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The Difficult Choices Hawaiian Air Is Making to Build Its New Service Map

Mar 31, 2014 3:00 am

Skift Take

Despite the positive talk from analysts about the cuts, there were plenty of analysts supporting Hawaiian at launch of those routes. Let’s see how the new ones turn out.

— Jason Clampet

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Aero Icarus  / Flickr

An Hawaiian Airlines plane flies into Los Angeles International Airport. Aero Icarus / Flickr


Hawaiian Airlines has pulled the plug on three international routes within the past year.

But CEO Mark Dunkerley stands by his decision to take the airline on an aggressive global expansion and next month will launch service to Beijing.

Since November 2010 the state’s largest airline has initiated service to nine international destinations. Hawaiian’s three-days-a-week nonstop service to Beijing that debuts April 16 will represent the carrier’s 10th new international route.

Even though Dunkerley said it costs about $100 million to launch a new route, he hasn’t been afraid to put those cities on a short leash. He announced earlier this month he will drop Taipei on April 7 after nine months of operation and Fukuoka, Japan, on June 30 after two years of service. Manila, the third recent route casualty that started before Hawaiian’s expansion blitz, was discontinued Aug. 1 after a five-year run.

The pattern of adding and dropping new routes within a short time frame may seem like a costly way to run a business, but airline analysts say Hawaiian is doing it just right.

“This is positive stuff,” said Colorado-based aviation consultant Mike Boyd, who doesn’t fault Dunkerley for dropping Taipei and Fukuoka after a short trial. “If it doesn’t work, leave. There’s not a hard source of data that will tell you if there’s enough disposable dollars in Taiwan to support nonstop service to Hawaii. On the surface there is. But they found out they can use their resources elsewhere for a better return. That’s just solid planning.”

New York-based aviation consultant Bob Mann also applauded Dunkerley’s nimbleness.

“Hawaiian had a lot of new capacity (aircraft) to deploy (and) judged those the highest and best opportunities,” Mann said. “Not all pan out as expected. Better to pull the plug sooner than tote up more losses.”

While some of Hawaiian’s routes have not worked out, Boyd expects Hawaiian will hit the jackpot with Beijing.

“It will pay off like a rigged Vegas slot machine,” Boyd said. “It’s going to be just brilliant.”

Dunkerley, who has been eyeing China service for a long time, said dropping underperforming international routes is part of the business.

“For us to say that we made a mistake expanding (to Taipei and Fukuoka) would lead us to question whether we made a mistake expanding internationally, and we clearly haven’t made any mistakes with that approach,” he said earlier this month during the launch of the airline’s new interisland turboprop operation, Ohana by Hawaiian.

“We always know that as a for-risk business that we make decisions about new markets, and not all of them are going to come up trumps. Some of them are not going to work out. Unfortunately, Taipei and Fukuoka didn’t work out for us. But if you look at the success of some of our other routes in our international expansion, we couldn’t be more pleased.”

Hawaiian won’t talk in detail about how certain routes are faring, but it reports its international passenger data to the U.S. Department of Transportation on a regular monthly basis. The DOT keeps the international data confidential for six months before releasing the monthly numbers.

Only one of Hawaiian’s active international routes daily service from Haneda International Airport in Tokyo filled more than 80 percent of its seats inbound to Honolulu through the first nine months of 2013, the most recent DOT data show.

Dunkerley cited lack of passenger growth in Fukuoka’s case and insufficient awareness of Hawaii among Taiwanese residents as the reason why those routes were dropped.

“We targeted our network adjustments to the routes that were having difficulties, and there were two separate reasons why Fukuoka and Taipei were not following the trajectory that the other routes did, and so we see them very much as special cases,” Dunkerley said.

Manila, which filled 82 percent of its seats with its four-days-a-week operation, was dropped due to high fuel prices and low fares necessitated by competition from Philippine Airlines on the same route, airline officials said.

Mann said a route’s success can’t be measured solely by how many seats are filled.

“Revenue and expense is what it’s all about,” he said.

Of the five Japanese cities that Hawaiian serves, Tokyo had the most inbound seats filled at 84 percent through the first nine months of 2013. That was followed by Osaka (74 percent), Sapporo (62 percent), Fukuoka (55 percent) and Sendai (35 percent). The Sendai data are outbound from Honolulu only as part of a Honolulu-Sendai-Sapporo-Honolulu “triangle” route.

Taipei, the other dropped route, was at 69 percent during the first three months of operation, the only data available.

But Taipei’s failure doesn’t mean Beijing won’t be a success.

“A scheduled flight between China and Hawaii has long been an aspiration of Hawaiian and the travel industry in our state, and as the barriers to visitor travel from China to the United States slowly come down, we believe there will be significant demand for a Hawaii vacation and Hawaiian Airlines,” Dunkerley said last year when announcing the route.

David Uchiyama, vice president of brand management for the Hawaii Tourism Authority, said the state is looking forward to Hawaiian’s Beijing route, which will supplement the visitors Air China brings into Honolulu from Beijing and those who arrive from Shanghai aboard China Eastern Airlines.

“This access will open the door to gaining additional business out of China,” Uchiyama said.

John Reardon, managing director of institutional sales for the San Francisco-based investment bank and broker-dealer Merriman Capital Inc., said “by and large that (Hawaiian has) done the right thing” with its expansion, noting that sometimes unforeseen circumstances like a weakening yen or additional seats added by competitors can throw a wrench into the best-laid plans.

“This is a good management team, and they’re very careful but not everything always works out as you plan,” Reardon said.

Local aviation historian Peter Forman expects the international expansion to begin paying off this year for Hawaiian.

“If you take a look at 2013, it was another profitable year ($51.9 million) for them, and 2014 will be a year in which they consolidate their long-distance routes and let them mature,” Forman said. “It often takes a couple of years to let an international route mature and bring in its full value, and you’re going to see that happen this year. I will say by end of this year their international routes will be looking very good.”

Boyd agreed that Hawaiian is going down the right path.

“If you don’t put any money on the table, you’re not going to win the bet,” Boyd said. “If you see the odds are not working for you, you take the money and leave.

“This kind of market planning shows real sophistication because too often what happens is the attitude is it’s going to work regardless, and ego gets involved. It looks like Hawaiian doesn’t have any ego. It either works or not.”

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