Hawaiian Airlines president & CEO Peter Ingram spoke recently with CAPA - Centre for Aviation senior analyst-Americas Lori Ranson to explore running an airline during a pandemic, the future of the carrier and a closer look at the US market. The following is a transcript of their CAPA Live conversation.
Lori Ranson: Hello everyone. I’m Lori Ranson, senior analyst for the Americas, and we’re pleased to have Peter Ingram here today. He’s the CEO of Hawaiian Airlines. After that quick introduction, let’s get right into it, Peter. I think just first off, can you give us a broad perspective of how you think Hawaiian and the industry will think about things like liquidity and CAPEX and fleet management and cost and all of those things that have been appended in the last year? Do you think those aspects of the business have changed forever?
Peter Ingram: I think we will probably carry some of the scars of this period with us for a while as reminders to think a little bit differently about some of our long-term decisions. Using liquidity as an example, right now we’ve gone and taken a tremendous amount of debt to ensure we do have the liquidity to survive the crisis, and that’s the right question for right now. The question for us is going to be, as we move back into whatever the new normal looks like, what’s the right amount of liquidity to have? Do we carry a little bit more buffer in terms of cash on our balance sheet?
I think we were fortunate to come into the crisis in a very strong financial position and that allowed us to have some flexibility to manage through it, but I think we’ll be thinking about it for a while. In terms of fleet, we didn’t have to make any big decisions because we had just retired our oldest fleet of aircraft a couple of years ago, the 767 and 300s. All of the airplanes that are in our fleet now are things we expect to have for a while, but I think it will perhaps have people approach some of those decision-making processes around lifecycle of airplanes, fleet simplicity, perhaps a little bit differently going forward.
Ranson: I know that Hawaiian just announced a transaction to raise some liquidity and refinance its CARES loans. Can you just walk us through the logic of doing that at this moment in time, market favorability, those type of things in terms of what led you all to do the decision right now?
Ingram: Sure. Well, the market conditions actually ended up being very favorable for us. So we were really pleased with the demand we had and the financing was substantially over subscribed and we were able to get a total cost of borrowing that was in line with our expectations going into the program, maybe even on the better end. Compared to the financial or the financing associated with the CARES loan, part of the reason we did this is because the overall cost of this is cheaper when you factor in the warrants that we had, some of the financial terms are better. It’s a longer term borrowing, so we didn’t have amortization in the next couple of years which we would have had under the CARES loan.
So all in, it was a better financing and it was important to us to get done before the deadline on when we had to draw more of the CARES money, because that would have triggered some of the warrants and the other things that made the CARES loan more expensive. So it was important to us to get this done in the early part of this year, and I’m really pleased that our treasury team was able to go and execute that deal as successfully as they did.
Ranson: It seems like you feel pretty comfortable with your liquidity position for the foreseeable future, maybe after this transaction is completed.
Ingram: Yeah. Yeah. With this transaction closed, which it is now, we’ve got ample liquidity. I never want to say to handle whatever the world can throw at us because after 2020, I don’t want to be too. . . . I want to be careful about presupposing that I’ve got a crystal ball for the future, but we think we’ve got the ability now to have the liquidity comfortably to manage through the pandemic as we see it evolving. We’ll really actually pivot now into thinking about, “OK, now that we’ve taken this debt on, how do we think about where our balance sheet needs to be over the next two, three, four years? And what are some of the other long-term decisions we need to make about investments, about paying back debt, which debt to pay back and starting to manage the business going forward?”
Ranson: I want to turn to testing just briefly, because one of your colleagues made an interesting point a few weeks ago in terms of, if you think back a year ago, Hawaiian would have never thought that it would be in the testing business. Now you’ve built up this testing network that’s pretty exclusive. I think about seven providers in five locations. Is that right? Is that the correct number right now?
Ingram: Yeah, we’ve got a number of partnerships that we’ve put together including one that effectively has been working with a company called Worksite Labs in putting up labs in shipping containers that are dedicated to testing Hawaiian Airline’s customer. Yeah, it is not . . . a year ago was not a business I thought we would be in. I think that’s absolutely right.
