Earlier this month, Airbus (NASDAQOTH: EADSY) suffered another setback for its popular A320neo aircraft family, as new defects cropped up for recently manufactured Pratt & Whitney engines. (Pratt & Whitney is one of two engine suppliers for the A320neo program.) As a result, Airbus had to stop deliveries of A320neos and A321neos with the affected engines.
Larger airlines may have enough flexibility within their fleets to compensate for these delivery delays. However, the same can't be said for Hawaiian Holdings (NASDAQ: HA). Late last week, Hawaiian Airlines revealed that it will have to cancel or delay the launch of several routes that it had planned to serve with A321neos during the 2018 summer peak season.
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Production knocked off course again
Pratt & Whitney has experienced several quality problems in the past couple of years, as it has attempted to ramp up output of its new line of geared turbofan engines. The company seemed to have resolved all of the initial production hiccups by the end of 2017. However, Indian budget carrier IndiGo has experienced several in-flight engine shutdowns in recent months, which have been traced to a design change for a knife-edge seal.
The new manufacturing flaw affects about 100 engines in total: 43 in-service engines installed on 32 aircraft, along with another 55 engines that had been delivered to Airbus.
Regulators have approved Pratt & Whitney's decision to return to an earlier design for the knife-edge seal. This will enable the company to start delivering engines to Airbus again in the next few weeks. Meanwhile, Airbus plans to resume delivering Pratt & Whitney-powered A320neos to customers in April.
However, some airlines believe that new A320neo deliveries could be delayed by six months. After all, Pratt & Whitney had only planned to produce about 750 engines this year. It has now lost weeks of production time, and it must build nearly 100 replacements for the faulty engines it previously delivered.
No choice but to cancel flights
The latest round of engine problems is wreaking havoc on Hawaiian Airlines' plans for 2018. The Hawaii-focused leisure airline received its first two A321neos late last year, and it is scheduled to receive another nine during 2018. Since last July, Hawaiian has unveiled a number of new flights that were supposed to start in the first half of 2018 using A321neos.
With fewer aircraft available, the carrier has had to change its plans. First, Hawaiian Airlines scrapped a seasonal flight between Oakland and Kona that would have operated for the full summer season, and a second daily flight between San Francisco and Honolulu that would have operated from Memorial Day weekend until the end of July. It also pushed back the start date for a new daily flight between Oakland and Lihue from April to mid-July.
Hawaiian Airlines is rebooking customers whose flights have been canceled on other Hawaiian flights from the Bay Area. That said, customers traveling to Kona or Lihue will now be forced to connect in Honolulu or Maui.
On the other hand, Hawaiian's two routes that are already using A321neos (Portland-Maui and Oakland-Maui) don't appear to have been affected, even though Hawaiian Airlines does have one of the faulty Pratt & Whitney engines. Additionally, the carrier's new San Diego-Maui and Long Beach-Honolulu routes are still set to launch with A321neos in May as originally planned. Obviously, this assumes that there won't be any new engine setbacks.
What will the financial impact be?
Hawaiian Airlines' seasonal flights between the Bay Area and Hawaii tend to be very profitable, as leisure travel demand peaks in the June-August period. Having to reduce growth during this peak period will be somewhat painful, as it is likely to pinch unit costs.
That said, industry capacity has been growing rapidly on routes between the Bay Area and Hawaii recently, which tends to push fares lower. Hawaiian's reduced flight schedule should enable the carrier to charge more for its remaining flights. Thus, the total impact on Hawaiian Holdings' pre-tax profit is likely to be less than $10 million. The company also may receive compensation from Airbus and Pratt & Whitney to offset some of this lost profit.
Hawaiian Airlines' competitors -- and particularly Alaska Air -- may feel a bigger impact from these last-minute changes. Alaska Airlines will now be the only airline with scheduled nonstop Oakland-Kona flights this summer, and it will also have a monopoly on the Oakland-Lihue route for an extra three months. However, this will be a short-lived boost. Hawaiian Airlines should be back to its previously planned schedule within a year or less.
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