Next week I’m off to the Boyd Conference in Las Vegas. I look forward to seeing some of you there. As I prepare for a whole bunch of interviews, I’ve decided this is a great time to post my lengthy interview with Hawaiian’s CEO Peter Ingram. I met him at the airline’s headquarters on August 1 while I was on O’ahu. I’ll break this into three parts. Today we talk about mainland flying (along with a small Guam tangent). Monday we’ll talk about interisland and then Tuesday, international.
Brett Snyder, Cranky Flier: Let’s start with capacity. It has flooded into the market, actually, I guess in all your markets. You have mainland with Southwest and others, then neighbor island is Southwest, and then internationally you’ve got those ANA A380s coming.
Peter Ingram, CEO, Hawaiian Airlines: North America has seen a significant amount of capacity come in really since the beginning of 2018. A lot of it predated Southwest adding capacity. I think almost all of the airlines serving Hawai’i grew last year. United which has got the most seats between U.S. mainland and Hawai’i was part of that. We were growing as we took the A321s which are a West Coast-focused airplane for our fleet. American, Delta, and Alaska had a little bit of growth. Most of that growth from that group of carriers leveled off a little bit this year — didn’t go down but has leveled off. Then we’ve seen Southwest growing starting middle of March with Oakland and San Jose added. And our expectation is a little bit more to come.
Cranky: So on the mainland side, we saw on United’s earnings that did not go well for them in this quarter — sounds like it really put quite a dent in their numbers there. Do you think this is a lag issue of just demand catching up to capacity or…
Peter: Some of it is that the market was performing very well. If you go back to 2016-2017, we had [unit revenue] growth that exceeded what other airlines were producing and a big part of that was driven by our North America performance. So it was a strong market. Strong markets tend to attract more capacity and that’s what happened. The numbers have come down a little bit… doesn’t mean that all of a sudden everyone’s losing money. We reported lower margins in the last few quarters relative to where we were. We’re still profitable and performing in line with the industry, and frankly we’re not happy about reporting declining margins, but we’re still profitable and North America is obviously a big component of that. It’s about half our revenue.
Cranky: And the A321neos seemed to be living up to the hopes and dreams here.
Peter: Yeah. The neo really does a number of important things for us. One it’s incredibly fuel efficient and you heard I had some of the stats on that. I think our capacity was up 2.6 percent year over year this quarter. Our fuel consumption was down 1.6 to 1.7 percent.
Cranky: And that was systemwide?
Peter: Yeah, that’s systemwide but it is it is really driven by adding capacity with the neo and reducing 767 capacity year over year.
Cranky: That’s an incredible number. I guess the biggest problem is just getting Airbus to give you the airplanes on time.
Peter: Yeah. Well, that’s been that’s been a little bit of a challenge. We’re getting towards the end of our firm orders. We’ve got 13 of 18 delivered now.
The other thing that that airplane does for us is previously all our long-haul flying was operated by widebody equipment. We had the A330 that are configured with 278 seats, our 767s had a range of different configurations but they averaged about 260. We’ve got 189 seats on the neo. Not having connecting opportunities of the same scale that our competitors have on the mainland, that limited some of the O&Ds [origins and destinations] we could serve. So now with a smaller-gauge airplane it’s more economic for us to serve LA – Lihu’e year-round as opposed to just seasonally, LA – Kona year-round, Oakland – Lihu’e year-round, and we’ve also built up our Maui flying. A few years ago we had three flights from Maui to the US mainland. Today we’re operating 8 daily services to the US mainland. [Ed Note: This interview happened before Hawaiian announced the reintroduction of Maui to Las Vegas service.] So most of our western U.S. gateways now have a Maui option as well as a Honolulu option.
Cranky: With that airplane, a lot of what you’ve done is right-sizing capacity, getting a better cost airplane on routes. But the big outlier here in that strategy was the Long Beach startup which is a new station that just couldn’t have been served with a widebody, or I assume profitably. Are there more of those in the pipeline? Because we haven’t seen any other new station startups; it’s been mostly either replacing capacity or connecting neighbor islands to mainland cities that you already serve right?
Peter: We haven’t certainly announced any other new cities with the neo besides Long Beach. The other new city we’ve launched in the last year was Boston [which] obviously because of the range is a widebody. There are things we’re looking at. There’s not an endless list of them as you look at what O&Ds are that aren’t served, and Long Beach was a little difficult. Long Beach wouldn’t have shown up on that that O&D list because it wasn’t connecting. There are a few opportunities but it’s not dozens.
Cranky: Are there opportunities going the other way? I mean is Guam too far? Are there other things you can do around the Pacific with that airplane?
Peter: There are a couple of things we’re looking at. Guam I think is is likely to be outside the range for that but there are some other things as you look so that may be possible.
Cranky: Guam is one that I find really interesting. I know United’s in there but it seems like a market that might be something that would work for you. Is that just not really on the radar or is there a reason that you guys aren’t in there?
