Aircraft delivery delays, increased competition, severe weather and a volcanic eruption helped to push down Hawaiian Holdings' financial results in 2018.
Though some of these factors will continue to put pressure on returns in 2019, executives say Hawaiian is responding by cutting costs, trimming capacity and rolling out new "basic" economy fares.
"We had quite an eventful year in 2018," Hawaiian chief executive Peter Ingram said during the company's 2018 earnings call on 29 January.
He described Hawaiian's results as admirable under difficult operating circumstances.
"Given the increased competitive capacity we faced entering 2018 and higher fuel prices, I'm not sure many expected us to be able to deliver results like this," he added.
The Honolulu-based company, which owns operating unit Hawaiian Airlines, earned an operating profit of $314 million in 2018, down 32% year-on-year. Full-year operating revenue increased 6.1% in one year to $2.8 billion, while operating expenses surged 14% of $2.5 billion.
Hawaiian's earned a net profit for the year of $233 million, down 29% in one year, it says.
The carrier's full-year capacity in available seat miles (ASMs) increased 6.1% as it received new Airbus A321neos. The company now has 11 A321neos in service and expects to close 2019 with 18 of the aircraft – the entirety of its A321neo orders.
Hawaiian's 2018 operating revenue per available seat mile (RASM) was flat year-over-year at 14.07 cents, but yields slipped 0.8%. Cost per available seat mile (CASM) jumped 7.6% to 12.51 cents last year and CASM adjusted to exclude fuel and special item expenses inched up 1.8% to 9.36 cents.
The carrier's fourth quarter operating profit slipped 28% year-on-year to $69.3 million, with operating revenue up 2.2% to $697 million and operating expenses up 7.1% to $628 million.
Financial analysts expressed little surprise at the figures but warned Hawaiian faces more of the same in 2019. Macquarie Research says Hawaiian's stock "still looks attractive", and Cowen says 2019 "will be a challenge given the competitive dynamic".
Hawaiian in 2018 coped with severe natural events that disrupted operations, including two hurricanes that struck the Hawaiian chain and volcanic eruptions on the island of Hawaii.
But Hawaiian also suffered from increased capacity on routes between Hawaii and the US mainland – routes that generated slightly more than half the company's 2018 operating revenue, Ingram says.
The number of seats carried by all airlines on those routes jumped 11% year-over-year in 2018, says Ingram. FlightGlobal schedules data confirms that figure, showing Alaska Airlines and United Airlines added seats at the greatest rate.
But Hawaiian played a role, too – its capacity between Hawaii and the US mainland jumped 9% year-over-year in 2018, data shows. Hawaiian's gains partly reflect its launch of new routes from Maui to both Portland and San Diego using A321neos, data shows.
"This created a difficult environment to generate revenue growth," Ingram says of the broad market conditions.
As a result, Hawaiian's unit revenue on Hawaii-US mainland flights declined in the mid-6% range year-over-year in 2018, says vice-president of revenue management and network planning Brent Overbeek.
"The competitive pricing environment in the North American market remained challenging…as we worked our way through the latter half of the year," Overbeek says.
Likewise, unit revenue from Hawaiian's intra-island network slipped in the mid-5% range year-over-year amid "demand softness", he adds.
In response to challenging conditions, Hawaiian has trimmed intra-island capacity; it now expects available seat miles (ASMs) on those flights will be down 6% year-over-year in the first quarter of 2019.
Performance of Hawaiian's air cargo business also slowed late last year, reflecting wider air cargo deflation and Hawaiian's replacement of widebody Boeing 767s with A321neos, which carry less belly cargo, executives say.
On the positive side, Hawaiian's unit revenue from international flights jump 3.3% in 2018. Business-class seats on flights to Japan and South Korea performed particularly well, offsetting under-performing routes to Australia, Hawaiian reports.
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Hawaiian expects the difficult revenue environment will continue into 2019; it estimates unit revenue will decline 3-6% year-over-year in the first quarter.
"Industry pricing pressure on our North America routes…will continue to pressure yields," Overbeek says.
Though capacity growth on Hawaii-US mainland routes will be near flat year-over-year this quarter, capacity will creep nearly 5% by the third quarter, FlightGlobal data shows. Those figures do not account for potential additional competition from Southwest Airlines, which is widely expected to begin Hawaii flights this year following regulatory approval of extended overwater flights.
"Hawaiian continues to see pricing pressure from the West Coast to Hawaii and those trends will likely persist throughout 2019," says Cowen in a 30 January report.
But Hawaiian has cut its capacity growth to 1.5-3% year-over-year in the first quarter and 1.5-4.5% for the full year – significantly less than last year.
Costs will also creep higher this year, though at a slower pace than in 2018. Adjusted CASM will inch up 1-4% in the first quarter, and full-year 2019 CASM will be flat to up 3%, Hawaiian says.
Competitive concerns aside, executives ticked off reasons for optimism in 2019, including a cost-cutting effort, the planned April launch of flights from Honolulu to Boston and investments in airports and technology.
The company also expects later this year to begin realising benefits pending joint venture with Japan Airlines – assuming regulators approve the deal.
In addition, Hawaiian expects benefits from a new basic-economy-type fare - "main cabin basic" - expected to be introduced later in the year, Ingram says.
"Basic economy can't come soon enough," Cowen says. "Yields are likely to continue to deteriorate until [Hawaiian] can contain the pricing weakness in the economy class."
Source: Cirium Dashboard