Isle airlines flying in another direction

By Michele Kayal
Advertiser Staff Writer

Lew Meteliz was miffed, really miffed, several weeks ago when an Aloha Airlines reservationist told him there were still seats open on the flight he wanted, but that his interisland coupon wouldn't get him one. All the seats for coupon holders were sold out.

Hawaiian Airlines is trying to make interisland flying less expensive by replacing its high-maintenance, gas-guzzling DC-9 fleet with 13 new, super-efficient Boeing 717 aircraft. Richard Ambo • The Honolulu Advertiser

Aloha almost immediately abandoned its apparent experiment with what industry insiders call "capacity control," a way to spread out discount fliers so each plane has the most profitable mix. But analysts and the airlines say that as changes occur in the interisland market, they may force those who live here to re-think the way they go about their Neighbor Island travels.

In the past five years, nonstop flights from the Mainland to the Neighbor Islands have nearly tripled, according to data from the Hawai'i Visitors and Convention Bureau, making an already shallow interisland market even weaker. Hawai'i's local airlines have sought bluer financial skies on the Mainland, with Hawaiian Airlines expanding its flights there and Aloha launching its first Mainland service. Meanwhile, Aloha has cut some interisland flights, and Hawaiian has brought in a new fleet of interisland planes that are smaller than the ones being replaced. Fewer Japanese visitors, once liberal with Neighbor Island day trips, and an increase in the number of people who visit only one island, have left an interisland market that the airlines say shows only meager growth in its best years.

Interisland flights aren't going away, the airlines and analysts say. Plenty of people still take multiple-island vacations, and the routes allow the airlines to offer Mainland customers easy access to the whole state.

But as nonstop Neighbor Island flights continue to increase, and Japanese and Mainland travelers grapple with anticipated economic turmoil, demand could shrink even further in the interisland market, pushing the airlines toward fewer flights or smaller planes, and, analysts say, inevitably higher fares.

"You're going to see reductions in local service, I don't think there's any way around that," said Stuart Klaskin, a partner at the Florida-based aviation firm Klaskin, Kushner & Co. "They could see a significant reduction in interisland discount fares — because there won't be excess capacity that needs to be sold," he added. "The market will shrink to what the market requires."

Interisland not profitable

Kama'aina long have seen interisland flights in a similar way to how New Yorkers think of the subway: the way you get around. Such thinking, combined with tourism, has made Hawai'i's airways among the busiest in the country. In 1999, Hawai'i had two of the nation's 20 busiest routes, according to the federal Bureau of Transportation Statistics. More people traveled between Honolulu and Maui than between New York and Washington, or Dallas and Houston, according to the data. More than 50 flights a day carry those Maui passengers alone.

Although many local residents use interisland airways to conduct their business, the routes' primary travelers are paying leisure or resident fares, making the flights some of the least profitable in the country. Both Aloha and Hawaiian say the market has been barely break-even for a decade or more.

"Suffice to say, we don't make money on our interisland operation," said Paul Casey, Hawaiian Airlines chief executive. "Haven't done (so) for some period of time."

So the airlines have adjusted. Aloha cut interisland flights by 8 percent earlier this year to 165 a day. And it added a new venture: Mainland flying. In just more than a year, Aloha has introduced service to Oakland, Las Vegas and Orange County, Calif., three of the most popular destinations for local residents.

Hawaiian Airlines, which says a largely flat interisland market actually grew 3 percent last year, has left its Neighbor Island schedule mostly intact, but at the same time has expanded its more profitable long distance flying to the Mainland and South Pacific. It has tried to make its interisland flying less of a drag on resources by replacing its high-maintenance, gas-guzzling DC-9 fleet with 13 new, super-efficient Boeing 717 aircraft. The $430 million investment is expected to save a bit less than $200 million in maintenance costs over the next decade, Casey said. The first of those planes began flying Thursday.

Aloha Airlines cut interisland flights earlier this year to 165 a day, and began service to Oakland, Las Vegas and Orange County, Calif. Advertiser library photo

And though Aloha Airlines chief executive Glenn Zander calls the airline's recent experiment with capacity control an example of "research spilling over into real life momentarily," he says he does not rule out a similar program in the future.

Both airlines are reluctant — and forbidden by federal law — to discuss potential fare increases. But both are firm in their conviction that capacity will be adjusted to market demands, whether those increase or decrease.

Aloha's Zander predicts interisland travelers could decline as much as 5 percent over the next five years, which would likely drive down the number of daily flights.

"You don't always have an immediate matching of capacity and demand," Zander said, "but over time you would see some decline in frequencies."

The airline could also meet the reduced demand with smaller planes, Zander said. Aloha has an interisland fleet of 18 737-200s, which average about 16 years old and generally have 118 seats. It has been looking for replacement aircraft for some time, Zander said, but must also find one with freight capability, making the task more complicated. Aloha carried 140.2 million freight-pounds interisland in 2000.

Hawaiian's new planes are already 10 seats short of the 133 found on its old DC-9s. The airline has no plans to add new flights, Casey said. But, he said, the number of flights and seats will match the market.

