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ANALYSIS: JetBlue and Hawaiian Airlines Report Strong Earnings

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ANALYSIS: JetBlue and Hawaiian Airlines Report Strong Earnings

ANALYSIS: JetBlue and Hawaiian Airlines Report Strong Earnings
July 27
14:01 2017

JetBlue Airways and Hawaiian Airlines both reported net profits for the second quarter (Q2) of 2017 on Tuesday, with JetBlue generating a net profit of $211 million and Hawaiian reporting a net profit of $80.4 million for the quarter. Both carriers increased their net and operational profitability year-over-year relative to Q4 2016 and generated operating margins of better than 19% in what is usually the second strongest financial quarter of the year for US airlines. Here were our key takeaways from both carrier’s earnings conference calls.

Hawaiian’s A321neo Order Has The Potential To Transform The Airline

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Alongside its announcement of record profits for Q2, Hawaiian also announced the first three routes planned with its Airbus A321neo. In early 2018, Hawaiian will launch A321neo service on the nonstop Oakland to Kahului (Maui) flight. Throughout the rest of the spring, the carrier will launch the A321neo on Portland-Maui, Oakland-Lihue (Kauai), and Los Angeles-Kona. On Oakland – Lihue/Maui and LA – Kona, the introduction of the A321neo will allow the route to switch over to year round service from the current seasonal widebody service (mix of A330 and 767).

Despite initial delivery delays, Hawaiian will take delivery of its first two A321neos in October and November 2017 respectively in advance of entry into service (EIS) in January 2018. Hawaiian has 18 A321neos on order in all, and Hawaiian Chief Commercial Officer Peter Ingram laid out the carrier’s plans for the type in more detail.

“As we’ve outlined previously, the A321neos will provide us with the combination of growth and replacement, enabling the retirement of the remainder of our 767 fleet by the end of 2018 and capitalizing on our industry-leading unit revenue performance between the Western U.S. and Hawaii. The smaller gauge and next generation economics of these aircraft, make them ideal for some of the routes we fly with widebodies today and other smaller O&Ds that we don’t currently have in the network.”

None of the first four routes are truly new, as Portland-Maui is a resumption of previously operated service. But these routes do offer a clue about Hawaiian’s intentions with the A321neo. For too long dating back prior to the late 2000s recession, Hawaiian has ceded share to the mainland US at basically every US airport save for Honolulu due to Alaska Airlines’ rapid expansion of point-to-point flying from the West Coast to Hawaii.

Even in Honolulu, destinations like Anchorage and Bellingham represented markets that Hawaiian simply couldn’t serve with its existing fleet of wide body Boeing 767-300ERs and Airbus A330-200s. But now Hawaiian has the ability to serve these markets and even new ones like Vancouver and Calgary. This will transform the US – Hawaii market, and there is a battle brewing between a resurgent United, Alaska, and Hawaiian over the next 18-21 months.

Hawaiian’s Already Precarious Asian Network Is About To See A Surge Of Competition

During the call, Hawaiian CEO Mark Dunkerley and Ingram were asked about the influx of new capacity into Honolulu from long haul low-cost operators like Jin Air in South Korea (nonstop to Seoul), AirAsia X (Kuala Lumpur via Osaka), and recently-announced Scoot (Singapore via Osaka). Despite this massive influx of capacity, particularly on a trunk route to Japan (Osaka), Ingram remains unconvinced:

Yes, sure. On our radar, we pay attention to all our competitors. I would say that the success of the long haul ULCC business model is still very much open to question. And we think that generally there is a market preference for a more premium experience than what is provided by those. But it does put extra capacity into the market, and that’s the main impact we see is that there is more capacity chasing at a given level of demand when we’ve seen some of the entries.

Meanwhile, Dunkerley also poured cold water on the competitive threat:

“I would just also share that the way in which people buy tickets in many of these countries is dramatically different from the way in which people in the United States buy tickets. And so, Peter is right that the factors are in the market, we do pay attention to them, but to a large degree, they don’t fish in the same pond as we do just by dent of how they distribute that product.”

We are not convinced by the dismissiveness of these executives.

Hawaii is principally a leisure destination, albeit an upscale one, and such markets tend to have large volumes of price sensitive travelers. Particularly from Asia (a price sensitive buying culture in the first place), there is the very real possibility that Hawaiian will lose substantial volume in Japan and Korea to these carriers. Premium cabin travelers are probably safe for Hawaiian on routes with flatbeds, but the not bad premium economy on these Scoot and AirAsia X planes may also hit Extra Comfort passenger volume given likely pricing parity. We will be monitoring all of the ULCC capacity in Hawaii very closely.

New York JFK May Be Due For A Resurgence Of JetBlue Growth Early In The Next Decade.

