In 2014, Hawaiian Holdings (NASDAQ: HA) began its first route to China, flying three times a week between Honolulu and Beijing. Management touted the route as opening up a massive new market that could potentially drive the bulk of the Hawaii tourism industry's growth over the next few decades.
However, earlier this week, Hawaiian announced that it will suspend its Honolulu-Beijing route in October. That made it the second U.S. carrier -- after American Airlines (NASDAQ: AAL) -- to slash capacity to China this week.
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The demand wasn't there
At the time that Hawaiian Airlines first began flying to Beijing, then-CEO Mark Dunkerley noted that Hawaii needed to become a friendlier destination for Chinese tourists. He cited a need for more low-price and mid-price accommodations, more marketing in China, and (most importantly) more Mandarin speakers in tourist-facing roles in Hawaii.
Those problems haven't been fixed in the past four years. It has been clear from management's commentary for a while that the Beijing route was seen as a long-term investment rather than one expected to be profitable anytime soon. With fuel prices rising, Hawaiian Airlines appears to have decided that nonstop service to China isn't viable yet.
Hawaiian Airlines spokesperson Ann Botticelli said that the Beijing-Honolulu market hasn't matured as quickly as expected, according to the Honolulu Star-Advertiser. She continued: "We hope to once again fly to China when the market matures. If you look at China's population growth trends and economic growth indicators, there is no doubt it will become a major contributor to tourism globally, and that includes travel to Hawaii."
The last flight to Beijing will depart on Oct. 9, while the final return flight to Honolulu will leave Beijing on Oct. 12. Hawaiian Airlines plans to maintain its current sales footprint in China and offer connecting service to Hawaii via its interline partners' hubs in Tokyo, Osaka, and Seoul.
Hawaiian can afford to pull back
American Airlines' decision to slash capacity from Chicago to Asia -- mainly China -- was risky because some of its corporate customers may depend on those routes. Without nonstop American Airlines flights from Chicago to major Asian business destinations, these corporate clients could opt to move their entire (lucrative) travel accounts to United Continental.
American Airlines may have felt it had no choice but to retreat, due to the scale of its losses on these routes and the likelihood that competition on routes to China will continue increasing. By contrast, Hawaiian Airlines has faced a fairly steady competitive environment on its Beijing route since 2014. Capacity in the Beijing-Honolulu market actually declined 9.9% year over year in the first half of 2018.
However, for Hawaiian, there's much less downside to dropping its Beijing route. The airline predominantly carries inbound tourist traffic. It doesn't generate the bulk of its profit from corporate clients who would drop Hawaiian Airlines if it didn't serve all of the biggest business markets.
The only real drawback is that Chinese carriers could come to dominate the China-Hawaii tourist market in the coming years. But it would be illogical to maintain the route indefinitely in a fight for market share if it's nowhere close to becoming profitable.
This move should quickly boost profitability
Hawaiian Airlines has plenty of experience redeploying capacity on short notice. After adding lots of new international destinations between 2010 and 2014, Hawaiian cut several of the lower-performing routes in 2014. It redeployed the extra capacity to the U.S. West Coast.
In the short run, I expect the same thing this time around. Hawaiian Airlines is in the midst of an aggressive fleet renewal project. It plans to retire all of its Boeing 767s by year-end, replacing them with state-of-the-art Airbus A321neos. However, it seems like Hawaiian may be tight on aircraft availability this fall (and in early 2019) relative to its plans. The A330 that is currently used for the Beijing flight could be used to fill the gap.
If Hawaiian Airlines does have extra aircraft time available, it could potentially add flights in a market like Las Vegas, where capacity is down 10% year to date. Fares for Las Vegas-Honolulu flights are nearly as high as fares for Beijing-Honolulu flights, even though the Beijing route is almost twice as long. As a result, redeploying capacity to a market like Las Vegas would surely be a profitable move in the short run.
Next year, as its A321neo fleet continues to grow, Hawaiian Airlines is likely to redeploy some A330s away from West Coast markets. At that point, it may explore new routes to Asia, the South Pacific, or even just the East Coast. But for now, Hawaiian seems poised to double down on its core West Coast-Hawaii market, where it's reliably profitable. That should lead to a quick improvement in its earnings trajectory starting next quarter.
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