The interisland fare war — that has made $39 tickets the norm — is taking its toll on local airlines and contributed to the decision by Hawaiian Airlines to lay off nearly 100 workers, analysts said.

Hawaiian announced yesterday it was laying off 98 non-union employees and cutting an additional 38 vacant positions. The move will save the state's largest airline about $4 million a year.

"Clearly, the fare war is taking its toll," said Scott Hamilton, a Washington-based aviation industry analyst.

Hawaiian lost $40.6 million in 2006, which was a year that saw the launch of interisland carrier go! airlines, increased competition from domestic carriers on West Coast flights, and continued high fuel prices.

"Four million dollars in savings is hardly going to get the job done," said Hamilton.

Hawaiian needs to make additional cuts to return to profitability or should consider reducing capacity on its interisland routes, he said.

Hawaiian's Chief Executive Officer Mark Dunkerley said the layoffs had little to do with low fares. He said the cuts were designed to flatten Hawaiian's management structure and adjust its resources to customers' needs.

"This doesn't signal a retrenchment or a retreat," said Dunkerley.

Hawaiian didn't make any job cuts while it operated under bankruptcy protection from March 2003 to June 2005.

"Most airlines that have gone through bankruptcy have made layoffs or cut pay," said Jason Kremer, a San Francisco-based research analyst with the brokerage firm of Caris & Co.

"I think that's one area they didn't focus on during their bankruptcy. They didn't mess with the workforce as much as other airlines have."

Kremer, who also cited the fare war as a drag on Hawaiian's earnings, said the layoffs are part of an effort to reduce costs by as much as $15 million a year.

MORE REDUCTIONS

Kremer said Hawaiian is looking for other ways to cut costs, including reworking some of its agreements with third-party vendors for maintenance, insurance and other services.

go! airlines, a unit of Phoenix-based Mesa Air Group, started the fare war nearly a year ago with $39 one-way tickets for interisland routes. Hawaiian and Aloha Airlines matched the low fare. A study commissioned by Aloha concluded the airlines are losing money when they charge less than $50.

Dunkerley said the cuts include some 20 workers in Hawaiian's information technology division, which is in the process of being outsourced to vendors in India.

Last month Hawaiian began transferring its reservation call center operations to an outside vendor in the Philippines. The outsourcing of the call center and information technology departments will affect more than 200 positions.

Hawaiian said the reductions — less than 3 percent of the company's total payroll but about 20 percent of the management staff — were the result of six months of study.

The layoffs include 47 of the company's 224 management positions.

None of the airline's roughly 3,000 unionized workers were cut and about 40 percent of the layoffs were on the Mainland. Areas losing workers include sales and marketing and customer service.

"Even after this decrease, our workforce will be bigger than it was a year ago, and we will continue to grow," Dunkerley said.

"Decisions like these are always difficult and painful," Dunkerley said. "But this is part of an overall strategy to adapt our business to meet the needs of our customers so that we can continue to grow."

INDUSTRY REBOUNDS

Laid off employees will receive severance and can apply for positions in other areas of the company, the company said.

Founded in 1929, Hawaiian is the state's oldest and biggest carrier, with 3,493 employees after the cuts. A new group of owners led by California-based Ranch Capital LLC took over the company as it emerged from bankruptcy in 2005.

The layoffs at Hawaiian come as many of the nation's largest carriers have expanded staffing as they return to profitability after the post-Sept. 11 downturn. That downturn cost the industry as many as 100,000 jobs.

According to the U.S. Department of Transportation, domestic carriers added 3,000 jobs in March, increasing the industry overall employment to 407,400. That came after airlines added nearly 1,000 jobs in February.

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.