HAL Inc.

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HAL Inc.

1164 Bishop Street
Honolulu, Hawaii 96813
U.S.A.
(808) 835-3001
Fax: (808) 835-3015

Public Company
Incorporated: 1929 as Inter-Island Airways Ltd.
Employees: 2,702
Sales: $365 million
Stock Exchanges: American Pacific
SICs: 4512 Air Transport—Scheduled; 4513 Air Courier Services; 6719 Holding Companies Nee

HAL Inc. is the holding company established in 1982 for the acquisition of Hawaiian Airlines Inc., a regional and international airline engaged in the transportation of passengers and cargo over routes that primarily cover the six islands of the state of Hawaii. The airline also serves cities on the U.S. mainland including Los Angeles, San Francisco, Seattle, and Anchorage, Alaska. Hawaiian Airlines also flies to the South Pacific and provides passenger charter services worldwide from its home base, Honolulu. The first to offer inter-island air travel, the company has survived 63 years and by 1993 carried an estimated five million passengers annually. The company provides service to 14 international and domestic destinations and to the pacific region, including Tahiti and American Samoa.

HAL Inc. is largely a formal legal entity set up to purchase Hawaiian Airlines. The history of the airline began in 1929 when Inter-Island Airways Ltd. was founded in Honolulu, Hawaii. At that time, Inter-Island Airways was the first company to offer scheduled flights between the six Hawaiian Islands. Inter-Island launched its inaugural flight to Maui and the Big Island of Hawaii, out of Honolulu’s John Rodgers Airport, on November 11, 1929 using two eight passenger Sikorsky S-38 amphibian planes. This was the beginning of three weekly round trips between Honolulu and the two other islands. By 1935, Inter-Island moved to modernize its fleet as aviation technology advanced quickly. The company added larger, 16 passenger Sikorsky S-43s to accommodate increased traffic and newly authorized inter-island airmail service.

By 1941, Inter-Island changed its name to Hawaiian Airlines and added 24 passenger DC-3s to its fleet. The company was under military control during World War II and, after receiving the very first air cargo certificate issued by the U.S. Civil Aeronautics Board, provided an aerial lifeline to Hawaii’s neighbor islands. The DC-3 would be a mainstay of the company’s fleet for years, and the company would also fly charters for tour operators and the Military Airlift Command in the late 1950s through the early 1960s.

The business grew steadily into the 1960s and became a leader in the inter-island air transport market. Hawaiian Airlines continued to expand its capacity to meet the growing demand, introducing new routes and improved service, as well as the Convair 340, which provided Hawaii with its first pressurized, air conditioned, cabin service. To expand their fleet further, in 1958, it purchased a long-range four-engine DC-6 aircraft for the military charter transpacific flights the company was starting.

With the expanding market base, revenues increased to around $10 million in 1960, representing substantial growth over the previous year. Profitability was fueled by lower costs and by a fare increase approved by the Civil Aeronautics Board. Further markets were opened as Hawaiian Airlines started still more routes, flying three jets between the Hawaiian islands and the West Coast in 1961. Also during this time commercial jet service was being established, resulting in increased air traffic to and from Hawaii. This meant not only expanded market potential for Hawaiian Airlines, but potential competition as well.

Hawaiian Airlines succeeded in attracting a large share of this growing tourist industry on the mainland, and the booming U.S. economy, with the greater purchasing power that followed World War II both for tourism and for cargo, provided a rising market tide that benefited all carriers. Closer to their home base, Hawaiian Airlines reduced travel time between the Hawaiian islands to 20 to 30 minutes. This was made possible by Hawaiian’s introduction of the first pure jet inter-island aircraft, the McDonnell Douglas DC-9, which became the backbone of Hawaiian Airline’s mixed inter-island fleet.

