Sunday, February 25, 2018

Hawaiian Airlines Will Buy Boeing's 787-9 Dreamliner, and It Makes No Sense

Boeing just pulled off a huge coup in its home market. It has convinced Hawaiian Holdings to cancel a firm order for six Airbus A330-800neos and order Boeing's 787-9 instead, according to Scott Hamilton of Leeham News and Comment.

This is an important win for Boeing. While Hawaiian Airlines had an all-Boeing fleet just a decade ago, it has become a repeat customer for Airbus in recent years. However, from Hawaiian's perspective, adding further complexity to the fleet is a bizarre choice. 

Hawaiian Airlines had a clear fleet strategy

Hawaiian Airlines is currently nearing the end of a fleet transition that has lasted for much of the past decade. The carrier will retire the last of its Boeing 767s by the end of 2018. For the most part, they have been replaced by Airbus' A330-200 -- a plane that's roughly 10%-15% larger, has somewhat more range, and can carry significantly more cargo.

More recently, Hawaiian Airlines has added the Airbus A321neo to its fleet. The A321neo is much smaller than the 767, is vastly more fuel efficient, and will be an ideal fit for some of the carrier's lower-demand routes between the West Coast and Hawaii.

In the past year, Hawaiian's management has touted that the carrier finally has the right planes for the right markets. The Boeing 717 is a perfect fit for its short-haul routes within Hawaii, the A321neo is ideally suited to the West Coast-Hawaii market, and the A330 will cover the rest of Hawaiian's route network -- particularly flights to Asia and the South Pacific.

One potential weak point of Hawaiian's fleet strategy is that the A330 is a 25-year-old aircraft platform. However, Airbus addressed this concern in 2014 when it decided to develop a re-engined A330neo that will virtually eliminate the fuel-efficiency advantage of Boeing's 787 Dreamliner. A330neo deliveries are set to begin later this year. 

Hawaiian waffles on the A330neo

Hawaiian Airlines ordered six A330-800neos soon after Airbus started selling the re-engined models. However, while the larger A330-900neo variant has been moderately successful -- albeit far from a blockbuster, with 214 firm orders as of last month -- Hawaiian is currently the only customer for the A330-800neo.

This made Hawaiian's management nervous, as "orphan" aircraft are more difficult to maintain, finance, and resell. As a result, the company began rethinking its decision last fall.

Hawaiian Airlines considered both the Boeing 787 and Airbus' A350-900 as alternatives to its A330-800neo order. While the company claims that it hasn't committed to any aircraft deal, multiple sources have indicated that it's buying the 787-9 Dreamliner from Boeing.

Why not the A330-900neo?

Hawaiian's preference for the 787-9 over the A350-900 and the A330-800neo makes sense. The lack of interest for the A330-800neo from other airlines is a big mark against that airplane, while the A350-900 is simply too large for Hawaiian Airlines.

However, the A330-900neo would be roughly equivalent in size to the 787-9, while maintaining commonality with the existing A330-200 fleet. This would offer significant cost advantages in terms of pilot training. While Boeing reportedly offered extremely aggressive pricing on the 787-9 to secure the order from Hawaiian Airlines, Airbus could have beaten that price due to the low production cost of the A330neo. It doesn't seem that Hawaiian seriously considered this option, though.

The 787-9's one real advantage over the A330-900neo is additional range. Hawaiian Airlines' management has talked about the possibility of flying nonstop to London, which is more than 7,000 miles from Honolulu. Yet flying to London hardly seems like an urgent priority. At its 2016 investor day, Hawaiian Airlines identified 18 potential new destinations that are all within the range of the A330-200 or the A330-900neo.

What it means for investors

Ordering the 787-9 isn't necessarily a bad move for Hawaiian Airlines. The 787-9 should reduce unit costs significantly on Hawaiian's longer routes, such as Honolulu-New York and Honolulu-Sydney. It's just perplexing that a company with less than $3 billion of annual revenue would want to take on the complexity of adding yet another aircraft type to the fleet when there was no clear need to do so.

On the bright side, this move should push back some capital spending. Hawaiian's A330-800neo deliveries were scheduled to begin next year, whereas the 787-9 probably isn't available until at least 2020. This will free up some cash for Hawaiian Holdings' share-buyback program.

From Boeing's perspective, getting a Dreamliner order from Hawaiian Airlines is a solid win, even though the initial order is only for six aircraft and the price was low. First, the 787-9 is set to be Hawaiian's growth platform for long-haul routes, which could lead to further orders down the road. Second, if Boeing eventually upgrades the Dreamliner with new engines, it will be in good position to win a replacement order for Hawaiian's fleet of 24 A330s in the 2030s.

Meanwhile, Airbus is the clear loser here. Hawaiian's decision to abandon its A330neo order puts further pressure on an aircraft program that hasn't gotten much support from airlines. Lining up more A330neo customers should be the top priority for Airbus' sales team in 2018.

(Adam Levine-Weinberg - The Motley Fool)

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