Hawaiian Airlines maintains profits

Still, the carrier says new competition from go! has taken its toll

Hawaiian Airlines' corporate parent yesterday posted a $7.76 million profit in the third quarter, despite increased competition from the startup interisland carrier go! and pressure from mainland carriers on trans-Pacific routes.

The company also said it was encouraged that fuel prices were starting to come down.

Hawaiian Holdings Inc.'s net income declined by just $73,000 in the quarter from the $7.83 million it earned in the third quarter last year.

Revenue rose 2.5 percent to $229.8 million from $224.1 million. Operating income fell 29.2 percent to $12.7 million from $17.9 million because of higher fuel costs.

"Heavy promotional activity and discounting by our competitors have taken their toll but we are encouraged that, despite the intensity of this competition, Hawaiian had a profitable quarter," said Mark Dunkerley, president and chief executive of Hawaiian.

Dunkerley said interisland air traffic increased only 4 percent in July, in spite of the deep discounting undertaken by go!, which has offered one-way fares as low as $19. Hawaiian and Aloha Airlines have matched go!'s ticket prices.

The low prices have failed to make go! fill more of its planes, Dunkerley said. "So we see a situation that the elasticity of demand isn't there. We're not seeing stimulation. We've seen prices come down but we're holding our own."

Dunkerley said go!'s Phoenix-based parent, Mesa Air Group Inc., has "fundamentally misunderstood the dynamics of the marketplace."

Go! filled two-thirds of the seats on its interisland flights in September, an increase from 64.5 percent in August, but down from about 74 percent in July.

Jonathan Ornstein, chairman and CEO of Mesa, has said he plans to replace go!'s five 50-seat Bombardier CRJ-200 aircraft with larger planes at the start of next summer.

Analyst Jason Kremer of Caris & Co., who has a "buy" recommendation for Hawaiian's stock, said he wonders about go!'s logic.

"All that's going to do is add more capacity and, obviously, not stimulate demand," Kremer said. "Why bring in bigger planes if you can't fill your small ones? You're only going to save money bringing in bigger planes if you fill those bigger planes and get a good yield out of them."

Dunkerley said the interisland fare war reduced Hawaiian's interisland passenger yield, or the revenue Hawaiian receives for each mile passengers travel, but the carrier's yield systemwide grew 5.4 percent in the quarter to 12 cents from 11.4 cents a year earlier.

"It was generally a good quarter, especially in the face of the increased competition in both of their major markets," Kremer said. "Fuel is coming down, and if they can maintain a good yield, they should have a good quarter coming up."

Dunkerley said that Hawaiian will save $1.2 million for every penny that fuel goes down in 2006, and will save $1.4 million for every penny fuel goes down in 2007.

Hawaiian's fuel costs jumped 18.8 percent last quarter to $65.1 million from $54.8 million a year earlier, but Dunkerley said he expects to catch a break in this current quarter. "Encouragingly, at the end of September, fuel prices began to turn in our favor, which will provide some welcome relief if the current price levels hold," he said.

During the third quarter, high fuel expenses offset Hawaiian's cost-cutting efforts, which include an agreement reached with the International Association of Machinists and Aerospace Workers that allows the company to outsource reservations and back-office operations, including accounting. In exchange, current IAM members get protection from layoffs. Hawaiian, which emerged from bankruptcy reorganization last year, also has been looking at outsourcing a wide array of its contracts, such as West Coast ground handling.