Paradise regained

Two years after his airline filed for bankruptcy, and despite shrinking home markets, Hawaiian Airlines chief executive Mark Dunkerley and his “family” of workers have achieved a dramatic turnaround

The view from Mark Dunkerley’s office is one of paradise: Hawaii’s blue-tinted, distant and inviting mountains and perpetually clear skies. He is not often there to see it, though, because Dunkerley spends a major chunk of each day as president and chief executive of Hawaiian Airlines out on the ramp and in the Honolulu airport terminal. On the ramp, he sticks his head into the cramped cargo hold of a Boeing 717 in the middle of the aircraft’s 25min turnaround before it heads back out to a neighbouring island on one of Hawaiian’s 110 daily local flights. He then chats with the bag-tossers and goes on board to see how the cabin crew is doing, ending up by helping a passenger into a wheelchair.

This is part of the daily routine, as much as the morning push and afternoon banks of aircraft are part of the rhythm of the airline day. And for Dunkerley, a veteran airline doctor even though he is just 42 years old, it is vital. “You have to be in constant touch with as much of the operation as you can. Airlines always talk about how important their people are, but at Hawaiian it is more true than most because of the extraordinary reputation the airline has for customer service and the great importance of the aloha spirit in helping the airline run.”

Hawaiian is both a local point-to-point carrier and longer-distance network carrier, but to Dunkerley it is more than that. “We are a destination airline. Hawaiian begins the moment a passenger steps on the aircraft, and it begins with the people,” he explains as he chats with a ticket gate agent. That means a heavily staffed operation, on the aircraft and on the ground, with a high level of direct contact for which technology is no substitute. And it means a lot of people on the ramp, working bags and loading. The ramp, incidentally, is as clean as any and well-ordered. It is a routine that Hawaiian’s people designed to make the quick turn­around a regular feature in a very competitive local market. The airline’s theme, “Hawaii begins here”, rests on providing a solid operating platform on which to base the islands’ culture of hospitality.

Hawaiian’s people have come up with ways to marshal baggage carts to be in place for the fastest turnaround; a co-ordinated choreography of simultaneous dockings and undockings; and ways to control costs by limiting on-the-job injuries and importing its own barge loads of fuel bought off-island at lower prices. These are the basics and Dunkerley is fluent in his mastery of airline essentials. Basics clearly are what this airline needed in its years of crisis.

Now, though, competitive forces, both indigenous to the islands and imported from the mainland, constrain the airline industry here. This paradise of islands would seem a good place to run an airline: lots of local traffic, no competition from roads or railways and a reputation as one of the world’s most desirable destinations for holidaymakers from east, south and west. Yet the Hawaiian islands have never been an easy environment for the airline business.

Competitive forces
For the airline that has borne the name of Hawaii for more than 70 years, the crisis began early. Before the frenzy of fuel costs overtook the world industry, Hawaiian Airlines found its niche eroding as fundamental changes in aircraft produced fundamental changes in the competitive landscape. At first, Hawaii was a place where airlines had to stop because they could go no further, creating an attractive stopover for vacationers. Then it was a place where people went by choice, but they could only go to Honolulu, the state main gateway. Longer-range aircraft such as the Boeing 747 could easily overfly the islands, and the growth of long-range twins fragmented the market as carriers increased direct flights to the neighbouring islands – and did so directly from cities that bypassed traditional West Coast hopping-off points. And this premium service meant Hawaii was no longer a low-yield dumping ground for frequent flyers burning miles. Hawaiian could no longer count on a steady flow of passengers through Honolulu.

By 2003, Hawaiian Airlines had been losing money for a decade, its operating margin was worse than that of most US airlines, and it had only $20 million in the bank when it filed for Chapter 11 in March 2003. It was not the airline’s first bankruptcy, coming a decade after an earlier reorganisation. Some in the islands thought it would be its last, especially as the reorganisation was complicated by a deteriorating relationship with Boeing, the single largest creditor; by competing takeover offers; and by a last-minute bid by pilots whose mystery backer was later arrested on charges that his “financing” was fraudulent and that he had tried to bribe an FBI agent to ignore his forged documents. A court-appointed trustee clashed openly with employees and others at Hawaiian, and top management was in a state of flux after the bankruptcy court ousted one chief executive for bad-faith dealings and a trustee quit after a month.

