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- Hawaiian Airlines
3375 Koapaka Street, G-350
Honolulu, HI 96819
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Hawaiian Airlines operates from hubs at Honolulu International Airport and Kahului Airport, on the island of Maui. The carrier provides a network of domestic services throughout the Hawaiian islands and to the mainland US as well as international services to Asia, the Pacific and Australia. Hawaiian utilise a fleet of narrow and wide-body Boeing and Airbus family aircraft.
Location of Hawaiian Airlines main hub (Honolulu International Airport)
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The paradox of margin expansion and unit revenue contraction will continue for most US airlines into 2Q2016 as those companies work to alleviate investor concern and set a course for a positive unit revenue trajectory. But maintaining favourable unit costs is key for the continued margin expansion forecast by the three large US airlines – American, Delta and United.
Although fuel prices have been rising, energy costs remain below historical levels, which is helping American, Delta and United to keep their unit costs in check. Excluding fuel, each airline has varying forecasts for 2016 driven by different inputs, including rising labour costs and profit-sharing.
American’s unit costs during the past year have been affected by labour contracts it reached with pilots and flight attendants in 2015. Delta and United will also likely need to weather labour cost increases as both companies are in the process of negotiating contracts with different employee groups. Many US airlines face uncertainty in their cost performance in the future as they work towards favourable contract terms that preserve their efforts to contain costs. And so the wheel turns.
The record profits that US airlines are enjoying from lower fuel costs are being shaded by weaker passenger unit revenues and labour discontent as work groups at various airlines strive for market rates that are on an upward slope.
Some of the higher-profile negotiations include pilot collective bargaining at Delta and Southwest. Pilot groups at each airline have rejected contract proposals during the past year, and are currently requesting wage increases that they believe will put them on par with the industry average; an average which has been growing due to contracts brokered by their competitors, American and United.
Even airlines that have typically enjoyed positive pilot relations are encountering higher levels of turbulence in their latest round of talks. Hawaiian Airlines’ pilots have been especially vocal during the current round of negotiations, the pilots voicing their frustration over lower rates of pay versus the airline’s competitors.
Hawaiian Airlines’ unique geographical positioning is helping the airline to deliver a passenger unit revenue performance that is outstripping its peers, who are more exposed to a lack of pricing traction and growing capacity on many domestic routes on the US mainland. Demand to Hawaii remains solid and competitive capacity growth in Hawaiian’s markets remains reasonable.
Hawaiian’s capacity expansion has been tempered during the last couple of years after a massive push into long haul markets earlier in the decade. Its planned capacity growth for 2016 is 2.5% to 5.5%, and expansion in 2017 is expected to remain in the low single digits. The airline plans to use existing capacity to support additional services to Tokyo Haneda, which will allow the airline to improve its service offering in one its most important markets – Hawaiian estimates that Hawaii is the end destination for one in four passengers travelling from Japan to the US.
Alaska Air Group’s intention to purchase Virgin America and merge with its rival has fuelled speculation about other potential M&A deals in the US market. Hawaiian believes that its attributes could create value for another company but stresses that it is not for sale, and many opportunities remain for the airline to grow independently.
Tentative approval was finally granted by the Us DoT for Norwegian Air International to introduce long haul, low cost service from Europe to the US. Even though the opponents have successfully lobbied legislators to introduce prohibiting legislation, this was a milestone in the contentious debate about open skies agreements, as well as the intricacies of labour law and foreign ownership requirements. There was a lively debate on this topic at CAPA's Americas Aviation Summit, under the guidance of CNN anchor, Richard Quest.
However, in the larger scheme of liberalisation Norwegian’s victory is a small step in what appears to be a long journey for a mindset change: to create new paradigms in the rapidly changing global aviation industry. In the US aviation landscape the easing of foreign ownership restrictions remains a non-starter, which means that joint ventures will continue to serve as stand-ins for cross-border ownership. As the status quo remains, and members of large global alliances holding anti-trust immunity dominate markets such as the trans-Atlantic, Norwegian’s ability to inject low cost competition is welcome, and a logical development.
HNA, the holding company that owns flagship airline Hainan Airlines, has grown a portfolio of airline investments outside greater China that has recently expanded to Brazil’s Azul, and could be extended to include TAP Portugal. Some of the stakes have been placed to allow HNA to be an active investor and boost its presence in the foreign market. With this general strategic objective – and cash to spend – it is logical for HNA to consider investing in a US airline.
China’s 'one airline, one route' policy generally permits only one Chinese airline to fly a long haul service. Hainan cannot serve blue-chip points like New York and Los Angeles from Beijing and Shanghai since Air China and China Eastern already serve those points. Hainan has instead developed a mostly secondary market network including Boston and Seattle. Purchasing a US airline to have it expand in China, or to launch all-new flights, would overcome these restrictions since there is no US limit on services as long as traffic rights are available. American, Delta and United all serve the Los Angeles-Shanghai route.
China-US open skies would permit HNA and its US partner to enter into a joint venture, and even share profits. Integration has not been a defining feature of HNA’s investments, but the potential ramifications of a US airline investment could be significant and wide-reaching. This potential trans-Pacific change comes as Canada's WestJet weighs an entry into Asian routes.
Although capacity has recently decreased in the Dallas market pricing remains under pressure, which has triggered Virgin America to trim some capacity on its routes from Dallas Love Field, starting in 2Q2016. For the last year, Dallas has been mired in outsized capacity growth and lower pricing. But Virgin America has concluded that the pressure it is experiencing is no longer driven by a supply and demand equation, but rather a decision by its competitors to trade yield for load factor. Virgin America is opting to reduce its exposure to the depressed fare environment instead of engaging in similar behaviour.
Virgin America plans to deploy some of the capacity that it is cutting from Dallas in 2016 to new flights from its Los Angeles base to Honolulu and Maui. Those new routes follow the debut of service to those Hawaiian markets from the company’s San Francisco base in late 2015. Despite entering routes to Hawaii that are already heavily populated by other airlines, Virgin America is pleased with its performance in those markets.
The airline is forecasting a 3% to 5% drop in passenger unit revenue for 1Q2016, while capacity for the full year of 2016 is growing 14% to 16%. Aside from the situation at Dallas, Virgin America remains optimistic about the performance of its network. However, similarly to the state of most US airlines, there will likely be no positive PRASM traction for the airline until 2H2016 at the earliest.