Hawaiian operators plan to tap a predicted growth in South Seas tourism.
Hawaiian guitar music wafts across the palm-fringed beach near Waikiki on a balmy afternoon. High overhead, locally based airliners look like partners in paradise as they shuttle to neighbouring islands.
No one should be fooled: there is little brotherly love between these airlines. The inter-island traffic passing over the beach huts is competing in one of the most fiercely contested markets in the world. Cutthroat competition for more than 9 million passengers a year and strong brand loyalties among locals make the relationship between the carriers anything but relaxed.
Aloha Airlines, along with its subsidiary commuter carrier, IslandAir, is the leading inter-island carrier by a hard-fought margin. Arch-rival Hawaiian Airlines, which emerged from Chapter 11, bankruptcy protection in September 1994, is making a renewed bid to increase its share of island traffic. A third start-up carrier, Mahalo, is also determined to establish a foothold in the territory.
Adding to the pressure is the promise of a new growth in tourism, which provides the majority of inter-island traffic. "For Aloha we're looking at maybe as much as 10% growth on an annual basis towards 2000," says airline president and chief executive officer Glenn Zander. "The real growth potential is not really the local market, it's the potential for inter-island travel that comes from the Far East, particularly Japan."
Japanese visitors are the most important element of the tourist traffic. Of around 1.7 million Japanese tourists, visiting Hawaii in 1994, only 30% ventured away from the island of Oahu, which is served, by Honolulu International. "So there is a market for incredible growth potential. We fly about 5 million passengers a year, so, even if we got half the Japanese, it would give us 10% growth," says Zander.
Both Aloha and Hawaiian believe that the Japanese visitors will almost certainly continue to come, despite the relatively recent onset of an economic downturn. According to Zander, the Japanese Government has committed to doubling the number of visitors to the USA by 2000 (as part of agreements to offset the bilateral-trade imbalance) and he expects significant increases in the numbers visiting Hawaii.
Zander also anticipates a growth in the number of tourists from South Korea, Taiwan and Mainland China, as it becomes easier for their people to visit the USA. More visitors will help Aloha add to an impressive run of profitable years. The airline has shown profitable net earnings for almost a decade, the only interruption being 1992 when damage to the tourist trade caused by Hurricane Iniki led to a net loss.
Aloha's strategy of tapping into the bigger tourist potential and extending its lead on inter-island services rests on several key building blocks. It is attempting to implement everyday low pricing and high frequency flights - not unlike Southwest Airlines on the US mainland, says Zander. "The big difference is that we have more frequency because we're really used as a public necessity. So one of the key things is to bring down the prices, so people can use the aircraft like a bus. It differentiates airlines here from anywhere else around the world, and it does lead to vibrant competition," he adds.
Aloha, founded originally in 1946 as the Trans-Pacific Airlines charter company, adopted its present name in 1958, almost a decade after starting scheduled services. "Since then we've historically been viewed as more of an airline of the people," says Zander.
To back up the "bus stop" image, Aloha has made a determined effort to ensure tight timetable keeping, which was previously unreliable. Now, Aloha claims to have the best on-time performance in the industry. It aims to depart or arrive within 5min of scheduled time more than 90% of the time. The sheer size of the Aloha operation makes the target a challenge. Together with IslandAir, it operates almost 2,000 weekly flights, of which some 1,300 are Aloha's.
To attract more business at its Honolulu "bus stop", Aloha operates what is believed to be the world's first and only drive-through check-in. Passengers check in for a flight at Honolulu and have baggage accepted at the curbside, without leaving their car, in the fourth storey of the parking garage. They then park the car and go straight to the departure gate. To get baggage down to ground level, Aloha uses an "extremely efficient" spiral chute for baggage, designed originally for the UK Post Office.
To draw business travelers and raise revenue in the face of its own low-price economy- class ticketing, Aloha offers first-class service to every airport it serves - the only inter-island carrier to do so. "We have a much different, and I believe, up-scale product compared to Hawaiian," says Zander.