As the Hawaiian crisis deepened, Dunkerley was forced to steer a very careful course among the conflicting parties: Boeing, the creditor that objected to the way the bankruptcy was run; labour groups; would-be buyers; and the high-profile trustee who oversaw Hawaiian from July 2003 until June this year – investment banker and federal official Josh Gotbaum. It is here Dunkerley’s background in fundamentals did him proud: his first job at Miami’s airport gave him experience in south Florida’s often high-powered political games in a city that is sometimes called the northernmost city in Latin America. His early exposure to diplomacy helped. Born in Bogotá, Colombia, of British parents, Dunkerley was raised among Washington’s diplomatic community. His career has given him a wide circle of acquaintances such as former AMR chairman Don Carty, who sits on Hawaiian’s board.

Turnaround story
Dunkerley insists that changes in the nature of air transport – growth in direct flights, the ubiquity of low fares and the rise in fuel prices – hobbled Hawaiian more than the dramatic and sometimes difficult-to-believe peculiarities of its recent history. He also insists that the turnaround is “far more a company success than the achievement of one or two executives – the people here wanted to do a good job”. Dunkerley was brought in as president and chief operating officer in January 2003, when the crisis was already deep, and added chief executive to his role as president on 1 June as the carrier was ready to emerge from bankruptcy court protection and leverage its dramatic turnaround.

And dramatic it has been. Just 26 months after filing, the 1,100 creditors received 100% of their $246 million in claims, the shareholders retained their stakes, employees have competitive contracts and profit-sharing even as labour costs have been trimmed. But far more than the fiscal workout is the reality that the company is running a good airline, one of the best in the nation. For the 20 months to August, Hawaiian has been in first, second or third place in the major performance categories of on-time, baggage handling and flight completion.

Financial challenge
But now the challenge really begins. Bankruptcy, Dunkerley insists, is neither fun nor easy, but life outside its protection is no paradise either. In fact, Hawaiian’s financial performance was deteriorating as the reorganisation concluded. In April, the last month in which Hawaiian was reporting monthly performance to the bankruptcy court, it earned $1.7 million – a 76% drop from the $7.1 million it earned in April 2004 on almost identical revenues. Certainly the $4.7 million increase in fuel costs was the chief culprit, but unit revenues also fell, by 4.5% year on year. So cost-cutting is not enough, even though without fuel, unit costs dropped by almost 3% over the year. The most dramatic revenue decline was in local or inter-island yields, down by 2.2% annually in the second quarter.

So growth is the answer, says Dunkerley. But it will not be through consolidation and it will not be on home territory. Hometown rival Aloha Airlines come close to merging with Hawaiian after the terrorist attacks of 9/11, but the deal fell through in March 2002. Aloha has cut back on the transpacific services it started in the 1990s, and returned two of its ETOPS-approved Boeing 737-700s to lessors, although it does fly nose-to-nose against Hawaiian on some mainland routes. And Aloha, enjoying its own rapid turnaround in the bankruptcy reorganisation it entered in December 2004, is a constant competitor on inter-island routes and its presence will grow as its codesharing affiliate, IslandAir, grows.

This privately held turboprop operation plans to add larger equipment (IslandAir operates to seven points for Aloha, but also flies one route for Hawaiian). And the threat of new entrants is constant. This is ideal territory for a low-fare model such as Southwest Airlines, says Florida-based aviation consultant Stuart Klaskin of Klaskin Kushner & Co. He cites such start-up attempts as short-lived Mahalo Air, which failed in 1997, or the pending start-up FlyHawaii. “The ­inter-island market is much like the intra-Texas, intra-California or intra-Florida aviation markets – ripe for high frequencies and low fares,” says Klaskin.

