What the islands' carrier can teach us about the airline industry, tourism and the state of the two-speed recovery

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If you've ever sipped passion-orange-guava juice while flying perilously close to Haleakalā volcano, then you know firsthand the Hawaiian Airlines experience. The carrier, which mostly operates thousands of miles from the American mainland, has enjoyed similar distance from the U.S. recession. Why hasn't the airline felt the pinch of the downturn? To find out, I spoke with the airline's president and CEO, Mark B. Dunkerley earlier this month.

The Sun's Still Shining in Hawaii

On the U.S. economic recovery, Dunkerley was actually quite optimistic. He told me that 2011 has so far been a year of pretty robust demand. The biggest obstacle his airline has faced has been rising fuel prices, which should not shock anyone who has been to a gas station this year. And unfortunately, fuel is one cost that an airline can't avoid.

But what about the summer slowdown -- is he becoming pessimistic about the rest of 2011? "What I think is interesting is that we haven't seen any fundamental change in (demand) going through the summer and looking out into the fall. In fact, if anything what we've seen is a small, but meaningful, moderation in the price of oil," said Dunkerley. In other words, profits have actually been improving over the past few months, since sales have remained strong while fuel prices have relaxed a bit, coming off the highs they hit earlier in the year.

This view certainly contrasts with some of the economic reports we've been seeing lately. In April through June, real consumer spending had been declining. Only in July did we finally see an uptick, possibly in part because Americans got a little relief from rising prices in June. And what makes Hawaiian airlines' resilience even more surprising is that its business is tourism: an industry that generally suffers early in a recession and recovers late in a recovery. Vacations are one of the easiest expenses for consumers to cut back on.

Hawaiian Airlines' Resilience

In fact, Hawaiian Airlines has performed relatively well over the past few years. Even throughout the recession, it continued to record positive annual net income. That's not a claim that all U.S. airlines can make. Here's a chart showing a few performance metrics of Hawaiian and a couple of other airlines that I thought might be interesting to compare it to:

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Its revenue has been relatively strong, an impressive feat during the worst recession in more than a generation. Its net income has been on verge of the remarkable in an industry that's known for constant bankruptcies and restructurings. And when it comes to the ever-important passenger load metric -- the ratio of passenger miles flown to seat miles available -- Hawaiian soundly beats these three other airlines.

Hawaiian's Secret: It Serves Hawaii!

So why has Hawaiian managed to perform so well? The first thing that came to my mind was that it may cater to more of a luxury market than other airlines that serve a wider variety of destinations. And even during a recession, the rich remain, well, rich. So if Hawaii is a relatively expensive and extravagant place to visit, then perhaps its customer base hasn't been as affected.

But Dunkerley disputed this view, explaining that my conception of Hawaiian tourism probably stems from my east coast zip code. On the west coast -- the only part of the continental U.S. that the carrier serves -- a Hawaiian getaway can be even an affordable weekend trip. "Hawaii is a good value for money destination," he adds.

Instead, he attributes much of the airline's success to the simple fact that it specializes in Hawaii. Its strategy is very different from most other airlines, since it is a destination carrier. "Hawaii is, I think unquestionably, the number one destination in the world, in terms of how highly sought after it is not only within the United States, but also overseas," said Dunkerley. Having spent some time there, I have to agree: it is a truly unique destination. "The fact that no other airline brings you Hawaii like Hawaiian can is unquestionably the source of our strength."

As long as people love traveling to Hawaii, this advantage will remain a valuable one for the airline. The flipside, of course, is that it does not have the vast diversification of some other carriers.

Hawaii's Resilience

Another thing that has likely helped Hawaiian Airlines has been the islands' resilience. While the rest of the U.S. has been hard-hit by the recession, in Hawaii things aren't so bad. In July, the state's unemployment rate was just 6.1%, among the lowest in the U.S. The national rate was 9.1%.

Its housing market was not insulated from the bubble, however. From their peak, prices are down 20%, about the same as the national average. But in Hawaii, many of the homes that inflated the bubble were likely second homes, which could mean that its residents were less affected by the frenzy than tourists who paid too much for a piece of paradise.

Since tourism is one of the state's chief income sources, its relative resilience makes sense in light of its unique place in the industry. Although people might be cutting back on vacationing, some of the more fringe destinations may be suffering more than the unique, very desirable spots like Hawaii.

Making Tourism Go Farther

I asked Dunkerley if there were actions that could be taken to make tourism a bigger part of the recovery. He definitely thinks it could help: "If you want to talk about natural resources, you can think of fewer natural resources that the U.S. has such a natural competitive advantage in as tourism." Unfortunately, he worries that the current visa regime discourages tourists from coming to the U.S. "To forgo the opportunity of some surpluses in travel and tourism is astonishing," he said.

One example quite relevant to Hawaii's tourism is China. At this time, Chinese travelers hoping to visit the U.S. need a tourism visa. While Dunkerley sees this as a market that could bring a great deal of money to the U.S., its potential is being stymied. This contrasts with South Korea, which Hawaiian has seen huge growth from, since its residents no longer need a visa to visit the U.S.

So that's one action that the government can take to help the U.S. economy, but Dunkerley also suggested a way to provide some relief to the airline industry, in particular: update the nation's air travel infrastructure. "No matter what industry you're in, it would be very hard to make money today if the infrastructure you had to use was constructed in the 1960s," he said.

A prime example he cited was routing. Currently, many flights cannot simply travel the shortest distance between the cities they serve. Instead, they are routed by beacons on the ground. This forces many flights to zigzag their way to their destination, instead of just taking the most efficient route. The result is extra fuel burnt and time wasted. This and other infrastructure changes would save the industry money, which of course would result in higher profits, more growth, and additional jobs.

Looking Ahead

In the future, Dunkerley sees Asia and Europe eventually surpassing the U.S. in air travel -- which provides another good reason for the U.S. to make key growth markets visa waiver eligible. Of course, Hawaiian Airlines is in a great position to benefit from rising tourism from Asia. When the growing middle- and upper-classes of China, India, and other developing nations in the region are looking for a unique, western tropical destination, Hawaii will be their obvious choice, given its proximity to Asia.

Dunkerley also sees consolidation within the industry continuing, but isn't so concerned about being a smaller player. When I brought up the Continental-United mega-merger, he suggested that being bigger doesn't always increase efficiency and lower costs. "Once you start getting into the hundreds and hundreds of aircraft and the tens of thousands of employees, I think the managerial task of optimizing each and every route as well as the network as a whole becomes bigger and bigger." Indeed, Hawaiian's success appears to be a testament to the fact that finding a good niche and specializing can be a great business strategy.

Image Credit: Hawaiian Airlines
