Things in the Sky

Last week, Hawaiian announced some interesting changes to its interisland fleet – changing the ownership structure of its existing aircraft and also committing to expand the interlisland fleet.

The carrier’s current interlisland fleet is composed of 15 Boeing 717s. The have been ”operated under long term leases from Boeing Capital Corporation (BCC),” as the press release puts it, but Hawaiian has purchased all of them “in a refinancing transaction that reduces its fleet costs over the long term.”

According to an SEC filing that outlines the deal, the total price of the aircraft was $230 million. What’s interesting is that Hawaiian is using loans of approximately $193 million from Boeing Capital to help finance the deal. So Boeing loses the regular leasing payments but gets interest income instead. One would assume that interest expense is cheaper than what Hawaiian is paying monthly for leases. In addition, each loan is “subject to a balloon payment at maturity” so that reduces Hawaiian’s short-term cash expense. The loans have an eight-year term.

But Hawaiian has made some other changes – including leasing three more 717s from Boeing Capital. The aircraft are set to be delivered in September, October, and November and will be under eight-year leases. If I had to guess, I would suggest these aircraft are ex-Midwest 717s owned by Boeing. These aircraft were slated to head off to Mexicana – but we all know how that turned out. So Boeing at least gets some of these aircraft flying again and probably gave Hawaiian a nice deal.

So why expand the interisland fleet? Hawaiian CEO Mark Dunkerley said in the press release that “with our increasing service to Hawaii from Asia, demand for our interisland flights during peak hours of the day and during popular travel periods has never been higher.”

I just found that interesting – as Hawaiian has diversified its route network lately, which I think helps them greatly as more US domestics move to the Hawaiian market.

According to that same SEC filing, it also appears that Hawaiian has entered into some loan agreements to help finance its upcoming A330 deliveries.

Speaking of Hawaiian’s widebodies – I wonder how much their long-term plans are affected by Airbus’ decision to delay the A350-800 by two years. That should help make for an interesting earnings call in a couple of weeks.

Well, I’m just assuming they do, since the carrier announced yesterday that it would be ordering six additional A330-200s that will begin arriving in 2012. I found it really interesting how Hawaiian’s A330 plans have evolved over the past three years, so lets’ review:

Just about three years ago, Hawaiian signed a memorandum of understanding with Airbus for six A330-200s, with deliveries beginning in 2012. Six A350-800s are also part of the order in addition to six purchase rights for each of the aircraft. The MoU is then converted to a purchase agreement a couple of months later in February 2008. The airline says at the time that it will “will move to secure additional aircraft in the leasing market for entry into service between 2009 and 2012.”

In October 2008, Hawaiian announces that it has entered into an agreement with AWAS to lease two A330-200s that will be delivered in the first and second quarters of 2011. (Also worthy of note – this press release says the A332 will seat 298 passengers, seven less than previously announced.) The A330 will now arrive a year earlier than originally announced.

Then, two weeks later, Hawaiian says it has formed a lease agreement with CIT for an additional A330-200 that will be delivered in 2010. The press release also notes that one of the AWAS aircraft will be delivered in 2010, while it was originally announced that both would come in 2011.

Hawaiian then announces further adjustments to its delivery schedule in March of this year, when the carrier says it has exercised one of its six purchase options to acquire another aircraft in the second quarter of 2011. Also interesting is that the three leased aircraft are now all scheduled for 2010 delivery.

In August, Hawaiian makes yet another change, and moves one of its orders from the second quarter of 2013 to the fourth quarter of 2011. The carrier will now receive two A330s in 2011 in the second and fourth quarters. Meanwhile, the carrier will now take one aircraft each in the first and second quarters of 2013.

And that brings us to yesterday’s announcement, which I think makes a whole lot of sense, especially when looked at in the context of 767 retirements. Fortunately, this recent Hawaiian investor presentation has that information (slide 23 in the PDF). So I took the 767 and A330 schedules from that presentation and then compared it to the schedule announced yesterday:

So before the announcement – over the next six years Hawaiian’s fleet would actually shrink as 767 retirements outpaced A330 deliveries. Now the fleet will only grow by one aircraft. And if we break down the numbers by year – this move makes even more sense to me. For example, previously Hawaiian would be shrinking its fleet by two in 2015, but it’s now it will be flat. And in 2013 the fleet was originally supposed to shrink by three aircraft, but now it will only be a net loss of two airplanes. I’d also guess this move makes sense as earlier this year Hawaiian lost one 2013 delivery when it moved to 2011.

The A330 could be able to open up some opportunities for new destinations as well. Take this slide from that same Hawaiian presentation, which has a range chart produced by Airbus that compares the A330 to the 767. Hawaiian CFO Peter Ingram did warn that “anyone who has been around the indsutry knows that all the airplane manufacturers are notorious for expanding the ranges that aircraft can serve by making certain asumptiosn of what it can and can’t do,” but did note that in general the A330 does create a “considerable expansion of our opportunities.”

