Hawaiian Air cuts quarterly loss

The smaller loss was an improvement but not what analysts expected

Hawaiian Airlines may have the best load factor in the industry, but it hasn't been filtering down to the bottom line.

Parent Hawaiian Holdings Inc., citing high fuel prices and intense competition in its trans-Pacific and interisland routes, reported yesterday a $9.6 million loss for the fourth quarter and a $40.5 million loss for the year.

The quarterly loss was an improvement over the year before, but analysts had been expecting a profit.

Mark Dunkerley, president and chief executive of Hawaiian, called 2006 "challenging" and said Hawaiian continues to focus on controlling costs after a year in which Hawaiian had the highest percentage of seats filled of any nationwide carrier at 86.4 percent.

"While most U.S. airlines enjoy the benefits of reduced capacity in the markets they serve, excess capacity on our main trans-Pacific routes and in the interisland market persists," he said. "Our attention, therefore, is on controlling our costs, and the major internal initiatives of 2007 are focused to this end."

Hawaiian's fourth-quarter results included $3.6 million of special charges related to the purchase and lease amendment transactions with Ansett Worldwide Aviation Services in which the airline purchased three Boeing 767-300 ERs that it was leasing from AWAS and renegotiated leases on four others.

The airline cut its loss to 20 cents a share in the quarter compared with 43 cents a share in the year-ago quarter, when it lost $19.5 million.

However, analysts were expecting a gain of 10 cents a share. Two of the analysts who cover the company said yesterday that the number of moving parts in Hawaiian's earnings release made it difficult to calculate by how much the company missed earnings estimates.

"It's obvious they did not hit my expectations because I had a 10-cents estimate," said Jason Kremer of Caris & Co. "But looking forward to '07, we still think they're well-positioned to take advantage of their growth through their new planes (four Boeing 767-300 aircraft purchased from Delta Air Lines in the first quarter of 2006). I think this quarter was just a blip because I think they got all screwed up with their plane delays and there was too much else going on."

In May, Hawaiian announced it would be expanding its West Coast service with the four 767s it purchased from Delta. All of the planes were expected to be delivered before the end of the year. But that timetable was pushed back due to interior plane modifications and only one plane was in service by the end of 2006. Hawaiian was forced to suspend its Maui-San Diego service for most of this current quarter and make other scheduling changes. Hawaiian said on a conference call yesterday that it now has a second aircraft in service, with the third one due to be delivered in mid-March and the remaining one in late May.

"In general, it was clearly a more difficult environment this quarter -- both on the interisland side and the trans-Pac," said analyst Nick Capuano of Imperial Capital LLC.

Passenger yield, which measures passenger revenue per revenue passenger mile, declined to 10.83 cents from 11.03 cents in the fourth quarter of 2005. Hawaiian's interisland yield fell 21.5 percent in the quarter as a fare war initiated by Mesa Air Group's go! forced down prices.

Overall revenue rose 3.6 percent to $219.6 million from $211.9 million.

Dunkerley said yesterday he expects seating capacity in the trans-Pacific market to flatten out this year after rising 4 percent in 2006 and 35 percent over the last five years. That could bode well for Hawaiian as it adds trans-Pacific capacity with aircraft newly acquired from Delta, Kremer said.

But there's no relief in sight in the interisland market, Dunkerley said.

"The increase in capacity and the substantial lowering of fares had only a modest impact on the number of interisland travelers," Dunkerley said. "We're seeing a price elasticity of demand lower than is typical for other markets. There is, frankly, no Southwest effect interisland (of increasing traffic with lower fares). Nonetheless, we see no immediate change to the competitive environment in this market.

Hawaiian's cost-control initiatives this year include beginning to shift its reservation call center operations to the Philippines, and its information technology and accounting jobs to India to reduce costs. Those plans were initially disclosed last year and Dunkerley said Hawaiian announced yesterday the terms of voluntary separation packages to its employees as part of the transition. Dunkerley also said Hawaiian expects to see savings in ground handling, catering and insurance.

That will help offset expected increased maintenance costs this of 25 cents per available seat mile due to the gradual aging of Hawaiian's fleet, said Chief Financial Officer Peter Ingram.

Although fuel costs rose edged up just 0.9 percent in the quarter to $60.4 million from $59.8 million, they represented close to 26 percent of Hawaiian's expenses.

The airline also incurred an additional $3.1 million in expenses during the quarter due to schedule adjustments because of the late availability of aircraft. For the year, fuel costs soared 83.9 percent to $241.7 million from $131.4 million.

In 2006, Hawaiian lost 86 cents a share compared with a loss of 32 cents a share a year earlier when it lost $12.4 million. Revenue soared 74.5 percent to $888 million from $508.8 million.

Hawaiian's operating loss for the fourth quarter widened to $13.9 million from $10.3 million a year earlier. For the year, Hawaiian had an operating profit of $3.2 million, up from $2 million in 2005.