FLYING THE ISLAND SKIES

ILLUSTRATION BY BRYANT FUKUTOMI / BFUKUTOMI@STARBULLETIN.COM

Despite both of Hawaii's
airlines filing bankruptcy,
experts say they can profit

Two airlines -- both dependent on a small geographic market and fickle tourism industry, while simultaneously slugging it out with big carriers on mainland routes.

With both Hawaiian and Aloha having retreated into bankruptcy protection, this business model would seem to have crashed and burned.

But there's still plenty of lift in the idea of two major Hawaii-based carriers, according to experts, who say the rivals' troubles indicate they need to cut expenses and operations rather than go for a complete makeover.

"Through no real fault of their own, the aviation world is changing around them. It's happening everywhere. This is a time to reassess how you do things. And they can pull out of this," said Ron Kulhman, vice president of aviation consultancy Unisys R2A TMC of Oakland, Calif.

It remains a risky business in a time of high fuel costs, tough competition on Hawaii-mainland routes and pressure on fares as consumers have harnessed the pricing power of online booking.

Both Hawaiian's and Aloha's interisland routes offer slim margins and the airlines' attempts at diversifying with more long-haul mainland routes have encountered stiff competition.

"The problem is that they are really focused on a single market that can be very cyclical," Kuhlman said. "Other airlines know they can take a beating somewhere but make up for it elsewhere. But not the Hawaii carriers."

But it still can still be a recipe for success.

STAR-BULLETIN FILE Aloha Airlines last month joined its competitor, Hawaiian Airlines, in filing bankruptcy. Despite thin margins on interisland routes, experts say there's room in Hawaii for both airlines to be profitable. Above, Hawaiian planes sit in front of an Aloha jet at Honolulu Airport.

The airline has escaped deep trouble by staying ahead of the cost-cutting curve.

"They had some of the highest costs in the country in their operations, their staff, you name it. But beginning in the mid-90s they embraced the need to change the way they do business," said Mann, of New York-based R.W. Mann & Co.

Hawaiian and Aloha should profit by following suit, he said.

"They'll have to do it the old-fashioned way. There are no short cuts. They need to look at every single line item of business," he said.

Analysts agree that there are few options available on reshaping the business model anyway.

With no Japan-Hawaii routes, the two airlines have no share of a key source of visitor traffic, Kuhlman said. But obtaining Japan slots is unlikely since they are notoriously expensive and hard to come by.

And due to the cost of getting a plane airborne, Hawaii's short inter-island routes will always offer slim margins. Shifting to smaller, cheaper-to-operate planes is not much of an option, however. Reshaping a fleet means huge expense, and smaller planes limit an airline's capacity when it might need it most. Moreover, charging higher fares could stifle demand.

"Hawaii is always going to be a difficult place to make money because of the cost of hurling planes such a short distance," said Mike Boyd, president of Colorado-based air travel consultancy the Boyd Group.

The airlines have taken some steps, such as dropping money-losing interisland commuter passes. Ultimately, interisland losses are the nature of the beast, but they can be offset by other routes, Boyd said.

"There's nothing wrong with running a department store in a way that you subsidize the underwear department with revenues from the linen section," he said.

That said, considerable streamlining will be needed on longer-haul routes and overall operations to make up the difference.

Among the measures airlines are taking these days: fare simplification, strategies for achieving higher aircraft use and embracing online booking and other efficiencies as a productivity gain rather than the cause of lost revenue.

"It's about using your assets well and paying attention to costs on a constant basis," Kuhlman said.

Such concerns weren't always at the top of the agenda. Traditionally, airlines have been concerned more about market share than efficiency. But with consumers having more choice and pricing control, that view is now outdated and Hawaii's airlines are being dragged into the new paradigm, Boyd said.

Despite the dual bankruptcies, there isn't a renewed call for Hawaiian and Aloha to take another look at a merger similar to the proposal that failed three years ago.

"We continue to believe that there is room in Hawaii for two airlines," said Joshua Gotbaum, Hawaiian Airlines' court-appointed trustee.

Kulhman agreed, adding: "If they had merged but were still troubled by the same problems that plagued the individual airlines, they'd be in no better position."

The airlines' prospects for recovery are greatly enhanced by the refuge of bankruptcy protection. Mann said it's questionable whether some of the airline bankruptcies since 9/11 were warranted under the bankruptcy code's original intent.

Regardless, since it allows airlines to renegotiate labor, aircraft leasing and other costs, airlines have discovered it to be a potent cure-all.

"It's a powerful tool with limited downside," Mann said, citing the better-than-expected reorganization plan that seems to have put Hawaiian back on track.

Aloha Airlines should soon follow suit, Boyd added, blaming the company's woes on oil prices that blasted off last year.

"Prices will came back down. I like their (Aloha's) chances," he said.

Airlines need
more productivity

To fix bloated costs, the financially ailing airline industry prescribed itself a familiar treatment in recent years: Slash wages and benefits.

Now, with the limitations of that approach apparent as large carriers continue to lose money, experts say the cure lies in operational improvements that enhance workforce productivity.

Consider Southwest Airlines Co. Its pilots, flight attendants and mechanics are among the highest paid in the industry, yet the Dallas-based company delivers steady profits while many competitors that spend less on labor consistently lose money.

"Our low costs aren't achieved by paying lower wages," Southwest Treasurer Tammy Romo explained. "The key to our low costs, really, is high productivity."

To drive home the point another way, Eclat Consulting vice president John Donnelly noted that both ATA Holdings Corp. and America West Holdings Corp., which have some of the cheapest labor in the industry, lost money in the third quarter of 2004, the most recent period for which carriers have reported earnings.

"It's not just the wage that matters," Donnelly said.

To boost the efficiency of workers and planes, carriers need to increase the number of hours their aircraft spend aloft; expand workers' responsibilities to ease the flow of passengers, baggage and planes; and outsource more maintenance work to third parties that can do it for less money.

One obstacle for airline executives has been getting employees to accept changes to union work rules and procedures.

"Taking down some of these walls is challenging, particularly in light of the fact that it is being accompanied in most cases with wage decreases," said Michael Allen, chief operating officer at Back Aviation Solutions of New Haven, Conn. "But if you increase productivity, you don't need to have wages come down as dramatically."

Analysts said airlines that seek to further shrink employee compensation without significantly improving operational efficiency also run the risk of worsening the morale of their workers.