But Dunkerley notes that the local aviation market is one of the few in the world that is actually shrinking. “The size of the market, from 2000 to 2004, fell by 25%, at the same time that seats on flights from the mainland to the neighbouring islands surged by 82%, decimating the core inter-island market,” he says, ­citing Department of Transportation studies. Dunkerley says that fragmentation – more direct flights to island points other than Honolulu – is the main reason for the declining market, but other factors include the growth in local healthcare on all the islands, which means fewer people have to fly to Honolulu for treatment; and the increase in retailing and large stores, which has cut out some traditional shopping trips.

To break out of the limits of the home market and to avoid the pattern of cutting size as well as watching costs, Dunkerley has emphasised new directions. He brought Hawaiian back to Australia, a nation of eager travellers that the airline had abandoned 15 years ago. Dunkerley is looking for more Boeing 767s and may add routes to Japan and China. The airline sought route rights to China earlier this year, proposing four flights a week from San Diego to Honolulu and then on to Shanghai. The DoT said no, but Dunkerley is likely to seek more China rights when they come up. The airline may also add Australian cities. “The 767 is ideal for this,” he says. He is looking for more 767-300ERs because “the aircraft can do a lot more – flights to the West Coast are using only a fraction of its range”, and Hawaiian is looking at some cities further inland. Hawaiian may go to cities in the midwest and possibly the East Coast. The 10h flight to Sydney is a more efficient use of the 767 – Hawaiian has 14 of the big twins, each with 18 first-class seats and between 234 and 246 economy seats.

Of course the right aircraft are only part of the solution, and it is Hawaiian’s distribution strategy that is truly custom-detailed. Rick Peterson, senior director of e-business and marketing programmes, says: “The difference is, our pricing and capacity people work directly with sales and marketing, making real-time decisions together. It is the size of the organisation, the fact that we are a small family, that lets us make fast decisions without bureaucratic in-fighting.” Hawaiian has also created special travel agent websites that are by invitation only, plus association and affinity group websites. The airline sells more than 50% directly through the internet, it will still sell via a GDS but charges a difference fee of as much as $100-200. Peterson says: “We’re indifferent to how people come to us as long there’s no cost difference. Over time people will find that the site is cheaper.”

The way to San Jose
The way in which the parts of Hawaiian’s overall strategy come together is well illustrated by its latest route choice, a daily non-stop between Honolulu and San Jose, California, that began in late September. This is a secondary city and so does not expose the airline to significant tail-to-tail competition from a dominant carrier. It also has an ethnic base as well as a source of tourists. Dunkerley explains that San Jose, in the heart of California’s Silicon Valley, is filled with expatriate islanders who have gone there to work as Hawaii builds up its own hi-tech and biotech industries – but who, like most Hawaiians, place a high value on family and friends and so travel home frequently. Randy Havre, a veteran of 17 years of watching and rating local companies and their stocks, says the Hawaiian market is marked by repeat visitors and by returning exiles to whom “family is deeply important”.

Family is a constant theme in Dunkerley’s talks with co-workers and visitors, as is a focus on the basics such as redesigning the ramp, operating on time and keeping passenger service levels high. He reads every complaint letter and attends a regular monthly customer feedback forum in which each senior officer shares complaint trends and a complaint of the month – and monitors follow-through. He is notified by mobile phone signal of every late departure and “every morning in a meeting we drill down on late flights”.

So far, the basics are paying off. Bob Winner, an IAM local union official at Hawaiian, says: “The operation is running as smoothly as, or more smoothly than, it has in my 37 years at Hawaiian.” This is easier said than done because in the terminal building at Honolulu airport the airline has 10% of the counter space and has to handle 30% of the passengers. Havre, the local stock analyst, says Hawaiian’s reputation “has revived mightily from a few years ago”. It is just a matter of exposure or, as Dunkerley might say, of enlarging the family.

Click here for more Airline Business interviews

Source: Airline Business