Issue 12.5: October/November 2009

Steady As She Goes



story by Paul Wood
photos by Dana Edmunds
 
Eighty years in business—that’s a remarkable achievement for any company. But for an airline, it’s stunning. In 1929, the year a little venture that came to be known as Hawaiian Airlines booked its first inter-island passengers, the prop-driven monoplane was still a novelty. Technology has advanced, but fundamental conditions are the same: If you’re going to fly, expect turbulence.

 

The past year was particularly difficult for all airlines—eleven domestic carriers filed for bankruptcy protection in 2008, and nine shut down altogether. Hawaiian (HAL) was not one. How this company managed to remain buoyant during such a year, turn a profit and retain its number-one position in both service and safety is a story of resilience and spirit. Between April 2008 and April 2009, HAL not only survived, but also sharpened its identity, boosted its morale and pursued its transformation from regional island-hopper to major international carrier.

 

The changes that occurred during this tumultuous year have been a long time coming. For the past three decades (ever since federal deregulation), the airline industry has been growing ever more Darwinian—fiercely competitive while subject to volatile booms and busts. Since 2000 the airline companies of the United States, taken as a whole, have lost more than $33 billion, which is almost twice their accumulated profits from 1938 to 1999. More than 100,000 pilots, mechanics, flight attendants, ticket agents, cargo handlers and other airline workers have lost their jobs since 2001, and more than 100 communities lost air service during the past decade.

 

Hawaiian, in contrast, took the major step of replacing its entire inter-island fleet with thirteen new Boeing 717-200 aircraft in 2001. That year it also began replacing its trans-Pacific fleet with new Boeing 767-300 aircraft—another bold move for a small airline given the lingering effects of 9/11. While the company was forced to do layoffs in 2001, these were minimal and by 2002 the airline was hiring again. And Hawaiian was winning accolades for its service: It was the number-one on-time airline in the nation from November 2003 to November 2006, when its rival Aloha Air edged past. (Hawaiian returned to the top spot in 2007 with an on-time arrival rate of 94.6 percent.) Such facts indicate a basically healthy, well-run airline company—but it took every skill and resource the airline possessed to withstand the challenges that 2008 would bring.


 

In the history of Hawaii aviation two airlines, Hawaiian and Aloha, had shared the inter-island market since Aloha was founded in 1946. Interloping competitors sometimes arose but never lasted long. In the popular imagination there were always two rivals in the Island skies, whose good-natured jostling kept their service reliable and their fares affordable. But in an increasingly inter-linked world economy, events outside the state would soon place both airlines under unprecedented pressure.

 

The first blow was the precipitous drop in air travel to Hawaii following the 9/11 attacks—a plunge of 9.3 percent at the end of 2001. Just as Island tourism began to recover, it stumbled again in 2003, victim of several forces including rising fuel costs, the start of the Iraq War and the panic that followed the SARS outbreak. The visitor count would rise again in 2004, but by then Hawaiian Airlines had already filed for Chapter 11 bankruptcy protection (on March 21, 2003), thereby committing itself to a significant reorganization while continuing to keep its customers flying. In 2004 Aloha Air, beset with the same challenges, filed its own Chapter 11. These filings led indirectly to the calamity that launched Hawaiian’s eightieth year.

 

In 2004 Mesa Air Group, a Mainland company, had stepped up as a potential investor in HAL’s reorganization; at the time, Mesa signed a confidentiality agreement that gave it a privileged look at Hawaiian’s business data. In 2005 Mesa did the same with Aloha. Then Mesa used that privileged information to create a competing inter-island airline. Launched in June 2006, just one year after Hawaiian’s recovery from bankruptcy, Mesa’s go! Airlines began offering inter-island flights at giveaway prices, prices far below what any profitable airline could offer. To all appearances, its strategy was to force one—or both—of the two long-term carriers out of business.

 

Even though a federal judge would eventually find that Mesa had violated fair business practices, the length of time it took for the wheels of justice to turn was frustratingly slow. The court cases brought separately by Hawaiian and Aloha against Mesa dragged on for more than a year. Ultimately the pace was too slow for Aloha Air, which watched its options gradually wither away in the early months of 2008.


 

April 1, 2008, turned out to be a day of seismic upheaval for airline companies in the Islands. Aloha Air, which had been Hawaiian’s neck-and-neck competitor for more than sixty years, stunned the entire state by going out of business—and not by slow decline. In one day. Another rival, charter airline ATA, followed suit in less than a week. The immediate effect was emotional, “a feeling of shellshock,” says Tracy Bean, a twenty-three-year veteran flight attendant for Hawaiian. “It was heart-wrenching. Even though they were our competitors, it had always been a friendly competition. And now to think that so many of our fellow Islanders had lost their incomes. It was a sad day for us as well as them.”