Aloha's all-Boeing 737 fleet of 16 aircraft could grow to "around 20" by 2000, he says, if growth matches the predictions. Three of the current aircraft, one-200 and two-300s are leased to America West and Continental Airlines, while nearly all of the remainder of Aloha's fleet is itself leased.
Nine of the 737s are-200s and three are-200QC (Quick Change convertible passenger/freighter) aircraft, converted for the role by Alabama-based Pemco Aeroplex. The airline also operates two Pemco-converted 737-300QCs and two -400s, with a further two -400s due for delivery in 1996. The -400s are half owned by GE Capital.
Aloha is therefore still loyal to the 737, despite the infamous April 1988 incident when one of its -200s lost a large section of the upper fuselage during flight. The structural failure of a fatigued lap joint affected a 4.6m-long section of the fuselage skin. The incident sent shock waves throughout the air-transport industry and led to the US Federal Aviation Administration setting up the National Aging Aircraft Research Programme.
"Aloha worked very hard with the manufacturer on what turned out to be a cycle-related maintenance issue as opposed to an hours - or years - in-service issue. Frankly, we'd stack up second to none in terms of our focus on this now. Our entire maintenance criteria is the most conservative in the industry," says Zander. As an example, he says that a fleet-wide airworthiness directive on the replacement of 737 rudder power-control units was achieved in record time. "We were allowed five years, but we did it by December," he declares.
No part of the fleet is worked harder, than the 737-200/300QCs, which are vital to Aloha's operation. In 1994, the airline's 737s hauled 60,000t of freight and mail, slightly up on 1993, and generated around $40 million of Aloha's $235 million revenue. A fleet of (usually) four QCs, begin operations at 22.00 each night and flies fresh bread, mail and newspapers to the other islands. The aircraft return with fresh produce, fish and a mail, before being reconverted to passenger use by 06.00 the next day.
The airline is also studying a possible expansion of its freight activity to farther-flung Pacific islands outside Hawaii, such as the Samoan Islands. It already carries out contract flights for the US military to Johnston Atoll.
Zander is also keen to see continued growth within IslandAir, which became part of the Aloha Group in 1987. "It's an integral part of the business and, although we try to keep it separate in many ways, it is under the same umbrella from a marketing standpoint," Zander says.
Under newly appointed president Neil Takekawa, IslandAir flies around 700 weekly flights to eight commuter and resort airports throughout the state. The carrier operates eight de Havilland DHC-6 Twin Otters and carried almost 365,000 passengers and almost 291,000kg of freight in 1994.
Other than its possible extension to freight runs to the South Pacific, Aloha is happy with where it is. "I don't see us adding value flying anywhere else in the world. We have people trained to high-frequency, quick-change- around, operations, and that's what we are best at," Zander adds.
At all of the largest island airports, the Hibiscus flower symbol of Hawaiian Airlines is seen alongside Aloha's Bird of Paradise logo. Hawaiian's inter-island fleet of 13 McDonnell Douglas DC-9-50s, is being used for an all-out attack on Aloha's market share. Hawaiian wants to be dominant on the inter-island routes. It has between 43% and 44% of the market, but hopes to improve on that, says senior vice-president for marketing and sales, Peter Jenkins.
Having emerged from Chapter 11 in September 1994, the airline's assault began with the start of shuttle services between Honolulu and Maui, the biggest inter-island market, and Honolulu-Kauai, the second largest sector. "The Maui shuttle was the logical place to start our campaign for dominance. We now have 34 flights a day and 55% of the capacity," says Jenkins. The Kauai shuttle was launched in November 1994 to mark the airline's 65th anniversary.
Like Aloha, Hawaiian is keen on punctuality, setting itself the target of being within 5min of schedule 95% of the time. By late 1994, inter-island on-time performance was up to 98% and reached 100% on the shuttle service in October.
Hawaiian is also examining plans to expand the shuttle concept to the Big Island of Hawaii. "It's where we have been out-gunned fairly significantly," says Jenkins, adding that the service could begin in mid-1995. On top of the 150-plus inter-island flights already operated by the airline, the additional commitment may require acquiring two further DC-9s.
