Hawaiian Airlines Goes Global: Why It Matters

Last week, Hawaiian Holdings (NASDAQ: HA  ) subsidiary Hawaiian Airlines added yet another new international route from its Honolulu hub: Auckland, New Zealand. Auckland is the seventh new international destination Hawaiian has added in the last two-and-a-half years, following Tokyo, Osaka, Fukuoka, and Sapporo (all in Japan), Seoul, South Korea, and Brisbane, Australia. Hawaiian will also begin service from Honolulu to Sendai, Japan, in June (as part of a triangle route with Sapporo), and plans to begin service to Taipei, Taiwan, in July. 

Revenue diversification
By July, Hawaiian will fly to 13 destinations in Asia and Oceania, up from just four in 2010. Adding these international flights has provided significant revenue diversification for Hawaiian; international routes account for 32% of Hawaiian's revenue, and that percentage is growing. Most recently, Hawaiian has been focusing its growth on markets where there is little or no competition. It is the only carrier on the Sapporo and Brisbane to Honolulu routes, and will be the only carrier on its upcoming routes to Sendai and Taipei. Hawaiian is also the only American carrier serving Auckland, and competes only with Air New Zealand on the Auckland-Honolulu route.

Adding routes with no competition has an obvious benefit: It creates pricing power for Hawaiian. Most of the company's new destinations have significant untapped demand for travel to Hawaii, and Hawaiian Airlines should see rising traffic as residents become aware of the new service. Furthermore, Hawaiian's growing international network creates possibilities for connecting passengers traveling between the U.S. mainland and international destinations via the Honolulu hub.

Merger in the future?
Hawaiian's strong and growing international presence makes the company an intriguing merger candidate. American Airlines (UNKNOWN: AAMRQ.DL  ) has been historically weak in Asia; as of this summer it will have just eight routes to four Asian cities (Tokyo, Shanghai, Beijing, and Seoul). Merger partner US Airways (NYSE: LCC  ) brings nothing to the table: It has never served Asia. Neither of the two carriers have any flights to Oceania, either. As such, Hawaiian could be a future merger target for American. Honolulu is ideally located for connecting traffic between North America and Oceania. While it is not as convenient for connecting traffic between North America and Asia -- for most itineraries it is at least 1000 miles out of the way -- offering free overnight layovers in Honolulu could attract passengers. Moreover, with a market capitalization of approximately $325 million, Hawaiian would be a relatively cheap acquisition.

Alaska Air (NYSE: ALK  ) could be another suitor, though this scenario is somewhat less likely, and could run into regulatory issues since the two are the leading carriers from the West Coast to Hawaii. Alaska does not have any international presence, although it has a partnership with Delta Air Lines (NYSE: DAL  ) that gives its customers access to Asia. A combination with Hawaiian would give Alaska a launching pad to introduce its own international service to Asia, the fastest-growing aviation market in the world.

Conclusion
Hawaiian Airlines' increasing international footprint is a key asset for the company. Over the next few years, the focus on international routes that have less competition should boost the company's profit margin. Moreover, this large international presence could also make Hawaiian a desirable takeover target in the next few years.

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Read/Post Comments (7) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 20, 2013, at 7:56 PM, ILIKETOFLY wrote:

    If Hawaiian does merge, I hope it is with Delta. Thank you.

  • Report this Comment On March 21, 2013, at 8:52 AM, Johnsboyz wrote:

    Alaskan does have an international presence in Mexico. I believe the article meant to say they have no ASIAN international presence!

  • Report this Comment On March 21, 2013, at 10:23 AM, SkyJet wrote:

    Dear ILIKETOFLY,

    Alaska Airlines has a stellar reputation and would be a MUCH better fit for a Hawaiian Airlines merger than Delta. If anything, Delta would and shall merge with Alaska Airlines, before merging with Hawaiian. Alaska Airlines and Hawaiian both have strong cultural ties as well, which puts the two at a better advantage of having a smooth and seamless merger transaction.

  • Report this Comment On March 21, 2013, at 10:37 AM, nytflyt wrote:

    All this speculation is fine, however Hawaiian is going to have increasing headwinds due to the difficulties in finding and developing markets that will be profitable and is at the moment under the burden of a difficult debt load and the lack of free cash flow going forward if things don't go perfectly.

    As a merger candidate I can't see any airline paying a premium for the "Hawaiian" name and goodwill which is mostly what Hawaiian brings to the table, yet that doesn't rule out someone doing something stupid and overpaying.

    I wish them well.

  • Report this Comment On March 21, 2013, at 10:44 AM, nytflyt wrote:

    Delta would be the best candidate to merge with Hawaiian.

    Alaska has little international experience, American will be infected by the virus which is USAir - eventually going to do itself much harm.

    United isn't much better, though trying.

    The true value of Hawaiian is its name which differentiates itself from every other airline on the planet and in turn highlights what it does best, all in one word.

  • Report this Comment On March 22, 2013, at 11:09 AM, TMFGemHunter wrote:

    Thanks for the correction, Johnsboyz: I meant that Alaska has no presence outside of North America. But I should have said that in the article!

    @nytflyt: I don't think Delta really needs Hawaiian. It has a good presence in most of Hawaiian's markets already. A combination wouldn't be bad, per se, but I think that Alaska would be a much more logical target for Delta.

    I don't see Hawaiian having trouble developing profitable markets. Hawaii is a popular vacation destination, and there are plenty of Asian countries with a growing middle class where you could see demand double or even triple in the next decade. The biggest headwind for HA is simply that it can take up to three years for a new route to fully ramp up. As the pace of expansion slows down over the next couple of years, I expect profitability to jump.

  • Report this Comment On March 29, 2013, at 1:31 PM, nytflyt wrote:

    Then I guess you missed the narrow body agreement between Airbus and Hawaiian.

    HA is spending nearly $3 billion to shore up its West Coast markets and was punished in the stock market after the announcement.

    These are destinations with lower margins and greater competition.

    HA doesn't have a lock on future profits by any means. Actually far from it.

    As far as the Delta merger was concerned, you are correct. I was looking at it from Hawaiian's perspective.

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