In June, Hawaiian Airlines launched its first daily nonstop flight between New York and Honolulu. That may not seem like much, yet it contributed to Hawaiian growing its overall capacity by nearly 25%. Starting a new air route “is always a risk,” says CFO Scott Topping, especially in uncertain economic times like these. But the airline is betting that the lure of nonstop service to Hawaii — complete with a complimentary hot meal — will pay off.
The airline business is fundamentally a “terribly difficult industry,” says Topping, who came to Hawaiian in 2011 after spending 16 years at no-frills carrier Southwest Airlines. Bankruptcy is common; in the past 10 years more than a dozen airlines, including giants like American, United, Northwest, Delta, and US Airways, have filed for Chapter 11 protection. Hawaiian too filed for bankruptcy in 2003, but it emerged 2 years later with, as one observer noted, “a better sense of who they are.”
“We’re focused on being a destination carrier,” confirms Topping. “We bring people to Hawaii. We stick to our knitting.”
Launching Hawaiian’s nonstop flight between Honolulu International Airport and John F. Kennedy International Airport, however, entailed some complicated financial stitching. For starters, travel to Hawaii, like all primarily leisure destinations, is largely wholesaler driven; trips to the islands are usually packaged as part of a vacation sold through retail, says Robert Mann, president of an eponymous airline analysis and consulting firm. This means Topping must work closely with the travel trade. “It’s an indirect ticket sale with extensive costs: commissions to retailers, discounts to wholesalers, high marketing costs,” says Mann.
Hawaiian also partnered with JetBlue Airways to get its Honolulu flight off the ground. Hawaiian’s planes will fly out of JetBlue’s JFK terminal, and JetBlue will handle some of the ground services, including baggage handling. Hawaiian also has a code-share agreement with JetBlue, in which Hawaiian code is on connecting JetBlue flights. And the airlines have a reciprocal frequent-flier agreement, which goes a long way toward mitigating Hawaiian’s risk.
It’s the Planes
To fly from New York to Honolulu, more than anything else, one needs to have big, long-range, expensive planes. By year-end, Hawaiian will have nine 295-seat Airbus A330 aircraft in its fleet, at a cost of about $200 million each, says Topping. Five more A330s are coming in 2013. That’s not to mention even bigger, more-expensive planes, Airbus A350s, ordered for 2017.
Topping says one of his biggest duties in supporting Hawaiian’s growth strategy is making sure it’s adequately funded. “We have to be proactive in trying to line up debt or lease financing for the 2013 aircraft deliveries,” he says. “The funding for three of those five [planes] is already taken care of. Staying ahead of this is the biggest risk.”
Hawaiian took a negative net-income hit in 2011 after purchasing 15 airplanes it had on lease. “The transaction was value-creating, but from an accounting perspective there was a $70 million one-time charge that hit the books,” says Topping. On the bright side, “if you look at cash flow from leasing to owning, it’s positive.”
Not surprisingly, given his Southwest Airlines pedigree, Topping keeps a close eye on costs. But Hawaiian does serve complimentary hot meals in flight, making it the only American carrier currently to do so. Why the perk? “We bring Hawaii to the world,” he replies. “We understand hospitality. The Hawaii vacation starts when you get on the plane, not when you get off.”
Besides, Topping says, “it’s a long flight.”