Hawai'i's local airlines could soar — or stumble

By Susan Hooper
Advertiser Staff Writer

The disintegration last week of the proposed merger between Aloha and Hawaiian airlines means that Hawai'i's residents and visitors will continue to have a choice of local carriers, at least for the foreseeable future.

As Aloha Airlines continues with a flight schedule separate from Hawaiian's, analysts anticipate that both airlines will look carefully at the interisland market — an important but costly aspect of business. Jeff Widener • The Honolulu Advertiser

Neither has so far revealed details of their strategies, but since they now are not joining forces, airline analysts say, each will need to make substantial changes to their operations to not only survive but to prosper.

Hawaiian Airlines gave an indication of the possible shape of things to come when it accelerated expansion plans and announced Thursday that in June it would start new daily nonstop flights between Honolulu and two mid-sized California cities, Sacramento and Ontario.

Such long-haul flights are the airlines' best bet for financial recovery, analysts say, because they allow the businesses to offset the high cost of operations with higher ticket prices than short interisland flights can command. Mainland routes also are showing strong demand, allowing the carriers to offset a stagnant and more expensive interisland market.

Aloha Airlines also has plans to expand service, according to president and chief executive Glenn Zander, who on Friday outlined a number of his company's post-merger plans, including expanded trans-Pacific service, adjustments to the interisland coupon program to make it more profitable, and taking advantage of a federal aviation loan guarantee program passed by Congress after the Sept. 11 attacks to give Aloha an infusion of operating cash that likely would be hard to come by otherwise.

"When I was asked about the merger at the Legislature, I said the one option not available to us was the status quo," Zander said. "You're not going to have two companies continue to lose money flying people around the interisland market. Quite how the status quo will change remains to be seen."

Yet no matter how impressive their plans may be, observers said, the two airlines face formidable challenges.

Even before the attacks, neither airline was showing substantial profits. In the interisland market, the growing number of direct flights from the U.S. Mainland to Neighbor Islands had cut sharply into Honolulu-Neighbor Island traffic. The state's decade-long economic torpor led local customers to cut down on both business and pleasure trips.

After the attacks, Hawaiian and Aloha both struggled to cope with the sudden, sharp loss of passenger traffic. Both cut service and furloughed hundreds of employees. Six months after the attacks, both say passenger traffic is improving — especially from the U.S. West Coast. However, many lingering effects remain, including continuing weakness in Japanese tourism.

Merger may offer blueprint

Key to the airlines' success is cutting costs while building business and increasing revenues, according to analysts. Airlines' top costs tend to be fuel and labor. Since there is little either can do about fuel costs, they likely will be looking to their employees for help.

The subject is bound to be touchy, in part because the airlines still have not recalled all employees furloughed after the September attacks.

And as much as they may want to support their companies as they renew competition, unions also have to protect the interests of their members.

"They haven't asked for anything specific, but we have meetings scheduled in the next several weeks," Nakaoka said. Aloha has about 370 flight attendants, and about 31 are still on furlough as a result of the September attacks, she said.

Nakaoka said it was "too early to say" how much the union might be willing to sacrifice to keep Aloha afloat. And, she said, "We definitely think that if the company is going to be asking us to work with them that they should be recalling the furloughed flight attendants."

Steve Brenessel, communications chairman for Aloha's Council 80 of the Air Line Pilots Association, said the company has asked for all employee groups to develop suggestions on how labor and management can "work together to get through this difficult time."

"We as pilots and the company are both optimistic, and we're confident that we can find solutions," he said. "We're willing to look at everything right now."

The rivalry between Hawaiian and Aloha dates back more than 50 years, to the 1946 founding of Aloha as competition for the then 17-year-old Hawaiian Airlines. Mergers between the two have been tried before without success.

Now, as they set aside their current plans to merge, the airlines are likely to become even fiercer competitors than before the merger was announced, analysts say.

But even though they are working separately, clues to the changes each might make may be found in the plans for the merged carrier that were described over the past three months by Greg Brenneman, the former Continental executive who was to have been chairman of the merged carrier.

Brenneman said the new airline would continue to fly to the same interisland markets each carrier serves, but he expected to cut the total number of interisland flights by between 10 percent and 12 percent.

Too many interisland planes were taking off at the same time with too few passengers, Brenneman said.

Brenneman also said he expected to build the new carrier's trans-Pacific service, adding flights to U.S. cities such as Sacramento, Fresno and Phoenix, and secondary markets in Japan.

Brenneman also repeatedly criticized the two airlines' ticketing systems. He wanted to offer higher fares for passengers traveling at peak times and lower fares for those willing to travel at off-peak periods, a standard practice in the industry but something neither carrier does much of now.

In addition, he said, he wanted to revamp the airlines' coupon system, arguing that currently as much as one third of the airlines' revenue from coupons is lost because they are sold at discounts to wholesalers and travel agencies, who resell them at higher prices. And because the coupons can be used at any time, it is difficult for the airlines to predict their flight revenues.

With coupons, "airlines lose control of their ultimate product pricing," said Danny Casey, a Honolulu travel agent and president of the Hawai'i chapter of the American Society of Travel Agents.

Casey said coupons were first started by (third carrier) Mid-Pacific Airlines in the early 1980s, "to grab market share." Since then, Aloha and Hawaiian "have kept the coupons and new airlines (including Mid-Pacific) have come and gone."

Now, Casey said, "The coupons have become a vehicle for cash flow. If the airline needs an infusion of several million dollars for payroll or other expenses, they would sell deeply discounted coupons to wholesalers to generate cash flow. ... They get the cash up front, but miss the opportunity to get more revenue per seat down the line."

In addition to the possibility of reviewing their coupon systems, Casey said he expects Hawaiian and Aloha to make adjustments to their interisland schedules.

"They're going to have to do something to match their schedule with the actual demand," he said.

He also suggested that each airline should carve out its own niche in the market, with Aloha capitalizing on its interisland cargo strengths and Hawaiian touting its long-haul expertise.

"They're not going to be able to succeed to be the same thing and top each other," he said.

Summer may tell story

The upcoming summer travel season will do much to tell how the two Hawai'i airlines succeed in the post-Sept. 11, post-merger environment, according to analysts.

"A lot of their survival will be what kind of action is coming in from heavy summer travel from the West Coast," said George Wozniak, president of Hobbit Travel in Minneapolis.

And as Hawai'i customers prepare for the likelihood of increased competition from the two carriers, analysts are not counting out the possibility of even more rivals entering the Island market.

Although third carriers traditionally have not done well in Hawai'i, the concept has worked elsewhere.

In recent years, low-cost jet operations such as Jet Blue and Southwest Airlines have become serious threats to established companies with older equipment and higher costs, said Patrick Murphy, a Washington, D.C., airline analyst.

Reach Susan Hooper at 525-8064 or shooper@honoluluadvertiser.com.