Hawaiian Holdings (NASDAQ:HA) is reaching the end of a period of breakneck global expansion, having moved decisively to diversify its traffic in the last three years. In that short period of time, Hawaiian Airlines has added nine new international markets, as well as one new U.S. mainland city. During this expansion period, Hawaiian was focused on improving its brand recognition in new markets and thereby driving passenger revenue growth.
Growing the top line is still a priority for Hawaiian, despite the slower capacity growth it expects for the next few years. However, the company is getting more "creative" in pursuit of this goal.
At Hawaiian's investor day on Tuesday, executives described a number of initiatives to boost revenue, aside from relying upon higher demand. Altogether, the company has four distinct strategies for boosting revenue. The expected revenue gains should drive strong earnings growth for Hawaiian over the next two years.
Boosting air-related ancillary revenues
Hawaiian's first strategy for revenue growth is an increased focus on air-related ancillary products -- products and services for which Hawaiian can charge extra on its flights. Two months ago, it announced that it would offer iPad Minis -- loaded with games and 100 hours of TV and movies -- for rental on most Boeing 767 flights. The iPad Minis will be complimentary for business class customers, but economy class passengers will be able to rent them for $15-$17 per flight segment.
On Tuesday, Hawaiian announced another new product. Beginning next June, the carrier's Airbus A330 aircraft (which currently make up about half of its long-haul fleet, rising to 75% by late 2015) will be outfitted with "Extra Comfort" seats. By removing a bulkhead, Hawaiian was able to ensure that each of its A330s will have 40 seats with 36 inches of legroom each (five inches more than the standard seat pitch).
Passengers who pay for these extra comfortable seats will receive priority boarding and complimentary access to all of the premium content on Hawaiian's seat-back personal entertainment system. (International passengers will have a few additional perks.) Hawaiian has never had a true "premium economy" product before, even though most of its flights are five to 10 hours long. The new "Extra Comfort" product could provide nearly $7 million in incremental profit annually.
Improving other ancillary revenues
Some leisure airlines -- most notably Allegiant Travel (NASDAQ:ALGT) -- have become very good at selling travel bundles. Allegiant boasts that its sales of hotel rooms, rental cars, and other travel products provide a source of high-margin, low-risk revenue.
Hawaiian wants to do better in this regard. Chief Commercial Officer Peter Ingram admitted that the company's website is not set up particularly well for selling these high-margin ancillary products. Now, the company is redesigning its website from the ground up, in part to boost ancillary product sales. Hawaiian believes it can double hotel and car rental sales over the next few years, adding several million dollars to its bottom line each year.
Hawaiian Airlines is also getting a windfall due to the expiration of its co-branded credit card agreement. The company was able to improve the terms going forward, which is expected to provide $100 million in incremental cash flow over the six-year term (starting in January).
Hauling more cargo
Cargo revenue growth has already been a big win for Hawaiian Airlines. Once an airplane is flying a given route, adding cargo to its belly is fairly cheap, making cargo revenue a very high-margin product. A major piece of the business case for Hawaiian's recent move to phase out its Boeing 767s was the A330's superior cargo capabilities.
Cargo revenue has more than doubled since 2010, due to the addition of A330 aircraft and Hawaiian's expansion into new markets in Asia and Australia. However, Hawaiian Airlines executives believe that while the company has harvested the "low-hanging fruit," there is plenty of room to grow cargo revenue over the next few years.
Improving revenue management
While Hawaiian is clearly focused on boosting non-ticket revenue, the carrier is eager to improve ticket revenue as well. This year, the company has rolled out a new revenue management system in stages. (Revenue management systems determine how many seats to sell at each price level in order to maximize each flight's total revenue.)
As the new revenue management system gathers data about passenger booking trends, it can better predict future demand, improving its own performance. Hawaiian believes that this new system can boost its unit revenue by at least 0.5%, and perhaps as much as 2.0%. With Hawaiian's annual passenger revenue approaching $2 billion, this is a $10 million-$40 million incremental revenue opportunity over the next few years.
Foolish bottom line
Hawaiian's new revenue initiatives may seem small in comparison to the enormous expansion that has occurred over the last three years, which has added nearly $1 billion in annual revenue. However, they could have a more dramatic impact on Hawaiian's profitability. These new revenue opportunities carry very high margins because they entail few incremental costs (although they do require some initial investments).
The maturing of Hawaiian's current route portfolio should already give unit revenue a boost, benefiting the company's profit margin. The revenue initiatives Hawaiian outlined this week should provide another margin tailwind, leading to significant earnings growth in the next two years or so.
Fool contributor Adam Levine-Weinberg owns shares of Hawaiian Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.