"If the market grows we'll add capacity," he said. "If it shrinks, we'll take it away."

Casey predicts the interisland market will hold steady — provided the Mainland downturn does not decimate tourism. "As long as total traffic to the state of Hawai'i continues to grow — and that's a big question mark because of the Mainland economy — the total interisland market shouldn't shrink that much," he said.

But one thing is certain, both executives say: as time goes on, Mainland and other long-distance flying will make up more and more business for Hawai'i's local carriers. Historically, interisland passengers provided about 80 percent of Aloha's total revenue, with the balance coming from cargo, handling contracts and Pacific routes. By the end of 2001 expansion, Zander says, it will drop to 60 percent.

At Hawaiian, about 35 percent of total revenue has traditionally come from the interisland market. That share shrank to 31 percent last year, and Casey says it will shrink further as the airline adds more trans-Pacific flying.

Two airlines better than one

As the interisland market evolves, local residents should not complain about service cuts and price increases, some analysts say. Encouraging the airlines to operate profitably, whatever that takes, they say, is the best way to keep a monopoly — or worse, a cessation of service — from coming to pass.

"You may not like this, but wouldn't you rather have an airline that's long-term sustainable because they're focusing on the flying that allows them to continue service to your community, even if it's not at the levels you're used to?" Klaskin said. "There are whole generations of people who have grown up with local air travel patterns as part of the culture. And people get very concerned, and legitimately so, when they start to see that shrinking and they can't get a seat for what they think is a reasonable fare. But the goal of an airline is to provide a good service at a reasonable price that makes a profit.

"It's not a public service industry. But that's very difficult for people to adapt to."

In no other market experts can think of do privately held airlines operate in such close quarters on such slight profit margins. To make things worse, Hawai'i's high-cost, low-yield interisland market, which puts heavy wear and tear on airplanes with more take-offs and landings than most other markets, primarily serve leisure travelers who are acutely price sensitive. In this environment, analysts say, it is difficult for either carrier to gain a significant advantage. Aloha and Hawaiian split the interisland market almost evenly, with slightly more going to Aloha.

In similar markets, the government often steps in. In the Bahamas, a tourist destination with 700 islands, 35 of which are inhabited, interisland service is offered only by the government-owned Bahamasair and a handful of charters, said Janet Johnson, Los Angeles-based area manager for the Bahamas Tourism Center. Numerous flights from nearby Florida go directly into the country's five major tourist destinations, Johnson said. This leaves profit-seeking airlines with little incentive to provide service between the various islands.

"The Bahamasair flights from (the main island of) Nassau to the outer islands are mainly Bahamians traveling back and forth," she said. "Because the government owns the airline, they have to make sure the citizens can get to the different islands. That's different from your private sector airlines that have to meet their bottom line."

But service in the Bahamas is more sparse than in Hawai'i. Johnson said there are perhaps half a dozen daily flights between Nassau and the second city of Grand Bahama, which she likened to Maui. Aloha Airlines alone offers 26 flights a day from Honolulu to Maui; Hawaiian offers roughly the same number. Fares have been relatively stable in the Bahamas, Johnson said.

Hawai'i is no stranger to government subsidized air service. Federal money subsidizes airlines that serve Hana, Kalaupapa, Kamuela and the island of Lana'i, according to the state Department of Transportation. The program, called Essential Air Service, was created more than 20 years ago after airline deregulation to assure flights to communities that otherwise might not support them.

But Essential Air Service is a dying program, analysts said, and there is little chance cuts in Hawai'i's interisland flights would ever reach a point where such drastic measures are necessary.

Both airlines profess a sense of responsibility to the community, and acknowledge that in Hawai'i they are "the local bus company," in Casey's words. But both airlines say they also have an obligation to their shareholders, and that the needs of the community must be carefully balanced with the need to make money. What that means exactly, they say, is difficult to outline because the market is such a strange beast. What is appropriate elsewhere, Zander says, may not be right for Hawai'i.

"If you were to compare this market to most airline markets in the U.S., people here who live, work and travel within the islands view it not so much as an airline experience, it's more akin to bus travel or the subway," Zander said. "And things that may work well on the Mainland — even for short-haul markets — may not necessarily work well here given people's expectations. This sort of traditional model of current airline yields management techniques that perhaps work well from Cleveland to Houston are not necessarily going to work well from Honolulu to Hilo."

Meteliz, of Kaimuki, couldn't agree more. Frequent, affordable air travel between the islands is a necessity, he said, and while he does not begrudge the airlines the need to raise fares or make other adjustments to maintain a decent profit, he says, the balance must not be lost.

"We are one community here in Hawai'i, and the airlines have to be run as they were in the past like a ferry," he said. "There is a line between reminding the local airlines to do what's appropriate for the unique situation, but also respecting the fact that they need to survive economically. That balance can be, and must be, maintained. And if it can't be maintained, then maybe the state has to come in and subsidize. Because it's a lifeline."