Cloudy Skies

For Hawaiian Airlines and the rest of the airline industry, the future (and even the present) remains uncertain

January, 2003

No industry was hit harder by the Sept. 11 terrorist attacks than the airline industry. Bar none. In 2001, the industry lost a record $7.7 billion dollars, according to the Air Transport Association (ATA). In 2002, the ATA expects that that record will be broken with an estimated $9 billion dollars in losses. Airlines aren’t expected to return to profitability until 2004 at the very earliest. And that is assuming that the nation’s economy recovers and the rest of the world remains stable both economically and politically. They are all very big assumptions.

Arguably, the world of Hawaii interisland carriers has been even more volatile than the industry as a whole. Hawaiian and Aloha Airlines’ failed merger in 2002 and significant fare and schedule re-structuring accompanied major layoffs at both airlines.

“The environment is so dynamic and uncertain that to guess long-term or even short-term outcomes is very questionable,” says John Adams, chairman, president and chief executive officer of Hawaiian Airlines. “The uncertainty and unpredictability that existed in 2002 in the international and domestic markets will continue for the indefinite future and through most of 2003. We will assume that the economy and travel will not be robust, and we will operate our airline accordingly.”

For Adams that means expecting revenues to be similar to what he has seen in the past 12 months. Hawaiian Holdings Inc. (AMEX and PCX: HA), parent company of Hawaiian Airlines Inc., last November reported net income of $6.4 million, down 43 percent from 2001 numbers. In addition, total operating revenues for the quarter were up $7.7 million or 4.5 percent to $179.2 million.

Hawaiian, like airline companies across the globe, has had to reduce prices while operating expense, especially fuel costs, have slowly rose. The result is pressure to increase load factors. However, for the industry as a whole, on a typical flight of a 150-seat aircraft, only 108 seats are filled; 122 must be filled to break even.

However, as precarious as the future is shaping up to be, it may be preferable to the local industry’s immediate past.

“Hawaiian and Aloha are still working on reducing the capacity, personnel and frequency of flights according to the government regulations. But financially, they should do better in 2003,” says BJ Wie, professor at the University of Hawaii’s School of Travel Industry Management. “I think interisland travel demands in 2003 will not be that bright. At best it will be similar to 2002. But the two airlines will survive because of better efficiency.”

Wie says that even in the off chance that one of the airlines does fail there should be another airline or a startup airline company to quickly take its place. Demand for the inter-island business is just too great, says Wie. According to the ATA, four of Hawaii’s routes are among the 25 busiest markets in the country (see chart). Honolulu to Kahului ranks No. 6.

Passengers (Thousands)**

1 New York Fort Lauderdale 3,183
2 New York Orlando 2,808
3 New York Los Angeles 2,652
4 New York Chicago 2,466
5 New York Atlanta 2,287
6 Honolulu Kahului, Maui 2,120
7 New York Boston 1,192
8 Dallas/Fort Worth Houston 1,789
9 New York San Francisco 1,781
10 New York Washington, D.C. 1,725
11 Los Angeles Las Vegas 1,632
12 New York Las Vegas 1,536
13 Honolulu Lihue, Kauai 1,528
14 New York West Palm Beach 1,495
15 Los Angeles Chicago 1,461
16 Los Angeles Oakland 1,436
17 New York San Juan 1,370
18 New York Miami 1,360
19 Chicago Las Vegas 1,349
20 New York Tampa 1,304
21 Honolulu Kona, Hawaii 1,218
22 Chicago Orlando 1,194
23 New York Dallas/Fort Worth 1,183
24 Chicago Atlanta 1,163
25 Honolulu Hilo, Hawaii 1,132

However, although these routes may be busy, they haven’t been profitable in years so Adams will continue to take an aggressive approach. “We are really putting an emphasis on cost control,” he says. “We are currently discussing productivity items with employee representatives and equipment issues with aircraft leasers. We are not looking to reduce wages provided we can get increased productivity. If these discussions are successful, we can avoid such cuts. If they’re not, then further cuts in service and staff are likely.”

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David K. Choo