Welcome back to the second part of my interview with Hawaiian CEO Peter Ingram. If you missed our talk about mainland flying, you can find it here. Today, it’s time to talk about interisland flying. This is particularly interesting since Southwest recently entered the market, and there is true competition for the first time in a decade. Tomorrow, look for the international discussion.
Brett Snyder, Cranky Flier: You have not had a true strong competitor [like Southwest] in neighbor island flying for several years. I mean, Island Air dabbled a little bit, Mokulele on the fringes a little bit, but for the most part those are different markets they’re dealing with it.
Peter Ingram, CEO, Hawaiian Airlines: I joined Hawaiian in 2005 and at that point Hawaiian and Aloha had competed for something close to 60 years. And there were a couple of other airlines that appeared at various points, but it was largely Hawaiian and Aloha and similarly-sized. We have since seen Aloha shut down which was in the early part of 2008; oil prices were accelerating to record levels. We didn’t realize it at the beginning at 2008 but we were on the verge of what hopefully will be the biggest recession of any of our lifetimes. So, obviously a different time for the business.
Aloha shut down, since then we’ve expanded to serve the needs of the market. Before then we had 11 717s. We have 20 717s in our fleet today. At various points we had go! that was already competing in the market. At that point we had Mokulele which went from flying nine seat Cessna Caravans to Embraer 175s that were surplus from airlines that had run into difficulty. Subsequently Mokulele, through various ownership and control changes has, reverted back to flying Cessna Caravans. Island Air, as you mentioned, had been operating for several decades mainly with turboprops flying to smaller islands and expanded a couple of years ago. So there’s been different players coming in and out. Certainly Southwest is the largest airline to take a run at competing in the neighbor island market.
Cranky: I guess with Southwest in the market, the biggest difference compared to Hawaiian is frequency. Other than that you have the loyalty program…. It’s not necessarily Southwest-specific, but how do you adjust the business when you get new competition in these markets?
Peter: Yeah, I mean the airline industry is always competitive, so we certainly… Even if you’re operating for a period of time without a competitor on a particular route, those of us who have been around long enough know that there’s a competitor right around the corner. So we should always be thinking of that. I think one of the ways to think about it on the neighbor islands is thinking about who is on the airplane and what goes into their choice about who they travel with. And there is a real mixture of people on these airplanes.
It’s really unique because we are a chain of islands with no surface transportation options, so people travel on these 200 to 250 mile trips for a variety of reasons that if you have a mainland North America mindset you would think about those as being “well, if I was traveling for that purpose I would I would get in the car and I would drive it.” And no one’s doing that between between here and Maui.
Cranky: Not successfully
Peter: laughs Yeah, it tends to stall…
Cranky: I noticed the exchange on the earnings call about adding capacity for the state paddling championships. For things like that… you have to get there, [so Hawaiian’s capacity advantage makes a difference].
Peter: And that’s one I happen to have a certain passion around, because my kids at various points over the last decade or so have competed in that. So I’ve been on those airplanes on Saturday morning and Saturday night when it’s in Maui or Hilo. But yeah we have that, we have the Merrie Monarch Festival which is the the world’s most prestigious hula festival. For four or five days in April every year our capacity to Hilo doubles, taking the halau who are competing, taking people who are going to watch and be a part of that. So we have those sorts of things.
We have people who travel regularly for business and when you think of business travel between the islands…. If your sort of paradigm around what a business traveler is is someone with a suit jacket and a briefcase that’s not necessarily what we mean. Business travel can be construction workers who are working on a job and checking a toolbox in the morning and commuting back and forth because they’re working on a job on one of the neighbor islands. Business travel for us — and you know when we think about our corporate program — could be the hospitals in the state that are transporting passengers for services that are provided here in O’ahu. So having the frequency that allows flexibility for those regular heavy frequency travelers to have choices of when they travel is valuable.
We have people on our airplanes who are connecting from one of our flights from the mainland or internationally and they are looking for convenient connection options at the times that correspond to when their long haul flights arrive. We have people who are connecting from other airlines on an interline or codeshare basis. And so we carry about 6 million passengers a year. They’re coming from various different sources and it’s thinking about… what do we have in place to be competitive for each one of those guests?
Cranky: I went to Lana’i last week and I was talking to the people that live there. They have ‘Ohana service. They don’t have Southwest service, obviously. But even there they’re saying “oh man, Southwest, it’s great.” They brought these cheap fares to other islands; it doesn’t even impact them. But they’re still talking about this. Southwest came in with some really low fares to start. I assume that will increase over time as otherwise probably doesn’t make much sense for them to be flying these routes. How do you try and influence the narrative when people start talking like that?