The company was profitable enough that, by the mid-1960s, it was attracting competition. By the time of the 1978 deregulation of the airline industry, Hawaiian Airlines was one of three companies that controlled the state’s inter-island traffic. The industry was fiercely competitive, with Hawaiian Airlines sharing the market with Aloha Airlines and Mid-Pacific Airlines, an aggressive low-cost carrier with 21 percent of the market. With deregulation, an increase followed in the number of direct flights by mainland carriers between the West Coast and the outer islands of Hawaii. In response, Hawaiian Airlines looked to longer term strategies as the company faced competitive challenges from big companies such as United Airlines, which began serving Oahu and Maui with non-stop flights from Los Angeles and San Francisco, and American Airlines, which put a flight in service from Los Angeles and Dallas/Fort Worth to Maui. Aloha Air was also operating new lines to Guam and Taipei and shipping cargo from Taipei to Honolulu.

Company leaders at the time expected that the increase in tourists coming to the islands from the mainland would also mean that more tourists would be traveling within the six islands. Thus, they felt secure in their ability to compete, given their control of inter-island travel. The company’s preeminence, along with its long-term cost reduction strategies, ensured that Hawaiian Airlines wouldn’t suffer losses of market share and revenues in a rapidly growing market. But, of course, they didn’t expect the growth in tourism to continue indefinitely, and they looked to other markets and strategies as well.

One major competitive move at the time involved the company’s airport on Maui. Hawaiian Airlines had owned and operated an $8.5 million airport built in the pineapple and cane fields of western Maui near the Kaanapoli and Kapalua resorts. Seeking to avoid competition in inter-island transport from large carriers such as United and American, the company chose to relocate this airstrip closer to the resorts, in order to provide more direct service. The new 3,000 foot airstrip on leased land was developed in 1984.

In another competitive move, the company entered the long-haul charter business and operated four McDonnell Douglas DC-8-60 series aircraft for several charter companies. Their entire fleet by 1985 consisted of four McDonnell Douglas MDSOs, two DC-9-50 series aircraft, and five de Havilland Dash 7s for use on inter-island routes. Four DC-8 60 series aircraft based in Honolulu and Niagara Falls, New York, were used for charter operations. The leased charter aircraft were operated through routes that included San Francisco to Honolulu and Maui; Honolulu to Seattle and London weekly round trips; and a weekly San Francisco to Paris round trip.

While the company was able to capitalize on the boom years of the 1960s and 1970s, the 1980s proved tumultuous, unstable, and largely unprofitable. During the 1980s, despite its growing revenues and markets, Hawaiian Airlines became known as a high cost carrier with a reputation for poor quality and unreliable service. Thus, while its sales grew consistently over the decade, its profits continually stagnated and declined. Not only was the airline forced into strict retrenchment, but it also spent a large portion of its earnings on advertising and promotion to overcome its reputation for poor quality.

Throughout the 1980s, the total number of visitors to the islands increased at a rapid rate, but there was also a change in the travel patterns of these visitors. Previously, many travelers visited several islands during trips to the state, but in the 1980s a larger number of repeat visitors visited only one or two islands during their stay. As a result, inter-island traffic remained flat even though overall visitors to the islands increased. Many experts thought that the increase in direct mainland to outer-island service would displace much of the inter-island business. However, company leaders at Hawaiian Airlines maintained that in the long run the increase in passengers could only be beneficial to the company, since this phenomena would ultimately lead to spinoffs of passengers to the home-based inter-island carriers.

Although the company was correct in its speculations about the market, this did not necessarily translate into larger profits. The number of tourists, notably from Japan, and an increase in tourist investment, again notably from Japanese investors who poured money into hotels and restaurants, led to increasing revenues. From 1982 to 1988, company revenues more than tripled, reaching $354 million in 1988. During this period, the total number of visitors to the islands rose from 4.2 to 6.1 million, with Japanese visitors accounting for the bulk of that growth. However, competition was fierce, and Hawaiian Airlines lost control over its costs while the quality of its services declined. In essence, Hawaiian Airlines’ cost structure couldn’t bear the weight of the price wars. As a result, the company experienced positive profits in only two of the seven years from 1982 to 1988, losing a total of $31 million dollars over the period, including $7.4 million loss for the first quarter of 1989. Hawaiian Airlines, which was thought to be critical to the state’s tourism industry, flirted with bankruptcy.