As with Aloha, most of Hawaiian's island passengers are tourists. Respecting its greater dependence on this revenue stream (75% as opposed to Aloha's 60%), Hawaiian is making the most of its long-range, transpacific, services and international connections.
The most significant of these is with American Airlines, with which Hawaiian has secured a marketing deal. "We needed a frequent flyer hook-up and American emerged as the logical choice to do that with," says Jenkins, who wanted to counter Aloha's participation in United Airlines and Canadian Airlines International programmes. The carrier also organised new holiday-package deals, using American's reservations, brochure, accounting and advertising services, "...like a turnkey operation," he adds.
After talking with American about a marketing agreement, "...it became a natural choice to talk about aircraft. We were facing the expenditure of huge chunks of money, some $15 million, on long-term maintenance of the Lockheed L-1011 fleet," says Jenkins. American Airlines leased Hawaiian six McDonnell Douglas DC-10-10s to replace the seven L-1011s in mid-1994. A seventh, straight from a D check, was delivered to Hawaiian in December.
The long-distance feed of passengers into the islands, using the DC-10 fleet, is a key component of Hawaiian's inter-island growth strategy. The airline is considering services to Phoenix, Arizona, and San Diego, California. A third daily service to Los Angeles, withdrawn at the end of the 1994 northern summer, will be re-introduced on 1 May. Los Angeles is a key point for European connections and Hawaiian intends to operate the route throughout 1995.
The long-term lease agreements for the DC-10s, together with re-structured leases for the DC-9s agreed as part of the escape from Chapter 11, are expected to save the company more than $13 million a year in operating expenses. The costs of the transition to the DC-10 and other aspects of the re-organisation meant nevertheless that the airline was, at best, breaking even over most of 1994 and it looks forward to improvements in 1995 as the benefits of the American deal take shape.
Other parts of the restructuring include agreements with airline employee groups, which were expected to save up to $10 million a year for the next three years. In addition, Hawaiian secured a credit line from the CIT Group/Credit Finance for up to $8.15 million, of which up to $3 million was allocated for letters of credit and the remainder made available for working capital.
The airline also sought the return of $2.8 million, which it had on deposit with the State of Hawaii in support of a state loan-guarantee which the company did not pursue. Ownership of the airline was also divided up, with 68.7% taken by the company's creditors, 16.8% for employees, 9% reserved for warrants and 5.5% kept back for a management incentive plan.
"We came out of Chapter 11 with little debt and we believe we have our cost structure under control. In terms of cost, we are comparable with the major carriers and any airline that has a significant short-haul operation," Jenkin says. "We're pretty lean now with just over 2,000 employees," he adds.
MAHALO MOVES IN
Mahalo is the new kid on the block and hopes to succeed where others have failed in the highly competitive Hawaiian arena. It started life as an air-service contractor for Idaho-based Empire Airlines, which flew operations, using Fokker F27s. Operations then ceased briefly in 1994 before a newly independent Mahalo re-started flying on 1 November 1994.
"It was an experiment that was both a success and a failure," says Mike Yocum, president of the re-launched airline. "It proved the demand for a third carrier was here, but the reliability of the operation was a failure and we weren't particularly proud of the way the airline was being operated for us."
Mahalo now runs six ATR 42s on 66 flights a day to all the islands. Its trump card is price, just $35 on any flight, which, Yocum says, others are finding difficult to match.
Like its bigger competitors, Mahalo also concentrates on punctuality. On-time performance was 94.5%. Customer acceptance has been "very good". The shorter stage lengths also make a difference to the ATR 42 operation. "Even though we have turboprops, which fly slower than the others, we often leave here and arrive at the gate at the same time," claims Yocum.
Only time will tell whether Mahalo's good start will lead to long-term prosperity. Aloha for one, takes the threat seriously. "Competition is very definitely alive and well," says Zander. In terms of Hawaii, this is an understatement.
Source: Flight International