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Hawaiian Holdings' Turboprops Are Finally Nearing Takeoff

Since late 2012, Hawaiian Holdings (NASDAQ: HA  ) has been planning to open a turboprop subsidiary to serve smaller communities in Hawaii. These flights would complement Hawaiian Airlines' mainline service between the four largest Hawaiian islands and to a variety of U.S. and international destinations. However, the company's plans were severely delayed by federal budget cuts this spring that hit the FAA particularly hard.

As recently as October, Hawaiian Airlines executives complained that the FAA was being thoroughly uncooperative and that they had no idea when the new service, named Ohana by Hawaiian, would get off the ground. Other carriers looking to add new aircraft types, such as Allegiant Travel, encountered similar -- albeit less severe -- delays with FAA certification.

Fortunately, the FAA finally began to work last month on certifying Ohana for passenger service. As a result, by sometime this spring, Hawaiian Airlines should be able to start Ohana's turboprop service. By expanding the carrier's footprint within Hawaii, the launch of Ohana by Hawaiian should improve the airline's competitiveness and boost long-term earnings.

The turboprop opportunity
Ohana by Hawaiian will represent a small fraction of Hawaiian Airlines' total business. Today, interisland flying accounts for just 23% of passenger revenue, and that includes about 170 daily jet flights. By contrast, Ohana will operate two or three 48-seat turboprops, and will initially serve just two routes.

So why is Hawaiian even bothering with the turboprop business? The key lies in how it fills out the company's global route network. Viewed on its own, Ohana by Hawaiian doesn't look like much, but it puts Hawaiian Airlines even closer to being a "one-stop shop" for Hawaiian travel.

Hawaiian Airlines is currently the only airline that offers both interisland flights within Hawaii and long-haul flights to Hawaii. This gives it a competitive advantage over larger rivals in terms of bringing tourists to the state. Today, Hawaiian Airlines can seamlessly route passengers from any of its U.S. mainland or international gateways to any of the four largest islands through its hub in Honolulu.

However, tourists headed for Lanai or Molokai have no choice but to switch carriers. The two top airlines flying to those islands are Hawaiian's much-smaller rivals Island Air and go!, neither of which offers any long-haul service. Moreover, both of those airlines have been plagued with reliability problems, whereas Hawaiian is consistently the most punctual airline in the country.

The launch of Ohana by Hawaiian will therefore extend Hawaiian Airlines' competitive advantage. Upon the launch of its turboprop service, Hawaiian will be the only airline offering single-carrier service from outside of Hawaii to Lanai and Molokai.

The real financial impact will therefore be seen on Hawaiian's long-haul routes. If broadening the interisland network draws in just two- or three-dozen extra long-haul passengers each day to fill seats that would otherwise go empty, Hawaiian Airlines could add millions of dollars to its bottom line!

Looking for a springtime launch
When the "Ohana" brand was rolled out last February, Hawaiian Airlines executives expected the turboprop service to begin in the summer, about five months later. With Ohana already nearing completion of the preliminary stage of FAA certification, it seems likely that proving flights will be able to occur sometime this quarter.

Ohana plans to start service within one month of receiving its operating certificate. Indeed, hiring and training has finally ramped up, now that Hawaiian Airlines executives feel comfortable that Ohana will be able to start service soon. Barring any unforeseen setbacks, it seems likely that the first Ohana by Hawaiian turboprops will begin commercial service by April or May.

Foolish bottom line
Ohana by Hawaiian will be a small part of Hawaiian Holdings' overall business; it will probably represent less than 1% of total capacity. However, it could have an outsized effect on earnings over time by driving incremental traffic to Hawaiian's long-haul flights. Hawaiian Holdings shareholders therefore should be very happy that Ohana is almost ready for takeoff.

A super investing opportunity
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Adam Levine-Weinberg

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry!

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9/2/2015 3:59 PM
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