An overhead view of the check-in area of JetBlue's new T5 terminal.JetBlue Airways officially opened its new terminal, known as "T5" on Wednesday October 22, 2008. The Terminal whose construction began in December 2005 and cost $743 million dollars more than doubles the airlines' passenger capacity from their original terminal 6, to twenty million customers annually. T5 features 22 food and beverage concsssions and 25 retail stores.

An overhead view of the check-in area of JetBlue’s T5 terminal.

Over the last 3-4 years, JetBlue has largely shifted away from growth at its home base and largest hub New York JFK in favor of growth at Boston (where it is targeting 200 daily departures) and Fort Lauderdale (where it is targeting 140). The primary driver of this, of course, has been slot restrictions at JFK, along with JetBlue’s desire to diversify itself away from the New York market. But JetBlue appears to be betting on having the ability to grow further in the New York market. JetBlue CEO Robin Hayes explained:

“In our Hometown of New York, we’re working to improve the airport experience for our customers and the economics for our shareholders. One example is the request for qualifications we released last week to developers. Under our lease with the Port Authority, we have the exclusive rights through to the mid-2020s to develop the former T6 site. Aligned with Governor Cuomo’s vision plan for JFK, we plan to lead the development of the Terminal 6 site and possibly Terminal 7.”

Stephen Priest also added:

“In terms of the existing slot portfolio, you’re correct. The T5 and T5i that we expanded relatively recently provides great infrastructure for our customers and we have enough gate space at the moment. The RFQ, if you like, or the Request for Qualifications which we sent out last week really provides, I believe, a great opportunity to secure our future in New York. New York, as you know, is our largest focus city and we see this opportunity as great for our customers, company, and shareholders. The key reason we’re going forward with this is that we have exclusive rights to develop the T6 space. It’s a valuable prime real estate, as you know, in an incredibly congested airport. So, it’s very early days in the process, and this is really about securing our long-term future and doing it in a way that’s very accretive and doing in partnership with other organizations.”

The talk of Terminal 6 and Terminal 7 is interesting given that JetBlue doesn’t have any slots with which to expand. So JetBlue is essentially betting on NextGen opening up more slots at JFK (the current volume is more than handled by Terminal 5). That is far from a home run in the current government environment, especially given the uncertainty of the 2018 mid term elections and the potential for a split government.

JetBlue’s Operational Challenges In The Northeast Are Coming To A Head

Through no fault of its own, JetBlue faces pretty substantial operational issues at its core Northeastern hubs, most notably at New York JFK, and also at Boston. Both airports had challenges with runway closures earlier this year, and while Boston has normalized some since the end of June, New York JFK is still in bad shape. As a result, the volume Air Traffic Control programs has gone up, subjecting passengers to a ton of delays. Robin Hayes explains:

“Look, everyone knows that ATC programs have always been a way of life in the Northeast. We went into this year with a great deal of planning, because we had major runway closures through to June in both Boston and JFK, and we have had some experience in that two years ago when one of the JFK runways was closed. I think that what we’ve experienced though is a significant increase in the number of ATC programs. So, as to kind of give you a sense of the magnitude of it, if we go back from January through to the middle of July, so about a week ago, when we pulled all this data together, then we have seen a 75% increase in programs in JFK and a 130% increase in programs in Boston.

Now, when we got the runway back in Boston, Boston has kind of returned to a sort of a fairly normal operating structure, but we continue to see elevated Air Traffic Control programs at JFK. So, again, then take the sort of middle of June to middle of July, a more sort of recent dataset, then we have seen GDP programs in JFK on nearly two days out of every three, and that compares to last year in the same period, where we saw GDP programs on average just over one day in nearly three. So, we’ve nearly seen a doubling of GDP programs, and we’ve also seen those programs start earlier in the day and last for longer. And I think the operating challenge that that gives us, Duane, is that, if we then end up in a program where we’re cancelling flights and that we’re running three to four hours late, that also has a knock-on effect into the next morning, because then you come up against scheduling, crew, and maintenance block.

So, that’s the kind of the size of the challenge that we faced. And so, in terms of what we’ve done about it, we did make a very unusual decision, I think, to reduce some capacity into Q3, at very short notice, to bring some relief to allow our recovery times to improve. We’ve also focusing on what we can control. So, a lot of work going on in terms of our own JetBlue on-time performance program, which we’ve had going since last November. And we continue to partner with partners like the FAA, in terms of what we can do in the short-term to better understand why these programs are being put in place and what we can do to mitigate them.

And then in the longer term, we are the biggest – everyone – there’s a lot of big advocates for ATC reform. We are extremely passionate about it, because I think that – if you think about where we fly in our geography, it’s extremely critical that we improve the efficiency of the system. And also, one of our – Jeff Martin sits on the NextGen NAC, and we are very active at the NAC in working some of the Northeast corridors and some of the Northeast routes, in terms of getting more efficient approaches into some of these large airports. So, apologies for the long answer, because I figured that it’ll come up in the call and it may come up several times. I kind of wanted to take you behind that a little bit.”

 

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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