Hawaiian Airlines expects to save nearly a quarter-billion dollars from lower fuel costs this year, but customers won’t necessarily see that passed on to them with cheaper fares.
The state’s largest carrier reported Thursday that its net income plunged 35 percent to $11.1 million in the fourth quarter after taking a $12.7 million loss for betting the wrong way on fuel prices. Like most other airlines, Hawaiian has been hedging against increases in the cost of fuel by buying contracts that lock in future purchases at near the current price. When the price drops, as it has in the past six months, being locked into the old price hurts the airline.
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FOURTH-QUARTER NET
$11.1 Million
YEAR-EARLIER NET
$17.1 Million
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Because accounting rules require airlines to expense the value of the fuel that is hedged, those contracts had a large impact on Hawaiian’s net income. Excluding the $12.7 million noncash charge associated with the fuel hedging and $2.3 million that was used to pay down aircraft debt and a portion of convertible notes, Hawaiian’s adjusted income more than doubled to $26.1 million from $12 million in the year-earlier quarter.
Hawaiian President and Chief Executive Officer Mark Dunkerley said he expects even better results this year.
"If you look at the fuel curve, and if that’s actually what happens, Hawaiian’s fuel bill (for 2015) would be $240 million lower than would have otherwise been the case," he said in a telephone interview.
"Hawaiian Airlines has made tremendous investments in the future of its business and travel within the islands," he added. "In 2014 we saw a lot of those investments beginning to bear fruit, and as we roll into 2015, we’re optimistic that we will further benefit from these investments made over the years. Coupled with a more benign fuel price environment, we think we’re set to have a stronger 2015 than 2014."
Lower fuel prices, though, might not mean lower ticket prices.
"When the price of fuel goes up, that increased cost doesn’t get passed on typically to consumers," Dunkerley said. "The reason why we don’t pass along fuel increases to consumers is because the price of an airline ticket is set by the amount of supply of seats and the demand for travel. As long as supply and demand stay at roughly the same equilibrium, ticket prices stay roughly where they are."
Dunkerley expects Hawaiian’s fuel expense to drop further this year after it fell 13.2 percent last quarter to $150.8 million from $173.8 million in the year-earlier period. The airline’s fuel cost per gallon declined 9.3 percent in the October-December period to $2.84 from $3.13 during the year-earlier period. For all of 2014 the airline’s fuel cost per gallon was down 3.8 percent to $3.03 from $3.15.
He expects the fuel price per gallon this quarter will range from $2.05 to $2.15 and for the full year to range from $1.90 to $2.
Dunkerley said he has no plans to change the way Hawaiian hedges its fuel, even though prices have been dropping. Hawaiian had 65 percent of its fuel hedged in the fourth quarter and has 40 percent hedged this quarter.
"We hedge fuel to reduce the volatility in our financial results," Dunkerley said. "It’s like buying insurance, and just like your car insurance, if you have the good fortune to go an entire year without dinging your car and calling your insurance company, you look at your insurance policy and it’s not money wasted, but just a cost for providing some certainty around your personal financial situation. That’s the same way we approach hedging."
The state has seen record visitor arrivals for the past three years, and that trend could continue this year because of added airlift. Dunkerley said capacity for all airlines from North America to Hawaii in the first quarter will be up 10 percentage points compared with the same period last year. The additional capacity prompted Hawaiian to forecast that its operating revenue for every seat flown one mile would decline between 3.5 percent and 6.5 percent in the first quarter compared with the year-earlier period.
"That’s a very large (seat capacity) increase year over year," he said. "Whether that is going to be sustainable has everything to do with how many people want to visit Hawaii. Airlift does not determine demand; demand determines airlift. If demand weakens and seats don’t get filled, you might reasonably expect some airlines to pull back a bit."
Hawaiian Chief Commercial Officer Peter Ingram said the airline has decided to push back by a couple of weeks some seasonal flying from California that the airline was planning to introduce during the second quarter.
"Despite the top competitive environment, the financial performance of our North America routes remains very good," Ingram said on a conference call.
Overall, Hawaiian’s revenue last quarter rose 8.1 percent to $574.8 million from $531.9 million. The airline made $11.1 million, or 17 cents a share, last quarter compared with $17.1 million, or 31 cents a share, in the year-earlier period. Excluding the fuel hedging and early debt payment expenses, Hawaiian had earnings per share of 40 cents to match the consensus estimate of 10 analysts, according to Thomson Financial Network.
For the year, Hawaiian’s net income jumped 32.9 percent to $68.9 million, or $1.10 a share, from $51.9 million, or 98 cents a share. Full-year revenue increased 7.4 percent to $2.3 billion from $2.2 billion. On an adjusted basis, its net income more than doubled to $97.1 million, or $1.55 a share, from $46.6 million, or 88 cents a share.
Hawaiian shares were down 9.5 percent to $24.10 Thursday in after-hours trading, following the release of its earnings.
