Five years ago, Hawaiian Holdings (NASDAQ:HA) ordered 16 medium-range Airbus (NASDAQOTH:EADSY) A321neos. It later agreed to lease two more A321neos, with all 18 aircraft scheduled for delivery between 2017 and 2020.
Hawaiian Airlines received its first two A321neos from Airbus in late 2017. Entering 2018, the carrier expected to have eight A321neos by the middle of the year, allowing it to replace its aging Boeing 767s and increase service during the summer peak season. However, a new round of production miscues at engine supplier Pratt & Whitney delayed this year's deliveries.
These delays have negatively impacted Hawaiian Airlines' profitability in the first half of 2018. Fortunately, Airbus is finally catching up, which should boost Hawaiian's profit growth over the next several quarters.
The strategic rationale for the fleet transition
The Airbus A321neo has enough range to serve West Coast-Hawaii routes, which account for about half of Hawaiian Airlines' revenue. Meanwhile, they are smaller and much cheaper to operate than the A330 and 767 widebodies that Hawaiian has been using in those markets.
As a result, the A321neos will open new route opportunities in lower-traffic West Coast-Hawaii markets that couldn't support daily widebody service. Additionally, Hawaiian Airlines will use the A321neos to retire its remaining 767s by the end of 2018. (It had eight at the beginning of the year.) This will allow the carrier to reduce capacity on some West Coast routes while still offering daily service.
Hawaiian Airlines originally planned to have seven A321neos by the end of March. Instead, it began the year with two A321neos in its fleet and the third one didn't arrive until May. This delayed fleet transition increased Hawaiian Airlines' unit costs in the first half of 2018.
First, the company trained dozens of pilots to fly the A321neo in late 2017 and early 2018, but then it didn't have enough work for them. The reduced pilot productivity negatively impacted unit costs. Second, Hawaiian originally planned to retire its oldest 767 early in the year. It had to do extra maintenance work in order to return that plane to service temporarily. That added costs beyond the unit cost headwind of using a less efficient plane rather than an A321neo.
As a result, Hawaiian Airlines' adjusted non-fuel unit costs rose 4.3% year over year in the first quarter. In a guidance update last month, Hawaiian projected that adjusted non-fuel unit costs would rise 5% to 7% in the second quarter. (It also faced unexpected cost headwinds during Q2 from a labor contract amendment and an unscheduled maintenance event for one of its aircraft.)
The story is about to change
The good news for shareholders is that after taking its first A321neo delivery of the year in May, Hawaiian Airlines received three more in June (including two in the last few days of the month). It took delivery of two more A321neos late last week. Another one -- Hawaiian's ninth A321neo overall -- has already been built and will presumably be delivered within the next month or so.
Meanwhile, Hawaiian's first 767 retirement of the year took place last month. That aircraft is one of three that will be sold to United Airlines.
With the fleet transition now progressing rapidly, Hawaiian's unit cost trajectory will improve dramatically. Most notably, the A321neos will have very low maintenance costs (especially when they are brand new). Whereas non-fuel unit costs rose about 5% in the first half of 2018, the company's guidance implies that non-fuel unit costs will be roughly flat for the rest of the year.
Furthermore, the A321neos are likely to be 30% more fuel efficient than the 767s they are replacing. That will unlock substantial fuel savings as the 767s are retired.
The new fleet should also improve unit revenue
In addition to driving cost savings, the 767-to-A321neo transition will also boost Hawaiian Airlines' unit revenue. The A321neos each have 189 seats, compared with more than 250 seats for the 767s.
By deploying A321neos in the place of 767s (or even larger A330s) on lower-demand routes, Hawaiian won't have to offer as many discounted tickets to fill its planes. Additionally, the A321neos have a much higher proportion of premium seats than the 767s that are being retired. Both factors should help accelerate Hawaiian Airlines' unit revenue growth.
Hawaiian Airlines is set to report solid (if not spectacular) results for the first half of 2018, despite the negative impact of A321neo delivery delays. Recent volcanic activity on Hawaii's Big Island hasn't helped, either. But Hawaiian is now ready to retire its remaining 767s at a rapid pace over the next few months, unlocking substantial cost savings and unit revenue growth potential. That should help snap Hawaiian Holdings stock out of its recent funk.