Ranson: As you monitor what is happening around the discussion about potential US domestic testing for domestic flights, do you think this puts you in a favorable position for a lot of reasons? Maybe, passengers might be willing to pay the cost of testing for a vacation to Hawaii versus maybe a short haul trip they were thinking about? I mean, this is all theoretical because nothing has been announced on domestic testing, but do you think if that were to happen, this might give Hawaiian a certain level of advantage especially given some of the capacity that might be coming into the Hawaiian markets in the summer season?
Ingram: Yeah, I think it is difficult with the current testing resources that are available now to think about how you would scale that up on a national scale for all the testing that’s going on. Certainly because we have the majority of the people on our airplanes traveling at least one way on the flight getting tested already. I think we are in somewhat of a better position to fathom it because it’s already going on. As I think about how we got to where we are on testing, it really was about recognizing that testing was going to be integral to getting Hawaii open for travel again. That became clear to us as we went through May and June, July last year. One of the things we said is, “OK, well, testing capacity is still difficult. It wasn’t . . . you weren’t able to just go out and get a test wherever you wanted it in the country.”
So we said, “How do we make sure that access to tests isn’t an impediment for the people who are traveling for us?” That’s what led us to some of the partnerships and led us to setting up the dedicated labs with Worksite Labs. It’s also served the purpose of adding supply into the market that helps the free market try and drive the costs down. I don’t think we want to be in the testing business long-term, but we want to make sure that there’s a little bit of an impetus for the market to create solutions so that testing can be available when people need it.
Ranson: Has that happened? That pricing pressure, has it materialized yet? Has pricing come down?
Ingram: Yeah, I think we’ve seen it in some places. Our Worksite Labs tests at a $90 price point is still the lowest cost on subsidized tests of any of Hawaii’s partners. But we’ve seen some of the other providers go from $150 to $130 to $120 and testing become more available. In the major markets that we serve, access is not a problem that it was back in August or September. I think there still is a challenge for Hawaii and the people who are coming from some of the smaller markets in the country, there really isn’t a big enough network of testing labs affiliated with the state of Hawaii’s programs. You can have access issues in those locations.
Ranson: Are you seeing any progress made in clearing up some of the patchwork of regulations in the inner island market in terms of quarantines or testing or both? Do you see that improving possibly as vaccination becomes more widespread? Do you think that’s what’s going to move the needle within those markets?
Ingram: It’s still a little bit less consistent than we would like, and there’s actually a bill that has been proposed in the state legislature to try and normalize around one consistent standard for all of the counties in the state again. So have a one of Hawaii rules structure, which is where we started out and for a variety of reasons that deviated based on some of the concerns that were unique county by county. For us, getting that consistency is very helpful. It makes it easier for us to explain to prospective travelers and to our guests, “Here’s what the rules are and here’s what you should expect. If you do this, you will be able to manage through all the protocols as opposed to having . . . if you’re going to Maui here is one rule, and if you’re going to Kauai, here’s another rule.” So we think that would be better. Some of this can be helped with technology over time. If tools like CommonPass become more available and accepted, then people can go to a centralized clearing house for [inaudible] of the standards. So not every guest has to learn it, you just know, “I’m going to go to the centralized provider and their job is to manage the rules of different jurisdictions.”
Ranson: Right. Do you see just on a broader scale, a larger international scale that standardization happening within the next few months or is that something that’s just farther out?
Ingram: My guess is that it’s probably a little further out in that we haven’t really seen that happen yet. I think we’ve got to see some momentum in that direction before we can be confident that it’s only a couple of months away. Going back to your point on vaccines, I think different jurisdictions, particularly internationally may have rules about vaccination. So this may be something we’re managing not just for 2021, but going beyond that as we’re validating not just testing status, but vaccine status.
Ranson: Right. I want to touch on new markets very quickly because you all made some interesting moves in the domestic market service to Austin and Orlando and Ontario, and then Long Beach to Maui. Can you just give us a picture of how those markets are performing? I know it’s the early stages yet, but maybe just give us some insight into how you market to a brand new destination in a pandemic.
