How Hawaiian Competes on Mainland Flying (Across the Aisle)

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.

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13 Responses to How Hawaiian Competes on Mainland Flying (Across the Aisle)

  1. Doug Swalen says:

    The merger with Continental is what turned the Guam airfare so expensive. Prior to the merger Continental Micronesia could do HNL-GUM-ROR for around $800 (we once got it for $500 which to this day I believe was an error fare generated by the international desk). This was back in 2009. It crept up a little in 2010 and when you tossed in SFO-HNL (on United), the total cost was around $1,100.

    Then the merger happened. By 2013 the fare had jumped to $1,600 (SFO-HNL-GUM-ROR) during the high season and $2,200 during the low. Now it’s averaging $2,100 in the high season. Last time I decided it was better to burn miles than pay it. I’ll probably do the same thing next year.

    The bulk of that fare is the HNL-GUM leg. And to top it off United killed meal service. For an 8 hour flight. They still serve food HNL-MAJ and that’s five hours.

    So if Hawaiian came in I would most definitely take a look at it. United for sure hasn’t done a thing to make me want to stick with them on that route.

    • Maui says:

      I wonder what he thinks of the the fact that Southwest was approached and asked by the Hawaiian Board of Tourism to do inter island flying? The Tourism Board actually came to Dallas and interviewed Southwest before making the inter island proposition. It doesn’t sound like Hawai’i has a lot of support for Hawaiian.

  2. James says:

    Would have been a good podcast

  3. To me, yeah, competition is stiffening, and yeah Hawaiian has had to compete with new entrants in the past. But, if we look at more recent new competitors, none were as strong as Southwest. This is competition on a level Hawaii hasn’t seen before, in my opinion. Especially when you factor in the inter-island network too.

    Now, honestly, I think Hawaiian will be fine. They have a ton of loyal fliers in Hawaii and seem to get a lot of love from visitors in the lower 48. But, there is a lot of animosity in Hawaii too thanks to the ridiculous fares Hawaiin charges for, say, Honolulu – Hilo, and Honolulu – Las Vegas. I mean, the last time I looked at an HNL – LAS fare, it was almost $900 RT. And I’m looking at Q2 2020, not this year.

    For me, I think Hawaiian needs to better define who it is. They tout themselves as a premium airline, yet they don’t always act like one. Yes, they are unique and do have a different vibe, but I think they’ll need to do more going forward. It’ll be interesting to see how things playout over the next few years.

  4. WrightHI says:

    I’d echo Island Miler’s comments. The loyalty HA gets from local customers seems to be the default loyalty of local people for local companies, not anything HA works to earn. Really the opposite: they emphasize that they see themselves as a tourism company, despite all the interisland business traffic they transport, and seem to be allergic to doing much to encourage people who fly them interisland to also fly them long haul. I like their crews a lot and their product fine, but I just don’t trust them on longer hauls the way I do AS.

    • Same. I fly Alaska Airlines almost exclusively when traveling between Hawaii and the Mainland. I’ve had too many 30+ minute delays with Hawaiian.

      Interestingly, I flew Southwest HNL-KOA and a vast majority of the passengers were locals. I’m sure most were there to try them out and take advantage of the fare specials, but it was interesting nonetheless.

      • CF says:

        Island – What time of day did you fly? I imagine the morning and evening flights are almost all local. I’d expect more tourists mid-day.

        • Cranky, it was the first flight out 8:15 am. I wasn’t expecting to see so many locals period, though, because Southwest is a mainland airline. But, there were even locals that have become regulars. So, if Southwest continues to charge less than Hawaiian on interisland routes, we could see a shift. Especially with Southwest expanding to cover all major airports in the not-too-distant future.

        • WrightHI says:

          I’m on morning and evening HA flights all the time and they have plenty of tourists on them. The mix skews more local than mid-day flights, but still plenty of tourists.

          • CF says:

            Oh sure, I’m sure there are tourists all day but the bulk do those mid-day runs. Meanwhile for locals doing day trips, those morning and evening flights matter most of all. I’m not surprised to see Southwest getting business. The question is what will happen when Southwest starts raising fares. But we can continue this discussion Monday when I post the interisland part of my discussion.

  5. tharanga says:

    The art of asking questions on future strategy, to a person who will not answer questions on future strategy. It was still interesting to read, but I wonder – as you ask a question like that, are you aware that it most likely won’t get a direct answer?

    • CF says:

      tharanga – I do try to ask questions that I think can get answers. In other words, I’m not going to ask what will happen to pricing tomorrow since that’s never going to get answered (by law). But I always know that some questions will get better answers than others. I can’t worry about that. I just try to ask the questions that interest me.

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