Hawaiian’s Big Growth Gamble
by David Rosenbaum, CFO Magazine (excerpt)
Last week Hawaiian Airlines launched its first, and currently the only, daily nonstop flights from New York’s JFK Airport to Honolulu, growing its overall capacity nearly 25%. Starting a new air route, admits Hawaiian CFO Scott Topping, is “always a risk.” That’s especially true in difficult economic times like these, and particularly in what Topping describes as fundamentally a “terribly difficult industry.”
Over many decades, the airline industry’s record is “break-even at best,” notes Topping, pointing out that the business of flying planes and people is “highly regulated, labor intensive, and energy intensive” with “high capital costs.” And yet, he notes, even with all those difficulties, there’s a steady supply of investors “who want to start new airlines.” Topping believes this stubbornness stems in part from favorable U.S. bankruptcy laws that “let airlines go through Chapter 11 and emerge stronger with new costs and new investors that help them recapitalize,” much as Hawaiian did when it filed for bankruptcy in 2003, emerging in 2005 with, as one observer noted, “a better sense of who they are.”
“We’re focused on being a destination carrier,” says Topping. “We bring people to Hawaii. We stick to our knitting.”
Preparing for Hawaiian’s nonstop East Coast flight, however, entailed some complicated financial knitting. According to Robert Mann, president of R.W. Mann & Co., an airline analysis and consulting firm, Hawaii, like all primarily leisure destinations, is “heavily wholesaler driven, usually packaged as part of a vacation sold through retail. It’s an indirect ticket sale with extensive costs: commissions to retailers, discounts to wholesalers, high marketing costs.”
This all places pressure on Topping to work closely with the travel trade, and it emphasizes the importance of Hawaiian’s partnership with Jet Blue. Hawaiian will fly out of Jet Blue’s JFK terminal, and Jet Blue will handle some of the ground services, including baggage handling. Indeed, Mann believes Hawaiian’s code-share agreement with Jet Blue, in which Jet Blue and Hawaiian will reciprocally market their services and place their code on each other’s flights (providing seamless connections for Hawaiian through Jet Blue terminals in the Northeast), goes a long way toward mitigating Hawaiian’s risk.
But to fly from JFK to Honolulu, more than anything else, one needs big, expensive planes.
By year-end, Hawaiian will have nine 295-seat Airbus A330 aircraft in its fleet (at about $200 million per plane) and, says Topping, five more are coming next year. That’s not to mention even bigger, more expensive planes, Airbus A350s, ordered for 2017.
Indeed, Hawaiian took a negative net-income hit in 2011 that came from purchasing 15 airplanes it had on lease. “We chose to refinance them by purchasing them,” Topping explains. “The transaction was value-creating, but from an accounting perspective there was a $70 million one-time charge that hit the books. If you look at cash flow from owning to leasing, it’s positive.”
Topping says one of his biggest jobs in supporting Hawaiian’s growth strategy is making sure it’s adequately funded. “We have to be proactive in trying to line up debt or lease financing for the 2013 aircraft deliveries. The funding for three of those five [planes] is already taken care of. Staying ahead of this is the biggest risk. When it comes time to pay, and you haven’t got the money, then you have to pre-fund 2014 deliveries. You need to sign up terms with banks that will commit to fund them or leasing companies that will extend the lease. The sooner you can get it done, the better. That limits risk. If we were to wait, the banks would like that — they don’t want to commit super long-term — but that takes on the risk of credit markets drying up. I want it locked down.”
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