 

But on April 1 there was a more pressing concern: the thousands of stranded visitors unable to return home on the carriers that had brought them to Hawaii. Somehow, Hawaiian had to had move Aloha and ATA passengers to their destinations before the world started seeing images of travelers haplessly marooned in the land of aloha. “We had a civic responsibility,” says company President Mark Dunkerley, “to accept their tickets even though there was little chance we would ever get paid.”

 

To fill the void in seat capacity, Hawaiian transferred one of its large Boeing 767s from trans-Pacific service to inter-island duty, and then added four more Boeing 717s over the next few months. These additions to the fleet meant hiring more skilled personnel: more pilots, flight crews and maintenance technicians. Due to the demise of Aloha, of course, many experienced airline men and women were looking for jobs—and of the 500 or so new employees HAL added in mid-2008, about half were retrained Aloha Air staffers.

 

One of them, flight attendant John Nelson of Oahu, recalls his dismay at Aloha’s collapse: “I thought it was a bad April Fool’s joke.” Like other employees he clung to the illusion that something would reverse the disaster. Before the shock could really settle in, he found himself responding to a mid-May employment offer from Hawaiian. “I couldn’t believe how fast Hawaiian did its decision-making and started its classes.” The training was grueling, says Nelson, but the reception was warm. “People were very concerned about us. A lot of Hawaiian employees had friends and family who worked at Aloha. We were competitive back in the day, but now all I saw was fellowship. I felt very welcome from the first day.”

 

Perhaps this warm welcome was tempered by an awareness of how close Hawaiian itself had once come to disaster. “It could have been us,” said HAL’s employees. The fact that it wasn’t had much to do with Hawaiian Air’s managerial habit of long-range thinking. In June 2005 the company had emerged from the bankruptcy process with reduced operating costs, thanks (to some extent) to cooperation from the employees’ unions. It was also in better shape than its competitors because of its habit of looking and planning far down the road. It had invested in new aircraft and experimented with flying long-range routes to international destinations. “One of the tricks in this business,” says Dunkerley, “is to keep a balance between focusing on our long-term future on the one hand and dealing with the crisis of the day on the other. If you give yourself entirely to the crisis of the day, you will never move the business forward over the long term.”

 

Following this belief to the letter, during this same seismic April, HAL initiated flight service to Manila, its first solo foray into Asia. And it continued its plans, long under development, to build a new fleet capable of long-ranging nonstop flights. Bounding out of bankruptcy in 2005, HAL had been determined to expand operations by creating new routes to international destinations. That move would require a revitalized fleet. On Feb. 8, 2008, Hawaiian Air signed an agreement to purchase six new Airbus A330-200 aircraft, planes that can fly direct from Honolulu to major cities deep within the Asian continent and to the US East Coast. HAL also agreed to purchase six Airbus A350XWB-800s, a still-in-development airplane that will have the near-miraculous ability to fly nonstop between Hawaii and European capitals halfway around the world.

 

As a result of these decisions, by mid-2008, at a time when the general US economy was contracting and unemployment was rising, HAL found itself hiring and expanding. Passenger counts were up by 21 percent, and Hawaiian reported a second-quarter profit of $54.3 million. Particularly sweet was the settlement paid by Mesa Air Group—$52.5 million as a “mea culpa” for its unfair attack on the Island carriers.


As fate would have it, though, the airline had scant time to savor these triumphs. The price of fuel was climbing crazily. In May 2008 oil was selling for the unprecedented sum of $125 a barrel. On July 11 that figure reached an all-time record of $147.27. The bill for Hawaiian Air’s jet fuel increased radically. In April 2008 the company spent $36.6 million on fuel; in July that figure shot up to $49.9 million. Although the company raised its fares to the extent it deemed possible, all it could really do was hunker down and lose money. “Fuel costs are our largest single expense,” says Hawaiian’s CFO, Peter Ingram. “In 2008 the cost of fuel was on the order of 38 percent of our operating expenses.”