I remember that happened with go! as well. And then people realized go! was running a horrible operation and wasn’t getting anyone there and instantly turned on them. I don’t imagine you’re going to see that type of thing with Southwest. So how do you influence the narrative for just maybe not the business traveler but the regular travelers just looking to go cheap?
Peter: Everyone loves a bargain. I’m a bargain shopper too. And so I like to be able to purchase the things that I appreciate at the lowest price possible, and I certainly understand that people think that way when it comes to air travel. What I do know is that, look, we’ve got a very competitive cost structure. We’ve done analysis that convinces us that we can supply capacity in the neighbor islands at a lower cost than Southwest can today. You will hear different discussion of that if you ask Southwest I’m sure, but that’s what what our analysis tells us. So we know we can be cost competitive.
We’ve got to provide good value to people. And we’ve got to provide quality service at a reasonable price. We will be competitive in our pricing. And I think when you’re the big carrier in any geography — and here in Honolulu and Hawai’i for neighbor island traffic we’re the big carrier — there’s always a little bit of this love-hate relationship that happens. My former employer was one of the the big network carriers; our headquarters was in a big hub city. People appreciated all the service they got from having that big hub carrier there.
Cranky: They just want it at half the price…
Peter: …there was a sense some time of feeling captive to that carrier. And and I think we’ve got to manage through that. I think it is helpful to remind people we are one of the largest employers here as well. I said earlier over 90 percent of our 7.300 employees are here in Hawai’i. Often people appreciate their friends and what they do. And I think that is part of reminding people that we’re part of the community; we have been an integral part of this community for 90 years. We expect to be for a very long time. But I know we have to compete. We don’t have an entitlement, just because we are based here, to the patronage of any guest. We’ve got to compete for everyone. We’ve got to deliver great service. We’ve got to deliver great value and we’ll earn business over time. Nothing is going to be given to us.
Cranky: It has to be more about playing the long game, right? Because when you see someone coming in with these really low fares it’s easy for someone in the community to say “oh great, finally we have competition and the fares are cheap now.” I believe you’ve been at least matching in time categories to make sure you’re competitive, but it’s hard to explain to people well that this isn’t really sustainable. We can’t have $39 fares on every flight on every seat or anything like that. So it’s just a long game?
Peter: A lot of times people are nostalgic about low fares from past times. People in Hawai’i remember when you could buy a coupon book with $25 tickets and you walk up at any time with a $25 coupon. In one sense that sounds great. It’s not particularly sustainable. Hawaiian was in bankruptcy twice in its 90-year history and we don’t intend to be in bankruptcy again. Aloha was in bankruptcy twice in its history and shut down in 2008. And so you know providing $25 walk up fares year-round is not sustainable.
Cranky: Yeah. So, people, take advantage while you can. Enjoy it.
Cranky: I’m curious about baggage. Southwest always loves to talk about the two bags free. Whether that’s actually free or not is always the debate, right? I mean, it’s part of the fare. On Hawaiian, if I remember right, you get one bag free if you have the credit card or elite status?
Cranky: But otherwise there’s a fee for checking bags. So this is a market that I assume…
Peter: …we charge a slightly lower fee for first and second bags on our neighbor island flights.
Cranky: Oh right, as opposed to long-haul. But is this something that you talk about to travelers that are here? Maybe this is a little bit less as the neighbor islands become more developed, but I have heard plenty of stories of people flying to Costco and bringing back the trunk of something. So I imagine you get a fair number of people who want to check bags that are doing these types of things. Do you have any concern or do you see any impact when you’re going against an airline that includes the bag in the fare?
Peter: You know the propensity for people to check bags on neighbor island flights is considerably lower than it is on long-haul flights. Long-haul flights are often traveling for a week at a time and they’re more likely to check a bag…. There are some people who do check bags on neighbor island. There’s not as much of what you were just describing of people traveling for shopping purposes. You might see some of that on places like Moloka’i and Lana’i where there isn’t as much infrastructure, but there’s a Costco in Lihu’e now. So some of that has evolved. Certainly for Southwest that’s been a differentiating message for them since they were the last major carrier to provide the first and second bag included in the price of the ticket. And we fully expected that would be something that would be part of their promotional messaging when they started flying to neighbor islands.
Cranky: But you haven’t seen anything that would cause you to change your strategy at this point?
Peter: At this point we’re comfortable with how we’re positioned. There are some things we provide included with our ticket that are not included in the Southwest ticket like an advance seat assignment on the airplane. There are some things they provide, and we think overall we’ve got a very competitive product.
See the mainland discussion here. The international discussion will follow tomorrow.