Peter: It’s something we’ve looked at from time to time. A lot of the the inbound lift into Guam is coming from Asia. You can reach it from Japan and Korea with a single-aisle aircraft and there’s a fair amount of low-cost carrier capacity into Guam now. We don’t have any immediate plans in there, but we’re certainly aware of of islands in the Pacific… being based on an island in the Pacific.
Cranky: Yeah I mean fares are pretty high on United and they’re flying 777s.
Peter: We hear that from people in the community that have business interests in Guam and have to travel there. There is certainly some interest in that.
Cranky: It’s just a matter of if the market is big enough I guess. But yeah.
Cranky: OK, so back to mainland. If we look at a market like Oakland-Honolulu, Southwest is up there, and I’m just taking that as an example, but you know you’re going to see Southwest in more of these. Alaska has been there for awhile and you guys have been there but are also ramping up, especially connecting neighbor islands. Considering the competition increasing capacity, how do you look at that compared to a San Francisco or an LA?
Peter: Oakland and San Francisco have a lot of overlap in their catchment area. Depending on where you are in San Francisco, it may be more convenient for you to get to the Oakland Airport than San Francisco Airport. I think as services build up in Oakland people are becoming increasingly aware of that. The reflex to go and look just for San Francisco changes once there’s more options out of Oakland. As we think of all those airports, we feel like we are very well-positioned to be competitive.
We’ve got a very good cost structure. We are the the only airline that can deliver authentic Hawaiian hospitality, which is a phrase I use a lot. And it’s not just a slogan. It is a function of 90 percent of our employees living here in Hawai’i, understanding that culture of hospitality and caring for guests. Leisure is not a byproduct that comes from having a business-oriented network. Leisure is the core purpose of what we’re doing and so we configure the airplanes with that in mind. We design products with that in mind. So I think we feel — and it’s reflected in the fact that we look at the DOT stats every quarter when they come out — we are able to generate a revenue premium that is a function of all of those things. That’s a function of good service. It’s a function of how the airplane is configured. It’s a function of how we sell tickets. So if you can deliver a revenue premium and you can maintain a competitive cost structure and you’ve got the fleet that is ideal for the market, we think that positions us well to compete in every environment. And over time as capacity settles out we think that means we should be able to operate profitably and continue to grow.
Cranky: When Southwest started, it just threw in low fares to fill the planes but then summer, I assume it’s almost like a cease fire because everyone can fill planes in the summer.
Peter: Well, I think as far as North America went, there were some very very low promotional fares when Southwest launched service that were available for a matter of hours. And you know I don’t have insight into what amount of inventory was sold on that. All we know was that the fares were there and the lowest of those fares were gone very quickly. We really haven’t seen the sort of ambient pricing environment change from when Southwest launched in March to today relative to what it was starting in the third quarter, fourth quarter of last year and continuing into the first quarter where fares were already down a little bit year over year on the basis of some of the capacity that had come into the market.
Cranky: I guess we’ll see what their ultimate plans are. It’s not a huge amount of capacity yet, but it sounds like they’re about to start adding more again soon. [Ed note: This was just before Southwest announced Lihu’e and Hilo service.]
Peter: But you know, one of the things I remind people is this is not the first time that we’ve been in a spot where people say “oh my goodness how is how is Hawaiian going to compete with this new airline?” We heard it when Virgin America started flying. “Oh my goodness. How is Hawaiian going to compete with Virgin America? Oh my goodness. How is Hawaiian going to compete with Allegiant?” And the fact is all these markets from the Western US are very competitive today. I’m not sure there are more carriers flying a single O&D than there are in LA-Honolulu. American, Delta, United, and Alaska are all tough competitors too and we’ve been able to compete with them and we expect to be able to compete with Southwest.
Cranky: I don’t know if people are still saying “how can Hawaiian compete?” I guess they do say it, but it seems like you’ve built the airline in a way that it’s not really a question of how can you compete. You can compete. It’s more how do you decide to compete and what’s the best way for Hawaiian to deal with these types of things? Because I look at a market like LA… I mean even Sun Country’s there. It’s just madness.
Peter: And Allegiant was there before.
Cranky: Right. But when you start looking at some of these like Oakland, you get people in San Francisco starting to look more at Oakland. A lot of these more secondary cities it seems like they’re getting a lot more capacity than they had before. So it’s just a matter of how does it settle out and who decides how they’re going to do that. So it sounds like for now for you guys pricing hasn’t changed all that much compared to what you saw. You’re continuing to execute on the plan and you haven’t had to make any adjustments, capacity-related adjustments based on what’s happening competitively.
Peter: That’s our approach. You know we have not exited any markets in North America and are not planning to exit any markets anytime soon.
Come back Monday for our discussion about interisland flying now that Southwest has entered the market.