 

Like all airlines HAL tries to “hedge” its fuel costs—that is, lock in the price of fuel that the company is certain to purchase in the future. There are a variety of ways to do this, says Ingram, but Hawaiian’s mode is to “keep it pretty simple. We take the approach of purchasing insurance.” In other words instead of speculating on the vacillations of the marketplace, the company chooses a safer philosophy of “managing the risk”—lest they get stuck paying too much when oil prices come down. HAL’s conservative approach proved to be a wise management strategy during the summer of 2008, for oil prices eventually dropped as steeply as they had risen.

 

By mid-September oil was selling for less than $100 per barrel for the first time in seven months. But by then a new threat was beginning to gather momentum: the worldwide recession. What that meant for the Islands was fewer visitors, and for every Island-based company—especially the airlines—a decline in revenue. In September the Hawaii Department of Business, Economic Development and Tourism reported a 24.2 percent drop in tourists from the same month the year before, the largest one-year plunge ever. The agency was predicting a statewide loss of income of more than a billion dollars.

 

Hawaiian Airlines’ response to this financial tumult, characteristically, was to look for new growth opportunities. Over the year it had added the four Boeing 717 aircraft and, in addition to flying to Manila, had added Oakland to its route map. Now in early 2009 the company signed ticket agreements to facilitate passenger transfers from Air France and Virgin Blue (of Australia), and as fuel costs eased it passed that relief on to Australian fliers by cutting fuel surcharges from Sydney. “As Hawaiian continues to reach out to more international travelers,” said Rick Peterson, Hawaiian’s vice president of marketing and sales, “these agreements will make the journey to Hawaii much easier.” Soon would come a code-sharing agreement with Korean Air meant to ease Hawaiian’s entry into the Far East, starting with Incheon and Pusan in South Korea.

 

Meanwhile, planning was well underway for the introduction of the new fleet of long-distance aircraft, the first of which is due in 2010. The Airbus A330-200 is powered by extremely fuel-efficient Trent 700 engines made by Rolls-Royce and has an operating range of 6,050 nautical miles. In the cabin, its Panasonic Avionics entertainment system is the best available.

 

In April 2009, one year after the collapse of its competitors, Hawaiian Air reported a first-quarter profit. The slump in tourism could not undercut what the airline had gained from ever-increasing inter-island traffic and now-stabilized fuel costs. HAL reported earnings of $23.5 million, as opposed to a net loss of $19.9 million during the three months preceding the fall of Aloha Air.

 

Two other announcements in April suggested that Hawaiian Air was ending its wild year in good shape—not just financially but also in terms of companywide esprit de corps. First, the union of flight attendants ratified a two-year contract extension by a vote of over 84 percent. What’s significant is the amicable way the deal was struck. When either side could have dug in for a long, drawn-out confrontation, both management and the 1,040-strong membership agreed to agree. “We did a little ‘horse trading,’” says union head Sharon Soper, a veteran of forty-four years as a flight attendant. “Then we all said, ‘Given the uncertainty of the times, let’s move this along.’”

 

In Soper’s mind, and those of many HAL employees who contributed to the research for this article, this quick agreement reflects a community pride that permeates the culture of the company. “The employees feel that they own this company,” she says. “All year long the employees have stepped up to make sure the company would survive. Something has shifted this year. Now that we’re the [primary] carrier of the state, we have a responsibility to everyone, to the people of Hawaii, to businesses, to kama‘äina, to assist in having the economy thrive. We’re all in the same canoe. We all have to work together.”

 

The second announcement in April derived, no doubt, from this same company spirit. The nineteenth annual Airline Quality Rating, a comprehensive national study, found Hawaiian Airlines to be number-one for service quality and for on-time performance. (HAL also continues to have the best safety record among all US carriers. In its eighty years in business, HAL has never had a fatal accident; it is the oldest US carrier with such a distinction.) CEO Mark Dunkerley gives all the credit for this to his employees: “Their focus on the customer never wavered throughout a very challenging year in the airline industry. They are the best in the business.”


 

The irony of this wild eightieth year is that cutthroat competition—the signature trait of the US airline industry—has produced a company that values community above all. Employees who felt emotionally battered by the demise of Aloha Airlines have responded by bonding as a team and deepening their commitment to the people of Hawaii. Ryan Casco, a HAL flight attendant who grew up in West Maui and who has worked previously for three other carriers, says, “Hawaiian has something that no other airline in this country has. Everybody is really a family here. Our lives go beyond the airplane. Even if we’re not blood-related, we’re still related. Not only do we have pride in our company but also pride in our community. We treat our customers well not because it’s our job but because it’s our culture. We feel that we represent not just Hawaiian Airlines. We represent Hawaii.”