Low fuel costs boost Hawaiian Airlines profit

Typically, the first quarter is seasonally weak for Hawaiian Airlines.

But the state's largest carrier parlayed plunging jet fuel prices and strong demand into a record period for the company.

Hawaiian's fuel costs plunged nearly 35 percent in the first three months of the year and boosted net income to $25.9 million, easily surpassing analysts' estimates.

Parent company Hawaiian Holdings Inc. said after the market closed Thursday that it earned 40 cents a share compared with a loss of $5.1 million, or 10 cents a share, in the year-earlier period.

Aircraft fuel expenses decreased to $111.3 million from $171.1 million a year ago. The airline paid an average of $2.21 per gallon compared with $3.10 in the year-earlier period.

Revenue rose 2.9 percent to $540.3 million from $524.9 million.

"Producing these record results for the seasonally weak first quarter demonstrates the growing strength of our business," Mark Dunkerley, president and CEO of Hawaiian, said in a statement. "Low fuel prices and strong demand across our network combined to more than offset the impact of a strengthening U.S. dollar, declining fuel surcharges in some markets and an increase in capacity between North America and Hawaii."

Only a small portion of the fuel savings is being passed on to travelers in the form of lower fares. The Airlines Reporting Corp. said this week that average fares from the mainland to Hawaii were down between 5 and 13 percent in the first quarter.

"Fares were definitely lower in the first quarter of this year than they were in the same period last year," Dunkerley said. "We're not permitted to talk about what we expect in terms of fares in the future, but what I can say -- in this very competitive marketplace with lower fuel prices -- is that consumers enjoy the benefit of those lower fares. The benefits of lower fuel prices are much greater for long-haul flying than they are for short-haul flying."

When asked what it would take to bring fares down further, Dunkerley said, "It's a competitive marketplace, and it all depends on how many people want to come to Hawaii and how many seats there are to accommodate them. When there are more seats than there are people who want to travel, fares tend to come down, and the converse is true."

Dunkerley said the strong quarter and what the company pro­jects to be record profit margins for the rest of the year prompted Hawaiian's board of directors to announce a $100 million share repurchase program that will take place over the next two years. It's the company's first buyback program since it authorized the repurchase of $10 million in stock in 2010.

"In an industry that never seems to enjoy good things happening together, we have a rare circumstance of demand being strong and fuel prices being low," Dunkerley said. "Thanks to much lower fuel prices, our profitability will be higher this year than it has been before."

Hawaiian also is benefiting from its value-added products, which generated $21.32 per passenger in the first quarter, up 28 percent from the year-earlier period. Driving that revenue increase were Extra Comfort seating, which provides additional legroom, and the company's co-branded credit card.

As part of Hawaiian's business strategy, it hedges fuel and currency to reduce volatility --similar to buying insurance -- to gain protection against fuel price spikes. The airline took a $5.3 million write-down on its fuel-hedging contracts, which contributed to Hawaiian reporting $24.7 million, or 38 cents a share, in adjusted earnings. On that basis, analysts were looking for 33 cents a share.

The airline said it continues to hedge foreign currency as well, and that 50 percent of the company's yen and the Australian dollar exposure are at better levels than today's exchange rates.

Strong demand for flights to Hawaii has led to an increase in seats being flown here. North America industry capacity to Hawaii was up double digits in the first quarter and is expected to be up a similar amount this quarter before leveling off to midsingle digits during the second half of the year, Dunkerley said.

Hawaiian is forecasting its own capacity will be up 3 to 5 percent in the second quarter and up 3 to 6 percent for the year. Dunkerley said when there's industrywide excess capacity to Hawaii, it's usually the competition that blinks first and pulls back.

"That's been the history," he said. "We've got the best product and the lower costs. And we are tied to Hawaii like no other competitor is. Other airlines will move airplanes around their network -- sometimes into the Hawaii market and sometimes out, depending where they can make the fastest buck. Hawaiian doesn't have that latitude and has as its business strategy meeting the needs of travelers within, and to and from Hawaii."

Dunkerley said both Hawaiian and its passengers will benefit from the ongoing reconfiguration of the company's 18 Boeing 717s that began earlier this year. The 717s are used on interisland flights. So far, seven of those aircraft have been altered. The additional five to 10 seats per plane will bring Hawaiian additional revenue, especially during peak periods, and reduce the company's unit cost per passenger. And Dunkerley said the passengers will receive a half-inch to an inch more legroom despite a reduction of about an inch in the seat pitch -- the distance from any point on one seat to the same point on the seat in front or behind it.

"The customer gets a more comfortable seat," Dunkerley said. "The geometry of the old seats had a very flat back that wasn't ergonomically correct. But adding some curvature to the back and using modern material and being a little more clever in the way the seats are positioned, we've been able to give the customer between a half inch and an inch more of legroom while at the same time adding an extra row of seats."

Hawaiian also has reduced its debt by repurchasing $63 million of outstanding senior convertible notes during the quarter. That brings its total number of convertible note repurchases to $78 million, or 91 percent of the balance. The notes, which had provided cash for everyday operations, eliminate the need for the airline to issue 10 million shares when the notes may have otherwise converted to common stock.

Hawaiian's stock fell 52 cents to $21.50 on Thursday. The results were announced after the market closed.

Credit: Dave Segal