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Average
fleet age of Hawaiian Airlines at the end of year 2016 was 11.04 years (Table
1). According to its 2016 annual report, Hawaiian Airlines planned to return
one 767-300 at lease end in 2017 and take order delivery of three A321neo and
one A330-200. Accordingly, the estimated average fleet age at the end of year
2017 is about 11.20 years. CAPA fleet database provides a good picture of
overall fleet age and median, as shown in Figure 1.

Hawaiian has 21 aircraft in
order with Airbus. Delivery is spread in the next four years, as shown in
Figure 2. We expect the Hawaiian’s fleet age to continue to reduce going
forward.

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Labor
efficiency

Labor
cost is the biggest item in Hawaiian’s operating expense. In 2017, Hawaiian and
its pilot union (ALPA) ratified a new five-year labor agreement in March of
this year, which includes significant pay increases. ALPA states that the new
contract will include immediate increases of between 20% and 45% depending on
the pilot’s tenure and the type of equipment that they operate. Hawaiian now
has contracts with all of its unions that run through at least 2021 except for
the flight attendants, whose contract became amendable in January of 2017. We
expect that any potential increase in flight attendant wages would have a less
significant impact on HA’s cost structure than the recent pilot deal.

To
measure labor efficiency, we use the ratio of revenue passenger miles (RPMs)
flown to full time equivalent (FTE) personnel. In 2016, Hawaiian delivered
15.49 billion RPMs in total operation. As of the end of 2016, Hawaiian has 6199
active employees. RPM/FTE ratio at the end of 2016 is 2.50 which is median. If
RPM/FTE decreases to be less than 2.0, then labor efficiency is considered
poor.

Fuel
hedging

At
the end of 2016, Hawaiian Airlines hedged approximately 50% of the projected
fuel requirement for 2017 with heating oil swaps and crude oil call options. In
a low fuel price environment, the fuel hedging policy is less influential in
airline’s financial policy. However, with 50% fuel price hedged for the next 12
months, Hawaiian has reduced the risk of fuel price volatility and thus is more
certain on its cost structure for the near future.

EBITDA
Margin

Hawaiian’s
EBITDA margin in 2016 is 20.5%, which stays at high level though dipped a bit
comparing to EBITDA margin of 23.0% in 2015. It proves Hawaiian’s business
model is consistent profitable. Low fuel price and limited aircraft delivery
certainly help Hawaiian to maintain a good level of profitability. With the
expected increase in fuel price and scheduled delivery of 9x A321neo in 2018
and 5x A321neo/2x A330 in 2019, EBITDA margin is expected to decrease in the
coming years. If EBITDA margin is lower than 15%, than Hawaiian is considered
poor in profitability.

Market
Conditions

The
number of markets in which the airlines compete is important for assessing
airline credit. The more diverse geographically the airlines are, the less
captive it is to the dynamics of a single market or economy. Operators with
good diversity are financially less impacted when exogenous events such as the
9/11 terrorist attack occurs.

Hawaiian
airlines have not joined any world-wide airline alliance or formed any joint venture
with foreign airlines. They have relied on code share with partner airlines to
provide customer services to destinations unserved by them. Its market is less
diverse comparing to the domestic competitors serving Hawaii, which have access
to more foreign market through either airlines alliance or foreign joint
venture. Many foreign competitors serving Hawaii have the benefit from network
feed to support the international routes Hawaiian is operating on. Hawaiian
lacks comparable direct feeding network and is more reliant on passenger demand
in the specific destinations.

In
summary, Hawaiian have destinations in three continents: North America, Asia,
and Oceania. 78% of revenue comes from North America. Comparing to its
competitors, Hawaiian airlines have a less geographically diverse market.

 

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