Three years ago, in the midst of a hotly competitive fare war with other inter-island carriers, executives of Hawaiian Airlines turned their attention to the future. True, roughly a third of the company’s revenues were tied to the routes servicing Hawaii’s major islands, and the situation demanded management’s immediate attention. “It would have been easy to say, ‘We need to focus on the day-to-day, and not on the long term,'” recalls Peter Ingram, CFO and treasurer of Hawaiian Holdings, parent company of the airline.
The executives knew, however, that long-term concerns were increasingly pressing. About 60% of the airline’s current sales were tied to flights from the West Coast to Hawaii, composed largely of vacationers wary of the upgrades that business travelers might routinely buy, according to the finance chief. Growth would therefore have to come from flights to Asia. The problem was that those flights were being made by Hawaiian’s fleet of aging Boeing 767s — not the best aircraft for such lengthy routes.
The company ended up deciding to switch to the Airbus A330, a slightly larger and longer-range airplane. Later, it plans to add A350s, which are currently under development. “It’s quite a complicated decision for an airline when it’s investing in aircraft,” says Ingram. “You’re making 20- or 30-year decisions on the physical plant that you’re going to be using for your business, and you’re doing it with a very uncertain view about what the future’s going to hold.”
In a recent interview with CFO, Ingram talked about the strategy and tactics that went into Hawaiian’s fleet overhaul. The following is an edited excerpt from that interview.
Tell us how you went about changing your fleet.
We saw that our 767 fleet was aging, and we started looking at what alternatives were out there. We did a long-term model and concluded that the right aircraft for our markets in the current time was the A330, and that it would be a durable airplane for us over a number of years. Ten to 15 years [from now] and beyond, we’ll come in with the A350.
How does the A330 fit your long-term model?
One key characteristic we were looking for is how to lower our unit costs — our costs of producing one seat flying one mile. An advantage of the A330 is that it’s slightly larger than the 767s that we fly today. There are 294 seats, compared to about 260 on the 767, and it’s larger than the aircraft of most of the big-network airlines we compete with. That helps us to produce a seat at a lower cost than our competitors can. Ultimately, if we can do that and market ourselves effectively, that gives us a really important advantage.
The other thing with this aircraft is that it better positions us for what we see as the markets we’re going to fly in during the next 5 to 10 years, as we start flying increasingly in Asia. We recently announced that our service to Japan will be starting in November and that we’ll start flying to Korea in January of next year. We needed an airplane that’s going to be more suited economically to flying those longer distances than we’ve historically had.
Which do you find more desirable, leasing the planes or buying them?
There are a couple of trade-offs. Typically, owning the aircraft gives you a lower cost of ownership over the life of the asset. You’ll have complete control over the use and availability of the asset in the future. On the other hand, leasing gives you lower up-front capital costs and takes away some of the risk of disposing of the asset at the end of its life, since that remains in the hand of the lessor.
There are pros and cons to both, and ultimately we think that argues for a strategy of maintaining some balance between the two. We’ve got airplanes coming off lease that we’re replacing with part of our current fleet order. That’s given us the opportunity to focus on the aircraft coming in and not have to worry about selling off airplanes, positioning them in the marketplace.
If you look back a couple of years ago, as the capital crisis hit, the asset value of those airplanes took a pretty big hit. We had a buffer against being exposed to that because those airplanes were on lease.
Currently, proposed accounting-rule changes would essentially erase the distinction between operating and capital leases and pull all leases back on the balance sheet. Could that tilt your balance away from leasing?
I think you need to make the right business decision irrespective of the accounting. We always need to understand the accounting and be prepared to explain it through disclosure, but it’s a bad practice to let accounting implications be the driver of the business decision.