Hawaiian Airlines Goes Global: Why It Matters

Hawaiian Airlines' recent global expansion is diversifying its revenue base while moving the carrier into markets with less competition. This should boost the company's profit margin over the next few years. Furthermore, Hawaiian's growing footprint in Asia and Oceania could make it an intriguing acquisition target for other airlines.

Adam Levine-Weinberg
Adam Levine-Weinberg
Mar 20, 2013 at 3:05PM
Industrials

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 (UNKNOWN:LCC.DL) 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.