Hawaiian Holdings, Inc. Retrenches Again: Smart Move or Sign of Weakness?

Hawaiian Holdings, Inc. is dropping another route from its international network. Is this a good thing or should investors be worried?

Mar 4, 2014 at 11:11AM

Last week, Hawaiian Holdings, (NASDAQ:HA) announced that it will end its daily flights between Honolulu and Fukuoka, Japan, at the end of June. This marks the second international route that Hawaiian Airlines has canceled in the past year -- last April, the company decided to drop its four-times weekly service between Honolulu and Manila.

Both of these decisions to drop unprofitable international routes come in the context of rapid growth in Hawaiian's international route network. Even after dropping these two cities, Hawaiian Airlines will have added eight net new international markets in less than four years.

Hawaiian A

Hawaiian Airlines has been expanding rapidly to international markets. Photo: Hawaiian Airlines.

Investors could interpret Hawaiian's decision to pull back from some international markets in two ways. First, it could be seen as evidence that international expansion is not very promising for Hawaiian in general. Alternatively, it could be seen as a sign that Hawaiian has plenty of other opportunities to use its aircraft profitably, so it doesn't need to hang on to routes that aren't working out. Fortunately for shareholders, the second interpretation seems to be correct.

Irrational competition
On the Manila-Honolulu route, Hawaiian Airlines faced what appeared to be an irrational competitor in Philippine Airlines. Due to stiff price competition, Hawaiian's average fare on that route dropped to less than $400, barely enough to cover the price of fuel.

At the same time as Hawaiian announced that it was dropping the Manila service, it rolled out plans to fly from Beijing to Honolulu. (Those flights are scheduled to start next month.) Long term, moving this capacity from Manila to Beijing seems like a no-brainer. The growth of the Chinese middle class over the next decade should drive an explosion in demand for travel to vacation destinations like Hawaii.

Another one bites the dust
Fukuoka is now the second destination to get pulled from Hawaiian Airlines' international route map. It was not much of a surprise to learn that this route was continuing to underperform, as Hawaiian has run into a lot of bad luck with this service.

As of the summer of 2011, no airline flew nonstop between Fukuoka and Honolulu. However, in the first week of September, Delta Air Lines (NYSE:DAL) announced that it would fly the route seasonally beginning in late December. Just a week and a half later, Hawaiian announced plans to fly daily to Fukuoka year-round starting in April 2012.

Given the significant lead time associated with planning new routes, Hawaiian undoubtedly had been doing market research and was close to announcing its Fukuoka service when Delta stole its thunder. Additionally, Delta eventually upgraded its Fukuoka-Honolulu flights to year-round service. While the route probably would have worked if Hawaiian had the only nonstop flights, competition from Delta made it hard to find enough demand.

In October 2012, Hawaiian Holdings CEO Mark Dunkerley stated that the Fukuoka route was ramping up more slowly than the carrier's routes to Tokyo and Osaka (added in 2010 and 2011, respectively). However, he still characterized the route's performance as "good" relative to a typical new route.

Unfortunately, the yen began a six-month long slide against the dollar right around then. Since Hawaiian sells virtually all of its tickets for Japanese routes in yen, but nearly all of its costs are dollar-denominated, this shift made it a lot harder to earn a profit. Hawaiian would have needed to raise prices (in yen) by nearly 30% just to achieve the same financial results!

US Dollar to Japanese Yen Exchange Rate Chart

US Dollar to Japanese Yen Exchange Rate, data by YCharts.

To make matters worse, Delta had hedged at least 50% of its yen exposure through 2015 in the 80 yen per dollar range. This has shielded Delta from the yen devaluation to some extent, giving it an artificial cost advantage. While the advantage is temporary, Hawaiian doesn't have the financial heft to play "chicken" with Delta, hoping that Delta would drop the Fukuoka route after its hedges run out in 2016.

Plenty of opportunities left
The timing of Hawaiian's decision to stop flying to Fukuoka is no accident. Hawaiian's routes to the West Coast performed very well last summer, and the capacity that would have been devoted to Fukuoka flights is now available for additional summer seasonal service.

Beyond the summer, Hawaiian has several options for this extra capacity. One likely alternative is that it will boost frequencies on some of the routes that it flies less than daily. For example, Hawaiian is adding a fourth weekly flight to Brisbane, Australia, at the end of this month, but it has expressed interest in eventually moving to daily service there.

Hawaiian could also use the extra capacity to add another city to its route network -- either an eastern U.S. gateway like Boston or an Asian gateway like Hong Kong. Lastly, it could bolster its Maui hub by adding direct flights to Maui from one of the West Coast gateway cities, where it only flies to Honolulu at present.

On the way up
Hawaiian Airlines has plenty of profitable routes and plenty of expansion opportunities. Thus, it's actually comforting to see that management is willing to pull the plug on routes that aren't working. The Manila and Fukuoka routes both faced unique challenges, whereas Hawaiian's international routes to Tokyo, Osaka, Sydney, and Brisbane quickly became successful, and its routes to other cities like Seoul, Taipei, and Auckland seem promising.

Dumping the low-performing routes to Manila and Fukuoka should help Hawaiian Airlines return to solid unit revenue growth in its international business by this summer, after enduring double-digit declines last year. This will provide a better platform for future growth. Shareholders don't need to worry much about Hawaiian's long-term strategy.

3 top stocks for the new U.S. energy boom
Record oil and natural gas production is revolutionizing the United States' energy position. The Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers