Last week, Hawaiian Holdings (NASDAQ:HA) announced that it will join the movement toward flat-bed first and business class seats that has swept through the airline industry recently. The company will outfit each of its Airbus A330s (of which there will be 23 by mid-2016) with 18 lie-flat first class seats.
This move will give Hawaiian Airlines a leg up in competing for high-spending customers in the markets where these planes are deployed. As well-to-do travelers learn about Hawaiian's new product offering, the additional premium seat revenue should more than offset the impact of having fewer seats on each plane.
The new configuration
Up until now, Hawaiian Airlines has opted to stick with "recliner"-style seats in first class. While these seats are universally acknowledged to be less comfortable than flat-bed seats -- especially for longer flights and redeyes -- they take up less space. Hawaiian's management reasoned that leisure travelers were less likely to pay up for a flat-bed seat, especially for daytime flights.
However, with a new fleet of A321neos arriving between 2017 and 2020 to serve West Coast-Hawaii routes, the A330s will increasingly be deployed on longer routes in the coming years. As a result, Hawaiian Airlines decided that it was time for flat-bed first class seats.
Rather than picking out an off-the-shelf first class seat, Hawaiian Airlines opted to work with a design firm and seat manufacturer to create a customized first class seat with island-themed design notes. The seats will be arranged in a 2-2-2 configuration, and each one will convert to a 76-inch long bed.
The new configuration will also increase the number of "Extra Comfort" premium economy seats from 40 to 68. This will allow Hawaiian Airlines to better meet the strong demand for Extra Comfort seats. The "price" of using more space on the aircraft for premium seats is that the total seating capacity of each A330 will decline by 5.4%, from 294 to 278.
The timing and financial impact
The first aircraft with the new seats is expected to arrive next spring. Hawaiian Airlines then hopes to retrofit its other 22 A330s between September 2016 and mid-2017.
The new configuration will benefit Hawaiian's revenue per available seat mile. It will have more Extra Comfort seats to sell -- for an extra charge of more than $100 each way on Hawaiian's longest routes -- and it should be able to get higher fares for its new first class seats. On the other hand, the reduction in the seat count for each plane will put pressure on unit costs.
Hawaiian Airlines CEO Mark Dunkerley says that the company did "extensive modeling" to determine the best configuration for its A330s. In other words, he thinks that the increase in unit revenue from the new configuration will more than offset the increase in unit costs.
For Hawaiian's longer routes -- mainly its international flights, but also its daily service to New York -- that's probably true. All of these routes have overnight eastbound flights. Most people who are willing to pay for a first class seat are willing to pay even more for a seat that converts into a bed for redeye flights like this. The additional legroom of an Extra Comfort seat is also valuable to many customers on these flights.
However, these longer routes are only enough to utilize a little more than half of Hawaiian's A330 fleet. While Hawaiian Airlines plans to add more flights to Asia, the East Coast, and perhaps even Europe over time, it will clearly have A330s flying on shorter West Coast-Hawaii routes for some time.
Most of these flights are six hours or less and operate during the day. That could make the financial benefits of the new configuration smaller or non-existent. As a result, the full financial impact of the reconfiguration won't be felt until Hawaiian completes its refleeting initiatives around 2020.
Hawaiian Airlines' long-term strategic vision appears to be that after it finishes retiring its small fleet of 767s, the flat-bed equipped A330s will specialize in longer-haul routes while the new A321neos will be optimally configured for West Coast-Hawaii service.
Customers in the western U.S. will likely continue to see the A330 in Phoenix (which is beyond the A321neo's range) and Las Vegas, where Hawaiian operates a redeye flight in each direction. The A330s are also likely to stay on in Los Angeles, which is the biggest and most competitive market for travel to Hawaii. Hawaiian Airlines could also keep the A330 in a few other ultra-competitive markets like San Francisco and Seattle to attract a more upscale clientele.
However, in other West Coast cities, the new A330s are likely to fly away for good within a few years of receiving their new upscale cabins. By 2020, the smaller, cheaper-to-operate A321neo will be Hawaiian Airlines' main aircraft for serving West Coast routes. First class passengers may yearn for the roomier A330, but this fleet strategy will maximize Hawaiian's profitability.
Adam Levine-Weinberg owns shares of Hawaiian Holdings, and is short April 2016 $38 calls on 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.