Hawaiian Airlines Is Banking On Growth In Japan

Since the beginning of 2018, Hawaiian Holdings (NASDAQ:HA) has focused its growth in the mainland-Hawaii market. The Hawaii-based carrier has used its new Airbus A321neos to add numerous flights in midsize West Coast-Hawaii markets, such as Portland-Kahului, Long Beach-Honolulu, and Oakland-Lihue. It also became the first airline to fly nonstop between Boston and Hawaii last month.

However, Hawaiian is facing "historically high levels" of industry capacity on domestic routes, which has undermined its unit revenue and profitability. As a result, Hawaiian appears to be shifting its growth focus back to Japan, its most important international market.

Fighting for route authorities at Haneda Airport

Today, Hawaiian Airlines operates 31 weekly round-trip flights to Japan, including three to Tokyo daily (21 weekly flights). Two of those three daily round-trips utilize Haneda Airport, which is closer to the city center than Narita, Tokyo's primary international airport. (There are also more domestic connecting flights at Haneda, which is important due to Hawaiian's new code-share partnership and planned joint venture with Japan Airlines.)

At present, U.S. airlines are permitted to operate just six daily round-trips from Haneda. Hawaiian is fortunate to have two of those scarce route authorities. Delta Air Lines (NYSE:DAL) also holds two, while American Airlines and United Continental each have one. However, a recent agreement between the governments of Japan and the United States will allow U.S. airlines to add another 12 daytime flights from Haneda beginning next spring.

This represents a unique opportunity for Hawaiian Airlines to add capacity in this high-traffic, underserved market. Most Tokyo residents prefer Haneda over Narita, but about three-quarters of the flights between Tokyo and Hawaii still use the latter.

As a result, Hawaiian Airlines has applied for three additional route authorities. That would allow it to expand its schedule to five daily round-trips between Haneda Airport and Hawaii. Delta, American, and United are also seeking multiple additional Haneda route authorities, though, so Hawaiian may have to settle for just one extra daily flight to this key airport. That would still be an attractive growth opportunity for the carrier.

Hawaiian Airlines wants to return to Fukuoka

Earlier this week, Hawaiian Airlines indicated that its growth ambitions in Japan extend beyond Tokyo. The carrier announced plans to return to the Fukuoka-Honolulu market as soon as November, contingent on government approval and securing appropriate slots in Fukuoka.

Hawaiian Airlines previously offered daily service between Fukuoka and Honolulu for a little more than two years starting in April 2012. It canceled the Fukuoka route in mid-2014 due to poor performance. At the time, it faced withering competition from Delta, persistently high fuel prices, and the yen falling steadily against the dollar.

A lot has changed over the past five years. For one thing, the price of Brent crude has averaged about $70 per barrel recently, compared with nearly $110 per barrel in the first half of 2014. Just as important, Delta Air Lines stopped flying its Fukuoka-Honolulu route this week, leaving a vacuum there. (The yen remains relatively weak against the dollar, though.)

Hawaiian Airlines plans to fly to Fukuoka four times a week this time around. While the Fukuoka route apparently hasn't been profitable for Delta recently, Hawaiian has a lower cost structure and can offer seamless connections from Honolulu to other destinations in Hawaii. Meanwhile, the carrier's partnership with JAL will help with marketing -- and JAL may be able to provide some connecting traffic in Fukuoka as well.

Shifting capacity away from the West Coast

Today, Hawaiian Airlines operates about half of its West Coast-Hawaii flights with wide-body planes, with the new A321neo narrow-body fleet covering the rest. The A321neos have 32% fewer seats than the carrier's A330s -- and comparable unit costs -- so switching to an A321neo is a good way for Hawaiian to shore up its profitability on a route suffering from overcapacity.

Growth in Japan will enable Hawaiian Airlines to profitably redeploy A330s that are no longer needed for West Coast routes. Indeed, industry capacity growth has been relatively muted in the Japan-Hawaii market in recent years, including a 2.7% increase in seat capacity last year.

Hawaiian's plans for growth in Japan are one more indication that the airline has plenty of tools available to respond to rising competition in its core markets. With Hawaiian Holdings stock trading for seven times forward earnings, it appears that investors may be underestimating the company's prospects.

This article originally appeared in the Motley Fool.

Adam Levine-Weinberg owns shares of Delta Air Lines and Hawaiian Holdings and is long January 2020 $20 calls on American Airlines Group. The Motley Fool owns shares of and recommends Delta Air Lines. The Motley Fool recommends Hawaiian Holdings. The Motley Fool has a disclosure policy.