Ingram: Yeah, sure. Yeah. It is early stages. So early in fact, we haven’t actually started those new routes yet. They all start during March and April. I could look at them in two separate categories. One group is Ontario to Honolulu, Ontario, California, to Honolulu and Long Beach to Maui. Those are medium-haul West Coast roads in the core of our Western geography where we’re a very well-known brand. We have a lot of people. We fly Long Beach to Honolulu already. So we can do some of the marketing and promotion and awareness for those new routes using our own database of guests and people here in Hawaii who travel to those locations. So that’s a little bit of standard how we’re doing. . . . How do we market West Coast flights normally. In terms of Austin and Orlando, these are our areas where we don’t have a flying presence at all. This is our first flights to Texas or Florida. In the case of Orlando, we’ve got some of the traffic base for that market is a Hawaii origination.
Certainly, we know that group of guests and we can work on awareness there, but it really does require us for . . . whether it’s Orlando origination or even Tampa, because that’s a fairly short drive. Then the case of Austin and San Antonio, we’ve got to go and do some awareness campaigning and make sure people know that we’re there. The airports have been very helpful and supportive of this. They always love to be able to add service to a new destination, particularly when that destination is Honolulu. They were excited to help us. But it’s going to be a difficult bit of work in a time when, as you say, people are not necessarily all thinking about traveling right now. We’ve been locked down for a while. The flip side of that is there is a lot of pent up demand. So when people become aware of it, they get really excited very quickly about the new routes, and we think that’s going to manifest itself in good demand for each one of these new routes.
Ranson: Do you see any more opportunity for markets like this that you’ve been looking at for a while that may be more favorable to launch now or in the next year? Or is it just, “Let’s take a look and see how these markets spool up?” I’m sure the spool up requirements are different than they would be a year or two years ago.
Ingram: Yeah. We’ve always got a number of routes that we’re looking at. This is unusual for us to be launching four new routes in the course of a couple of months coming up. It really is a little bit of a function of taking a realistic look at how demand is going to come back over the next year or so and realizing that the depth of some of our traditional markets isn’t going to be what it was in 2019, 2018 immediately. So this is an opportunity to accelerate some of the broadening of the network by moving some of these new demand pools so we can access up and getting them into our network sooner rather than later.
So we’ll continue to look at that. Obviously, we’ve got to manage building back service on our existing network as well and some of the timing of that is going to be a little bit unpredictable, particularly with the international routes where we’ve got different government regulations on either end of the route that we have to manage through, and the pace of those coming back is going to vary market by market and country by country. But we’re working to keep looking at these. Right now the focus is on, “Let’s get these four up and running,” and they’re booking fine right now. They’re generally in line with how we’re booking system average for our existing routes. So we think we’ve done a good job of creating some of the awareness.
Ranson: You mentioned fleet earlier, and I just want to touch back on fleet for a moment because I’m curious. . . . I know that you’re all very bullish on the A321. Do you think that aircraft presents certain opportunities in the pandemic that are unique to these crisis conditions?
Ingram: Well, I think one thing that’s great about it is for the routes we’re serving, it’s by far and away the most efficient aircraft out there in terms of the fuel economy and the good mix of density and comfort that you get on that airplane. So for us, we look at the 321 as a little bit of a Swiss Army knife in our network. For a while, we’ve actually flown it on some inner island routes, very short haul and we’re using it for some of those flights. While at the same time, we can put it into a market on the mainland U.S. that might’ve been a A330 market in prior times, but doesn’t have the volume of demand to support that right now and the cost per cycle of an A321 is considerably below that of a wide body aircraft. If you don’t have the cargo revenue to offset that and you can’t fill all those seats, then absolutely we’d like to go ahead and use the 321 as much as we can. Most of the planning that we’ve done about how the network ramp backs up has us flying the 321s more fully of historic utilization before the other aircraft in our fleet.
Ranson: Yeah, obviously it makes sense. It’s interesting. What routes were you flying them on the inner island markets?
