Hawaiian's CFO Talks ....
Extract From Hawaiian's SEC 8-K filing today (Q&A prepared by the CFO)
1. What do you think about Mesa’s announcement they plan to enter the inter-island market and the effect it will have on Hawaiian Airlines, Inc. (referred to herein as "Hawaiian")?
A: We believe that whether Mesa enters the market or not, Hawaiian will continue to enjoy a strong position. New airlines have repeatedly entered the interisland market over the years (Mahalo, Discovery, Mid-Pacific) but none have been able to make a success of it. The issue is not barriers to entry; there are in fact few of them in the interisland market. Rather, the issue is that the current operators provide a high level of service at competitive rates. The strong local brands, the high frequency of service already provided and the strength of the local frequent flyer programs have proven decisive in the past. Having said that, we take all competitive threats seriously and will closely monitor developments and respond accordingly.
2. Do you expect to add any planes to your fleet in 2005 or 2006?
A: We would like to add one or two additional Boeing 767 aircraft to our fleet in 2006. We have been actively searching for suitable aircraft but have thus far been unsuccessful. We will continue these efforts until the right aircraft at the right price becomes available.
3. What should we expect as far as ASM (available seat mile) growth?
A: There are no plans to have additional aircraft in service in 2005. As a practical matter, we are unable to increase capacity with our existing fleet because, given our route network and the maintenance burden associated with long-distance, over water flying, our fleet is fully utilized operating our existing schedule. Our new San Jose-Honolulu began September 29 th , was made possible by pulling capacity from other routes.
4. Any changes in the charter business?
A: There are no planned changes in the charter business. ? We will continue with our scheduled charters. ? We provide charter service for the Oakland Raiders football team, and operate a regularly scheduled charter out of Anchorage. ? Given the full utilization of our existing fleet, we are unlikely to operate any ad hoc charters.
5. How does the entrance of other carriers, and specifically America West/US Airways (US Airways), into Hawaii impact Hawaiian Airlines?
A: The Hawaiian market continues to be very competitive. Year-to-date, capacity into Hawaii from the mainland has increased approximately 11% versus 2004, and is up approximately 21% from 2003. US Airways is scheduled to start service to Hawaii from Phoenix in December. It is too early to know what impact this will have on yields, although the early published fares on their new service do not generally seem to be below existing fares. Based on published schedules the capacity to Hawaii out of Phoenix will increase by about 127% as US Airways is entering the Phoenix market with four flights per day. Based on published schedules Las Vegas to Hawaii capacity will increase about 29% assuming US Airways adds two flights per day. One factor that will impact how large the effect US Airways entry into Hawaii will have on Hawaiian will be the percentage of their traffic that connects from the rest of US Airways network. The larger the proportion comprised of connecting traffic, the smaller the impact on Hawaiian. In addition, we believe our frequent flyer program is very strong in the local market, and creates a significant advantage for us when competing for traffic originating in Hawaii.
6. Any reason to think this new competition should be limited somehow or have a limited impact on Hawaiian? ? Is this a big deal or minor change?
A: Intensifying competition has been a constant over the past several years and there is no reason to suppose that the latest round of capacity additions will be any different from previous increases. Pricing in the airline business is much more closely tied to the demand for seats versus their supply than it is to the cost of providing those seats. No one knows exactly how the interplay of the supply of seats to Hawaii and the demand for them will play out.
As discussed above, we have seen a recent increase in the number of seats flying between the mainland and Hawaii, and we are aware of the future capacity increases announced by US Airways. Obviously, the domestic airline industry is in a period of extraordinary upheaval, with many of the largest players operating under bankruptcy protection. It is impossible to predict in any precise way how these companies will be restructured, but we expect fleet sizes will be reduced which could ultimately lead to fewer flights to Hawaii. Obviously, there can be no assurance that such an outcome will occur. On the demand side, travel to Hawaii is strong, and while there are no guarantees, we expect Hawaii to remain a popular vacation destination.
7. Hawaiian’s position in its markets has been fairly strong and Hawaiian has had better pricing power relative to its competitors. Yet, it appears that yield declined in the second quarter, whereas many carriers were showing improvements in yield. Also, why did RASM decline when other airlines have seen pricing increases? Is it competition? What should we expect going forward?
A: As mentioned earlier, in a competitive market pricing generally is linked to the demand for travel and the number of seats offered. In times of rapid capacity expansion, it is common for fares to decline and it is worth noting that capacity between the U.S. mainland and Hawaii has risen quickly this year while on the mainland, domestic capacity has been essentially flat.
Hawaiian has several marketing programs aimed at mitigating the effect of additional competition. These programs, which include the HawaiianMiles frequent Flyer program, contribute significantly to Hawaiian’s industry leading 88.2% load factor year to date through August.
8. Generally, why should Hawaiian’s position be defensible and this particular market not be subject to a lot of price-based competition with discount carriers getting more into Hawaii from the mainland?
A: The Hawaii market is already a very competitive market with low barriers to entry which suggests that while most airlines not already serving Hawaii could gain entry to the market, there is not the attractiveness to doing so that may exist in other markets with higher yields.
The lack of barriers to entry is not new and is reflected in the fragmentation of market shares among principal competitors, including Hawaiian. There are two areas of advantage for Hawaiian which in the past have proven important in allowing Hawaiian to compete successfully against all comers. The first is technical: before flying to Hawaii in any twin-engine aircraft, the FAA mandates the aircraft carry extra equipment, and the airline undergo considerable additional maintenance rigor and submit to considerably more stringent oversight. This additional burden generally runs counter to the ‘keep it simple’ corporate philosophies of the new breed of low cost carriers and, as such, represents a barrier to entry for many potential competitors. More importantly, whereas Hawaiian’s competitors offer service to Hawaii in addition to their full range of other services, Hawaiian focuses exclusively on selling Hawaii as a destination. We believe we understand the Hawaii market better than our competitors and have been successful in leveraging this knowledge in the face of competition.
How much fuel usage does Hawaiian forecast for the second half of 2005?
A: Approximately 57 million gallons
In the past the Company has talked about a one cent change in jet fuel prices yielding a $1.1 million increase/decrease in annual operating income if sustained over the course of a year. Does that include the effect of hedging?
A: No. Hawaiian forecasts that it currently consumes 110 million gallons of jet fuel annually, therefore each $0.01 change in the price of jet fuel results in a $1.1 million change in fuel expense, before considering any effect of hedges in place.
