Hawaiian Air plans new strategy to survive crisis

By Kelly Yamanouchi
Advertiser Staff Writer

Hawaiian Airlines chief executive John Adams is at a crossroads.

John Adams, CEO of Hawaiian Airlines, is putting together a new strategy that he hopes will allow the airline to survive. Bruce Asato • The Honolulu Advertiser

Many U.S. airlines have announced dramatic reductions in flights and laid off thousands of their employees. Saddled with rising security costs and lower fares that have hurt their bottom lines, domestic carriers have yet to recover from the sharp decline in travel following the Sept. 11 attacks.

There are few signs of hope; a war with Iraq could further batter the struggling industry.

Hawaiian is carrying out layoffs of 150 employees announced in October. But it is shopping around a new business plan to workers and its business partners that Adams hopes will achieve substantial cost cutting and position the airlines to survive long-term in the market.

But Hawaiian isn't there yet.

"There are really a couple of challenges to the airlines. One is the obvious financial crisis in the industry and the other one is a transition into a new kind of way of operating airlines," Adams said in an interview last week.

Owned by holding company Hawaiian Holdings Inc. and employing 3,500 workers, Hawaiian focuses on the vacation travelers taking its 135 daily flights on 31 leased Boeing aircraft.

Its most recent financial report covering the third quarter of 2002 showed a 40 percent drop in net income. Hawaiian shares closed at $2 each Friday, down from a 52-week high of $4.60 last March. Hawaiian expects in coming weeks to report a loss for both the fourth quarter and the entire year of 2002.

Drastic steps

In an effort to save the airlines, Adams recently hired former British Airways and Sabena Airlines executive Mark Dunkerley as president and chief operating officer.

Hawaiian has since taken drastic steps to pare costs, including announced reductions in inter-island flights and elimination of interisland coupons. Both Hawaiian and competitor Aloha Airlines have maintained the inter-island flight business is simply unprofitable.

To Hawai'i residents and businesses, the cost-cutting steps have been painful.

Reduced flights especially hurt the Big Island, where residents say they have trouble getting to meetings and medical appointments on other islands because of fewer flights. Travelers enjoyed the popular coupon program because it allowed them to catch flights at the last moment, provided seats were available.

But the airlines say generous flight schedules and the on-a-whim coupon traveling are expenses they can no longer afford, and that in fact threaten their survival.

"It's almost hard to put into words how important having our own local airlines is," said Rex Johnson, director of the Hawai'i' Tourism Authority.

"They're extremely important to the (tourism) industry here."

Hawaiian found itself in ever-deepening financial quicksand after last year's planned merger with Aloha disintegrated. The carriers said at the time that they needed the merger to survive.

After the expected marriage fell apart, Hawaiian executives were forced to re-examine how they would soldier on and began looking at financially restructuring the airline.

Aloha's advantage

Today, Hawaiian and Aloha continue to compete in a marketplace that some say can't support two major independent carriers. Aloha achieved competitive advantage when it received approval for a $40.5 million federal loan guarantee and $37 million in labor concessions.

Aloha executives say it's difficult to compare the two airlines because their business plans and strategies are so different. But clearly Hawaiian feels it must achieve similar cost savings, if not a loan guarantee, to remain competitive.

Hawaiian, unlike other airlines, says it does not want to significantly cut flights, employees or in-flight services, including free meals.

Adams instead has been working on restructuring Hawaiian Airlines as an airline known for premium Hawaiian-style customer service for vacationers. From the airport parking lot to baggage pickup, the airline is promoting service with aloha.

Hawaiian executives said their effort will help differentiate the carrier from its competition and they believe they can convince customers that the added service is worth the additional cost.

"There's sort of a conventional wisdom out there at the moment that says the only thing that's important in terms of people's travel choices is the price. We don't believe that's the only thing that counts," Dunkerley said.

Hawaiian's plans include improvements in its Web site booking and check-in service, the carrier said. It also expects to upgrade its airport check-in kiosks to improve travelers' experiences.

The carrier also is looking into starting longer flights, most notably trips to Asia, and maximizing use of its planes — moves that will affect flight schedules and routes, Adams said.

The airlines' goal is to secure needed cost savings by the end of February and have a full business plan in place by April that would achieve profitability by the end of 2003.

Hoping for rebound

Executives hope that Hawaiian may by then have enough capital once the economy rebounds to start new routes.

"Whether we're going to be successful in doing that, I think, is open to the discussions we're currently having," Dunkerley said, referring to meetings last week with employees and companies such as Boeing that have been asked for concessions.

Employees, and others outside of Hawaiian, question Hawaiian's chances at succeeding given its strategy.

"We faced this problem about five years ago," said Gilbert Kimura, sales director for Japan Airlines in Hawai'i. "We had to really reorganize and downsize. ... When you're really restructuring and so forth, expansion is not the answer."

Airline union leaders hesitate agreeing to Hawaiian's request for concessions. If the company is in as dire a situation as described by executives, workers ask, why did it use available cash to buy back shares after last year's failed merger? They say the purchases benefited shareholders, including Adams, who is the carrier's major shareholder.

Hawaiian officials have said that the carrier needs to compensate its investors and by increasing the value of the airline stock, the company will eventually do better in the market.

But the carrier's executives have no idea when the picture will improve for the company or the industry as a whole.

Hawaiian's future depends on many variables, some of which are beyond its control.

It is depending on workers and companies it does business with to grant concessions. It faces the possibility of a war. It is betting travelers will pay more to fly Hawaiian when customers comparison shop for cheap fares.

"It's really a tough industry right now," said Brian Smith, a RedChip Companies analyst who covers Hawaiian, after the company's last quarterly report. "They're going to have to cut their costs."

If Hawaiian succeeds in significantly trimming expenses, the next question is whether it will be positioned to compete and grow when the economy turns around.

"We've got some areas where we've got to tighten up and improve what we do," Dunkerley said. "But the fundamentals are very good."

Reach Kelly Yamanouchi at 535-2470, or at kyamanouchi@honoluluadvertiser.com.