Ingram: Well, we’ve flown them Honolulu to all of the major neighbor islands. So Maui, Kona, Hilo, but probably Maui more often than the others because that is the densest of them. Particularly at certain times of day, even when demand was very low, we would have times of day and times of week where there’s peak demand periods in the day. As we were for a period of time not selling the full load factor on the airplane, it gave us a little bit more seat capacity than our 717s.
Ranson: Yeah, interesting. So it really is a Swiss Army knife.
Ingram: Yeah.
Ranson: Maybe just . . . I know you can’t really talk about international markets, but do you see any positive signs emerging? Do you think there’s as much pent-up demand as you would say for domestic travel in the U.S. in your long haul international markets? I mean, I know it’s a matter of regulations and confusion and passenger friction because they don’t really know what they’re supposed to do on the other side, but do you see countries coming together and trying to work together terms of, “Let’s figure this out. Let’s have some standardization across what we’re trying to do to get the traveler back in the skies?”
Ingram: Unfortunately, I don’t think we’ve seen much of that. I think it has been . . . in our experience with the Asia-Pacific markets that we fly to, it’s been very much a country by country approach, and I’m expecting that’s liable to continue for the foreseeable future. A lot of it has been a little bit of a two steps forward, one step back, or some days it feels like one step forward, two steps back, and it very much differs by how different countries have reacted to the crisis and what their experience with the spread of the virus is. So, for us, we’ve been flying to a certain degree between Japan and Hawaii and Korea and Hawaii for several months. That started with originally all cargo flights, just carrying cargo in the belly of the aircraft with demand high enough to justify that the cash costs of operating. That allowed us to, as the pre-travel testing regime has come in place in Hawaii, to open it up to passenger demand with a low hurdle for what incremental costs we need to cover to do that.
It’s worked generally fine, but what we saw was there’s still a lot of restrictions. People still have travel restrictions on their return from their trip, which hasn’t been the case with our domestic flights. That really curtails how much demand there is to access right now in Japan and Korea. We haven’t flown at all to Australia and New Zealand. They’ve obviously . . . those are two countries have taken a very strict approach to closing their borders and have really not sought to control COVID-19, but to completely eradicate it within their countries. That’s leads us to the conclusion that it’s going to be even longer probably well towards the end of this year at least before we see those markets open up. But we’re keen to get back in when conditions are available to do so.
Ranson: Is South Korea still on track to be added to Hawaii’s testing program?
Ingram: Yeah. South Korea has been added to the program now. I don’t know if we’re past the effective date, but I know it’s been announced that South Korea is in the program and there are testing partners available. I’m pretty sure we’re actually up and running with tested partners now. So South Korea and Japan are in place and that Canada is in place as well, although that’s not part of our network, and Canada has some incremental restrictions for people coming back in now. Again, I expect this is going to be a global question of jurisdiction by jurisdiction managing through what the restrictions are for some period of time.
Ranson: Right. We don’t have too much time left, but I want to end on a positive note in terms of, can you just share what’s been the biggest lesson learned or the biggest positive takeaway, if there is any positive takeaway, from this crisis for you all at Hawaiian?
Ingram: I think what’s been really gratifying about this is how our team came together in a moment of extreme challenge and extreme crisis and really just look for, “What do we have to do to go and address this and make sure that our company survives and comes out ready to thrive on the other side of this period?” To see how much all of our employees care about Hawaiian Airlines and care about one another has really given me a lot of energy during this time period. Here, at our offices, looking at people taking on different roles. We talked about testing earlier, the folks who set that up didn’t think that that was going to be that . . . that wasn’t on their list of goals as we entered 2020, and it really just became a case of, “Hey, there’s work to be done. Let’s go and figure out what that is. Doesn’t matter what my job title is. If I can help, I’m going to help and then we’ll move on to the next thing after that.” That spirit of collegiality and working together has just been remarkable and wonderful to be a part of.
Ranson: Great. I think we’re running up against our time limit. So thank you so much for joining us today. It was really good to talk to you.
Ingram: Thank you very much. I appreciate it.
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