Anyway, Hawaiian really seems to like this aircraft, which allows it to carry higher payloads at greater ranges. Management has said that passengers enjoy flying on the A330, and that the aircraft is also good for cargo.

We’ll see if any more changes will be made. Hawaiian can tinker with its existing 767s, something it has done before. Hawaiian also says that it has four purchase rights for more A330s, and the leasing market is also available. Meanwhile, Hawaiian is still scheduled to begin receiving A350s in 2017, so we’ll see how that all pans out.

I always enjoy listening to airline earnings calls, as you get a lot more detail about the airline’s quarter compared to the actual financial press release, and the analyst question and answer session is usually very interesting as well. So I’ve decided that this earnings season I’ll be sharing some of my notes from the calls. I hope to do this for all of the airlines, but it will probably take awhile based on the sheer number of them today and tomorrow.

Anyway, Hawaiian’s call was yesterday evening here on the East Coast, and I did find a few things interesting.

CEO Mark Dunkerley brought up the topic of the airline’s new A330s, saying that “operationally, the aircraft has performed every bit to our expectations,” and also noted that customer response to the new product has been “excellent.”

He was further asked about the aircraft during the Q&A, when one analyst was wondering if there was any difference in fare on the A330 routes, such as LA – Honolulu, where Hawaiian operates both 767 and A330 aircraft.

Dunkerley responded by saying that “where we see the value of it, is that people tend to look out for the A330 operation, book to it, and then that helps up move up the revenue management curve that way. So the fares are actually the same, you know the fare levels are the same, but we have had the 330 book up really very very nicely indeed.”

The Hawaiian chief was also asked about the possibility of the airline joining an alliance. “We do look at whether or not it is in our long-term interest to join an alliance periodically. We look at it periodically. So far we’ve determined that the costs would outweigh the benefits but it is a changing equation as we see the development of our industry move in a sort of pro-alliance way.”

Allegiant’s entrance into the Hawaiian market came up, and what Hawaiian could say about it was a bit limited because thye have yet to announce any routes. But Dunkerley did mention that, if one looks at Allegiant’s current domestic route structure, they could be flying on routes that Hawaiian doesn’t, which could reduce the competitive effect of their entrance.

When asked about ancillary revenues as part of the Allegiant question, Dunkerley said that “we are looking at ancillary revenues…we are absolutely committed in this direction.”

Dunkerley also provided some interesting notes on performance on different parts of the route network. On the interisland side, it reported that load factors were up over 4%, with PRASM up over 30%. It would appear that this market has rationalized a bit now that go! and Mokulele have teamed up.

PRASM for transpacific flights was down about 3%, and Dukerley had some very interesting commentary on that result:

“While this number is clearly very different from the year-on-year numbers being reported by our competitors for their domestic networks, it is important that the raw numbers are viewed through the lens of the vastly different circumstances this time last year on the West Coast to Hawaii routes, and the other domestic routes. Unlike most of our competitors who reported substantial losses last year, Hawaiian had a good 2009, on the back of a surprisingly mild slowdown in demand for Hawaii vacations. In fact, the decline in US West Coast to Hawaii revenue per seat mile for all of last year was a remarkably modest 5%, considering the state of the economy. During this period, demand in other markets, with a much higher exposure to business traffic, was down substantially more. It’s not surprising, therefore, that both the recovery in demand for our…[transpacific]…markets is less dramatic than in other markets, and that airlines have belatedly reacted to the good conditions of last year by adding capacity this year.”

Anyway, that’s the stuff that really interested me. I haven’t been able to find a free transcript of the call, but if you’re interested in listening for yourself you can find a recording of the call here.

Hawaiian is also having an investor day next week, so there could be some interesting information coming out of that as well.

Hawaiian Airlines announced yesterday that it will start flying Maui-Vegas service twice-weekly in October. When one looks at the route its not a whole lot different from other Hawaiian routes that we’ve seen in the past couple of years or so. Many of the routes where Alaska has grown are ex-ATA and ex-Aloha routes, in the case of Maui-Vegas, ATA flew the route from 2007 until its demise in April 2008. US Airways also started flying the route in March 2006 but dropped it later in 2007. And while it wasn’t nonstop service, Aloha did provide one-stop flights to Maui by way of Oakland.

Photo Credit: Flickr User Ack Ock

The new flight, operated with 767-300 aircraft, will depart Vegas on Sundays and Wednesdays, and the return from Maui to Vegas leaves on Mondays and Thursdays. While the schedule has yet to be posted I’d think that those aircraft will then fly off to Honolulu, but I’m not too sure about that. Right now Hawaiian has three Vegas departures to Honolulu, with two of those being daily.

Anyway, I think this is a smart move. It doesn’t seem like US Airways and ATA had trouble filing seats, with the two carriers averaging an 86% load factor in all of 2007, so I’m guessing yields weren’t too hot. Hawaiian is showing some capacity restraint here with two flights per week, and passengers can still access Maui the other five days of the week via connections in Honolulu. So we’ll see how it goes.

Meanwhile, I’m interested in seeing what Hawaiian does as they get more A330s, which give them more range