MIAMI — Hawaiian Airlines announced new nonstop service between San Francisco and Maui last week, marking the latest in a series of route additions from secondary Hawaiian cities for the Honolulu-based niche carrier. Hawaiian will begin serving the route four times per week on November 20, 2014, up-gauging frequency to daily on December 17, 2014. The route will be served by Hawaiian’s Airbus A330-200 seating 294 passengers ( 18J / 276Y ).
With the addition of San Francisco, Hawaiian will serve ten destinations from Maui, including service by its regional subsidiary Ohana by Hawaiian. The table below shows Hawaiian’s destinations and frequencies from Maui for the month of December:
|Destination||Weekly Frequency||Destination||Weekly Frequency|
|Seattle – Tacoma||7|
*Ohana schedules are only loaded through the end of the summer. It is unclear whether they will
For the past four years, Hawaiian has pivoted towards Asia, growing services from its largest hub at Honolulu in an attempt to redirect the company’s mission. The company reasoned that increasing affluence and economic growth in secondary Asian markets would combine with increased market share in Japan and give Hawaiian a viable Pacific franchise to pair with its already profitable mainland operation and resurgent inter-island.
Viewed over a long run perspective, Hawaiian’s calculus remains well founded. The underlying economic fundamentals that underpin the rise in origin and destination (O&D) traffic to and from Asia in Hawaii remain, and economic reform in Japan might restore growth in a market that has been stagnant for several years. Unfortunately, Hawaiian’s expansion was ill-timed.
Right as Hawaiian started to pour capacity into Asia, economies around the region slowed. Even though the Japanese economy bucked that trend under the economic plan of premier Shinzo Abe, the aggressive devaluation of the Yen limited Hawaiian’s pricing power and profitability in Japan.
The intersection of these two factors meant that even as Hawaiian remained profitable, investors and analysts grew increasingly skeptical of the company’s route network changes. Growth in passenger revenue per available seat mile (PRASM) and profitability lagged behind peer airlines, as the routes suffered through an unusually long spool-up process.
Meanwhile, Hawiian’s domestic business was booming. The collapse of Aloha Airlines left Hawaiian as the only major player on inter-island routes, allowing it to raise prices substantially and boost profitability. On mainland routes, Alaska Airlines had begun to stabilize capacity after several years of nonstop increases, and the economy had recovered from the late-2000s recession, boosting demand.
While Hawaiian never explicitly shared profitability figures broken down by operating segment, even a cursory analysis of government and MIDT fare date made it clear that the inter-island and mainland businesses were outperforming the Pacific operation by a substantial margin. As analysts and investors became increasingly aware of this fact, Hawaiian’s executive team came under substantial pressure, publicly on earnings calls, and perhaps privately as well, to boost earnings by increasing growth in the domestic arena.
Of course investor pressure was not the sole factor in Hawaiian’s shift in focus. Hawaiian’s executives are paid in part based on the company’s return on invested capital (ROIC) figures, and unprofitable routes have an adverse impact on their pay.
The specific changes have been well covered at this point, but to recap, Hawaiian has added wide body capacity to the mainland from secondary Hawaiian cities. Eventually, this capacity will be redeployed using the Airbus A321neo, which Hawaiian ordered in early 2013. To offset mainland growth, Hawaiian has canceled several Pacific routes and reduced frequencies on many others. And of course the carrier launched its Ohana by Hawaiian regional operation, tapping into smaller inter island markets that had been previously blocked off from its fleet of Boeing 717 mainline aircraft.
While the shift towards domestic growth has improved financial results in the near term, it might not be the best long term strategy for Hawaiian. Domestic markets suffer from ease of entry and the ability to serve markets with cheaper narrow bodies. Island Air is looking to reassert itself on inter island routes with the financial backing of Oracle CEO Larry Ellison, and the imminent entry of Southwest Airlines over the next couple of years on routes to the mainland will dilute margins.
Meanwhile, sticking with the Asian markets through the present lean period would pay dividends in the long run. One of the largest challenges that a new entrant carrier faces is generating brand awareness in a market, and doing so today could pay dividends two to three years from now when demand growth resumes.
But Hawaiian will not have the chance to see if things pan out, which could very well prove to be the wrong decision five or ten years down the road. And that harkens to one of the fundamental challenges faced by American business today: the inability of management to make aggressive long run bets in an environment that judges them by short term, quarter-to-quarter variables such as quarterly profits, share price, or ROIC.