted an 8.7% increase year-on-year in passenger unit revenue on its North American routes during 4Q2016. In the fourth quarter and throughout 2016 Hawaiian benefitted from rational industry capacity on those routes, which was close to flat during most of the year. Hawaiian has also stressed its outperformance was also driven by better revenue management and improved first class revenues.

See related report: Hawaiian Airlines: enjoying a revenue premium while preparing for crucial new network development

Hawaiian foresees capacity discipline on North America and increased supply in interisland markets

The company recorded a slight increase in interisland PRASM during 4Q2016. Hawaiian faced challenges from capacity increases by its rival Island Air on routes from Honolulu to Lihue and Kona in 2016. Breaking Hawaiian's monopoly, Island Air launched service on both of those routes during the year, building a 16% seat share on service to Kona and a 15% share of seats on service to Lihue.

Honolulu International to Kona International (seats per week, one way): 25-Jan-2016 and 23-Jan-2017

Airline Week of 25-Jan-2016 seats Week of 25-Jan-2016 percentage share Week of 23-Jan-2017 seats Week of 23-Jan-2017 percentage share
Hawaiian Airlines 14,637 seats 100% 14,166 seats (-3.22%) 84.05%
Island Air N/A N/A 2,688 seats 15.95%
Total 14,637 seats 100% 16,854 seats (15.15%) 100%

Honolulu International to Lihue (seats per week, one way, 25): Jan-2016 and 23-Jan-2017

Airline Week of 25-Jan-2016 seats Week of 25-Jan-2016 percentage share Week of 23-Jan-2017 seats Week of 23-Jan-2017 percentage share
Hawaiian Airlines 15,252 seats 100% 14,760 seats (-3.23%) 84.59%
Island Air N/A N/A 2,688 seats 15.41%
Total 15,252 seats 100% 17,448 seats (14.4%) 100%

Hawaiian expects industry capacity on its inter-island routes to grow in the low double digit range in 1H2017, which could put further pressure on its revenue performance on those routes. Hawaiian is taking measures to counter the increased interisland competition, by adding Boeing 717s to increase capacity during peak periods by 11% in 2017 while cutting off peak capacity by 3.5%.

On its Pacific long haul routes Hawaiian's passenger unit revenues increased 4% in 4Q2016, and the airline expects sequential improvement in those markets in 1Q2017.

During late 2016 Hawaiian added a second daily flight from Honolulu to Tokyo Narita, new service from Kona to Tokyo Haneda, and a second Honolulu-Haneda flight four times per week. Hawaiian chief commercial officer Peter Ingram recently concluded the new service to Tokyo was immediately accretive to international PRASM.

Hawaiian does not foresee a dramatic change in the positive trends in the current operating environment, and is forecasting a 4% to 7% increase in unit revenue for 1Q2017. However, the airline is cautioning year-on-year comparisons will get tougher as 2017 progresses.

Airbus A321neo delays cloud Hawaiian's 2017 revenue outlook

One of Hawaiian's most strategic initiatives for 2017 - the introduction of the Airbus A321neo - hit a roadblock in late 2016 when it was informed of delivery delays on the first three aircraft - by three months to 4Q2017, which means an entry into service is not likely to occur until early 2018.

Hawaiian is one of the aircraft's biggest proponents, declaring that before the A321neo's availability the unit cost penalty of downgauging from widebodies on certain routes did not make sense. The 189-seat A321neo narrowbody fills the gap between the airline's A330 widebodies and the 123-seat 717s it operates on inter-island flights.

By shedding Boeing 767s, adding the A321neos and moving A330s into a wider number of long haul markets, Hawaiian believes it will steadily improve RASM as the number of next generation narrowbodies in its fleet increases.

Hawaiian Airlines fleet summary as of 28-Jan-2017

Aircraft In Service Inactive On Order*
Total: 49 2 24
Airbus A321-200neo 0 0 17
Airbus A330-200 23 0 1
Airbus A330-800neo 0 0 6
Boeing 717-200 18 2 0
Boeing 767-300(ETOPS) 1 0 0
Boeing 767-300ER 7 0 0

But the delays will affect the timeframe of the unit revenue benefits Hawaiian aims to derive from the new aircraft. "The delays impact our projected ASM growth for the year [2017] and of course the revenues we had anticipated in the fourth quarter", Hawaiian CEO Mark Dunkerley recently said.

Aircraft delivery delays add to Hawaiian's cost pressure in 2017

Hawaiian is forecasting a 1% to 4% increase in its available seat miles for 2017, which is lower than a previous projection of 2% to 5% growth. The company expects unit costs excluding fuel during 2017 to rise in the mid single digit range, which is slightly nuanced from a previous forecast of an increase in the low to mid single digit range. Its nonfuel unit costs for 1Q2017 are expected to grow between 3% and 6%.

The adjustment for Hawaiian's full year 2017 unit cost forecast is driven in part by the delivery delays of the A321neos as Hawaiian's executives have had to accept that the airline will not attain any revenue benefit from the new aircraft, but will still incur the induction costs. The added cost pressure is on top of costs Hawaiian is incurring from IT investments and the construction of a new hangar in Honolulu.

Hawaiian is in the middle of negotiations with its pilots, who have joined other US pilot groups currently engaged in collective bargaining, stressing the need for their compensation to reflect the industry's average move to the right in the light of several years of profitability. Hawaiian has acknowledged a unit cost increase that will ensue due to the new contract, but has stressed that is not an incentive to delay reaching a new collective bargaining agreement with its pilots.

See related report: Pilots aim to join the profit party; Hawaiian Airlines in tough pilot talks as profits improve

Hawaiian faces the challenge of unit revenue keeping pace with cost growth

Key for Hawaiian and all US airlines facing cost pressure from new labour deals in 2017 is working to ensure that unit revenues grow at a faster pace than unit costs.

If Hawaiian achieves the top end of its guidance for 1Q2017 and the low end of its unit cost forecast, it can achieve that goal. But given Hawaiian's conclusion that it faces tougher unit revenue comparisons throughout 2017 due to its outperformance in 2016, and from potential cost inflation out of a new pilot agreement - Hawaiian is likely to face margin pressure in 2017.

Delta has already acknowledged its margins will compress by 100 to 200 points in 2017 due to the challenge of building up unit revenue growth at a faster rate than unit cost increases.

See related report: Delta Air Lines: cost pressure drives margin compression in 2017. Revenue generation is paramount

Despite encouraging trends, Hawaiian faces problem of striking a tough revenue cost balance

Hawaiian's strong unit revenue performance in 2017 gives it a solid footing at the start of 2017 to continue enjoying an advantage compared with other US airlines. However, the advantage starts to soften as the year progresses due to tougher year-on-year comparisons for the airline.

The airline is making investments - a new pilot agreement and new generation aircraft - to sustain its unique competitive advantage over the long term.

But in the short term, Hawaiian joins other airlines in 2017 working to crack the tough equation of sustaining unit revenue growth that outpaces marked cost inflation.

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