Friday, August 20, 1999

Analysts see risks
in Aloha Air move

Containing costs will be
vital in making the carrier's
new service to Oakland pay off

By Peter Wagner


Aloha Air Aloha Airlines' bold move into a West Coast niche market could be a brilliant but high-risk venture, industry analysts say.

"The critical thing is keeping their costs down," said Alan R. Bender, associate professor of Aeronautical science at Embry-Riddle Aeronautical University in Daytona Beach, Fla.

Aloha, whose core business is its 1,200 weekly flights in Hawaii, yesterday announced plans to start daily service to Oakland Airport in February. The twice-daily flights, from Oahu and Maui, will be the airline's first service to the West Coast.

The company plans to use new Boeing 737-700 aircraft, nearly identical to the airplanes now in use in its neighbor island fleet but capable of longer range. The planes will be about one foot longer and nine feet wider than the 737-200s now in use.

Bender said Aloha's choice of aircraft is smart because it allows access to smaller overlooked markets like Oakland that aren't economical for larger aircraft. But he wonders how Aloha can compete for price-conscious mainland travelers with the higher cost of operating a smaller plane.

"A plane that's twice as big doesn't cost twice as much to operate," said Bender. "There's an economy of scale in operating a larger aircraft. The fewer seats you have the more each passenger is going to have to pay for them."

The 737-700 could pose a problem in an air fare war, he said.

"If an air fare war should break out Aloha might not be able to lower their prices as much as the big air carriers flying out of San Francisco because they can spread their costs out," he said.

But Glenn Zander, president of Aloha, said the 737-700 was chosen for its operational efficiency and that it will cost about the same to fly per seat as a bigger jet.

Robert Mann, president of R.W. Mann & Co., a New York airline consulting firm, wonders if customers will accept the 124-seat aircraft Aloha has chosen for its route. The plane is dwarfed by the much wider 747s which can carry 300 passengers and the longer 757s capable of 200 seats commonly used by larger carriers to Hawaii.

"There's nothing unusual in this except the choice of airplanes for the route, which is a little unusual," said Mann.

Mann believes it would be the first 737 put in service across the Pacific.

"I think it could be judged to be more confining," Mann said. "But that depends on how it is configured. The question is how will it be viewed by the market."

Zander yesterday said the aircraft, capable of 140 seats, is being limited to 124 seats for comfort. The planes will have 12 first class seats and 112 coach seats, he said.

He noted other airlines including United and American use narrow-bodied 757 aircraft with success in the Hawaii route.

"Rather than being a confining experience we think it will be a very pleasurable experience," Zander said. He said Aloha plans an "upscale" coach service but would provide no details.

Zander said his biggest challenge is in marketing his new service to Oakland. The company plans to spend about $1 million on advertising in its first year of operation, he said.

He said Federal Aviation Administration approvals to fly the craft across the Pacific are in progress.

The new route will create about 100 jobs in Hawaii, 25 of them pilots and the balance flight attendants and ground crew, Zander said.

Zander said Oakland is an overlooked and promising market, the kind Aloha has been seeking for several years.

"We're going into a secondary market," Zander said at yesterday's news conference at Gov. Ben Cayetano's office. "Nobody's serving it right now."

Oakland is a vibrant and fast-growing community of 2.8 million, Zander said, with a promising market in nearby Silicon Valley.

And eastbound travelers from Hawaii will be able to bypass the heavy traffic of San Francisco by touching down across the Bay, he said.

Mann said Aloha is doing what Hawaiian Airlineshas already done -- expand beyond a confining role dependent on passengers brought to Hawaii by larger mainland carriers.

"It's an expansion opportunity for an airline that otherwise would be limited by its regional focus," said Mann. "I think we're seeing a cycle where carriers will attempt to expand their scope of operations."

He noted that both Aloha and Hawaiian have suffered in recent years from a drop in visitors to Hawaii. Local carriers also are losing business to mainland carriers with direct flights to the neighbor islands.

Aloha reported a 1998 net profit of $5.3 million, up 89 percent from 1997.

However, like all other airlines serving Hawaii, Aloha saved millions last year from the state's waiver of landing fees. That two-year waiver is due to expire at the end of this month and Cayetano's office has said it will not be extended.

Bender sees a close comparison in what Aloha is doing to the success of Southwest Airlines, which operates the smaller 737 aircraft in smaller niche markets. He said Aloha's Oakland plans may have been a strategic move to preempt a bid by Southwest for the same route.

"Southwest is known to be a short-haul airline, but every day they're getting into longer and longer flights."

He noted Southwest is now flying from Las Vegas to Washington D.C. and Baltimore, nearly as far as the Oakland to Hawaii route.

Operating since 1946, Aloha made its first foray outside Hawaii in 1984 when it began flights to Guam and Taipei under the name Aloha Pacific. The company, using wide-body DC-10s in three weekly round trips, hoped to expand to Hong Kong, Seoul, Singapore, Okinawa and Bangkok. But heavy competition and low-yielding fares brought heavy losses and the venture was abandoned six months later.

Aloha later tried to establish a route to Japan but the effort didn't pan out.

The airline currently has weekly charter flights to Johnston, Christmas and Midway islands and plans to begin service to the Marshall Islands in September.

The $82 million expansion will include the two new Boeing 737-700s, leased from Australia-based Ansett Worldwide Aviation Services at a cost of about $36 million each, and ground facilities and other startup costs adding about $10 million.

The $10 million is being financed by BancWest Corp., parent of First Hawaiian Bank, which made a similar move into mainland markets last year in a merger with California-based Bank of the West.

Joining Zander in yesterday's announcement were Cayetano and BancWest chief executive Walter A. Dods, Jr.

Cayetano called it a historic move for Aloha and a welcome indication the company is growing. "It is exciting to see yet another Hawaii-based company strengthen and grow their business and I applaud First Hawaiian Bank and its parent company BancWest Corp."

While he wouldn't offer specifics on fares, Zander said they would be geared to budget-minded travelers. He also said Aloha will offer a free one-way ticket to passengers not satisfied with the new mainland service.

The new aircraft are to arrive in November and December, with pilot training to follow. The company said reservation and flight information will be available within 30 to 45 days.

Meanwhile, the company is looking for other "niche" markets on the U.S. mainland, Zander said.

"We think there are under-served markets in every direction from Honolulu," he said.

Mainland venture

Here's a look at Aloha Airlines' plans to expand its service:

Bullet What: Twice-daily round-trip flights to Oakland; one from Honolulu, the other from Maui.
Bullet When: Scheduled to start in February.
Bullet Jets: Leased two Boeing 737-700s configured with 124 seats
Bullet Bookings: Fare and reservation information will be available in 30-45 days.

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