ANALYSIS: Hawaiian cost growth slows as network matures

Washington DC
Source:
This story is sourced from Pro
See more Pro news »

Hawaiian Airlines anticipates slowing unit cost growth in 2014 after an initial jump in the first quarter, as its international network begins maturing after significant growth.

The Honolulu-based carrier anticipates a 5% to 8% jump in costs per available seat miles (CASM) excluding fuel in the first quarter, with growth slowing in later quarters for a “low single-digit” increase for the year, says Scott Topping, chief financial officer of Hawaiian, during an earnings call on 28 January.

The launch of Hawaiian’s Ohana regional subsidiary, the costs associated with the installation of its new premium economy product, and Boeing 717 painting expenses are among the one-off expenses driving the increase in unit cost during the first half, he says.

“We expect our cost to continue to track a bit higher in the second quarter due to the timing of these one-off items before improving in the second half of the year as the impact of these activities recedes,” says Topping.

The increases come after a year of declining unit costs. CASM excluding fuel fell 3.7% to 7.88 cents during 2013, according to the airline.

MATURING NETWORK

Yields were hit by Hawaiian’s rapid expansion since 2010, which included adding 10 new cities in both Asia-Pacific and the USA to its network.

Passenger revenue per available seat mile (PRASM) was 11.59 cents in 2013, which is an 8% increase compared to 2009. However, this is slower than many of its main competitors, including Alaska Airlines whose PRASM grew 20.2% to 12.67 cents during the same period.

International PRASM, where most of Hawaiian’s growth has been concentrated, fell 10.6% during the fourth quarter of 2013. Peter Ingram, chief commercial officer of Hawaiian, attributes this to the strengthening Japanese yen and Australian dollar, competitive capacity pressure and Hawaiian’s own rapid expansion.

Helane Becker, an analyst for Cowen Securities, expects currency issues to continue to impact unit revenues in the near term.

“2014 will be marked by the maturing of our network,” says Mark Dunkerley, president and chief executive of Hawaiian, during the call. “Our focus shifts slightly to the task of maturing all that we have started in the recent past, and we expect this effort will enhance our unit revenues in the coming year.”

The airline plans to launch just one new mainline destination – Beijing – in 2014, after adding Auckland, Sendai and Taipei in 2013. It could also add a new nonstop between Kona and Tokyo Haneda, two airports that it already serves, if the US Department of Transportation (DOT) awards it an available frequency to the Japanese airport.

Dunkerley says that Hawaiian has no insight into when the DOT will announce a decision on the Tokyo Haneda frequency, which is also sought by United Airlines.

“We saw a window of opportunity to develop a network and then we thought that window would be open for a while and then would start to close,” he says on the airline’s growth. “We very deliberately accelerated plans that had previously existed to try and get in that window while it was still open. And that's why we grew so quickly from 2010 to 2013.”

Hawaiian anticipates a 4% to 7% increase in capacity in 2014, mostly due to the network additions in 2013. Capacity will increase 1% to 3% in the first quarter.

Part of this increase will come from the launch of Ohana, the carrier’s new regional subsidiary within Hawaii. Ohana operator Empire Airlines is now performing proving runs for the US Federal Aviation Administration (FAA) and certification is expected in the “coming weeks”, says Ingram.

Hawaiian anticipates service beginning within a month of certification.

The carrier will take delivery of five Airbus A330-200 aircraft in 2014. These will replace two outgoing Boeing 767-300ER aircraft as well as two 767s that were removed at the end of 2013.

Hawaiian expects 4% to 7% PRASM growth during the first quarter, which is an improvement over the 3.7% increase during the fourth quarter of 2013.

“As we look out into the future, we see cost control and we see optimism on the revenue line that would logically lead to that conclusion,” says Dunkerley in response to questions on margin growth in 2014.

The guidance did little to impress Wall Street analysts. “Overall the guidance was good but nothing truly unexpected,” wrote Helane Becker, an analyst for Cowen Securities, in a research note on 28 January.