During this time, Hawaiian Airlines, now wholly owned by HAL Inc., opened some new markets worldwide, including, in 1984, service to Pago Pago, American Samoa, and Nuku’alofa, Tonga. To support this expansion, they acquired five Lockheed L-1011 wide body aircraft the following year. On June 12, 1985 HAL opened wide body jet service between the west coast and Hawaii with daily flights to Los Angeles. Daily flights between Hawaii and San Francisco and Seattle started in January 1986. Service to Western Samoa soon followed.

But with increased traffic and expanded use of their existing fleet, maintenance costs rose even higher, doubling between 1986 and 1988, and quality of service and reliability declined, the result of wear and tear from frequent short hops and general depreciation of its already aging fleet. After awhile the firm was left with much of its aircraft out of commission for routine maintenance. Consequently, flight time suffered; by March 1989, only two-thirds of its inter-island flights ran on time, compared with 85 percent for its chief competitor, privately held Aloha Airlines, which had been solidly profitable for around six years.

During this time, Robert Magoon Jr., a 53 percent shareholder in the company, took over the presidency from Paul Finazzo and elevated Albert Wells, the former senior vice-president, to chief operating officer. Magoon moved quickly to restructure costs and improve maintenance. On-time performance improved to 91 percent for inter-island routes, and the airline also began offering heavily discounted fares. However, the airline’s costs continued to be high, and its price cuts resulted in heavy losses. Wells conceded at the time, “Maybe we’ve overdone it on discounts.” While the company’s load factor of 65.2 percent was one of the highest, it had one of the lowest possible yields per passenger. The company’s 30 plane fleet was mostly leased and leveraged, and many of its markets were saturated, most notably the San Francisco and Los Angeles to Honolulu route, while its routes to Australia and New Zealand were heavily regulated, further limiting its profit potential. As a result, the company was again up for sale in 1989. But with its reputation for low quality, as well as its poor performance in the 1980s, Magoon had a tough time finding a buyer.

By January 1990, former major league baseball commissioner Peter Ueberroth and an investor group led by J. Thomas Talbot, after long negotiations, completed a $37 million takeover of HAL, Inc. Uberroth’s group moved quickly to slash costs and increase output. In its first move after the takeover, HAL chair and CEO John Ueberroth, brother of Peter, launched a debt conversion into equity to deal with cash flow problems and boost confidence in its stock, which was at a historically low price. The new owners also began a competitive cost-cutting strategy, giving them room to undercut competitors’ prices and expand markets—in fact, they went so far as to cut fares to 68 percent of their competitors’ rates. The strategy was not an unmitigated success, however. HAL was still struggling and unable to win back much of its market share. Takeover again loomed.

Other worldwide events were affecting the airline market as well. As the United States attacked Iraq in the Persian gulf, travel demand was cut in general. Fuel prices rose temporarily, which contributed to HAL’s loss of $13.3 million in the third quarter of 1990 after a small profit of $300,000 in the third quarter of 1989. Its stock price continued to nosedive; stock that had been priced at $38 in early 1959 fell to a little over $20 at the end of 1989, and then collapsed to around $7 in the middle of 1990.

In December 1990, Northwest Airlines agreed to acquire key pacific routes from HAL along with a 25 percent stake in the company. Northwest paid $20 million to HAL for five routes, including a potentially lucrative route between Hawaii and Fukuoka, Japan, a minority stake in the company, and a $7 million loan which would provide a much needed cash infusion to HAL.

Cost cutting continued. HAL implemented a ten percent cut in wages across the board. The company also cut expenses in all operating categories except promotions, advertising, and sales, in which costs increased by 50 percent as HAL tried desperately to live down its reputation as an unreliable company. In addition, HAL streamlined its fleet to two to four kinds of aircraft in order to cut maintenance expenses and to get rid of excess capacity.

Despite these moves toward increased cost efficiency, 1991 was not a good year as HAL’s market share declined to 60 percent from 33 percent. Once the dominant local and regional carrier, HAL’s biggest problem, according to company executives, was its inability to deal with its image problem—despite more advertising and improved services and promotional offers. For example, HAL offered a free ticket to anyone who waited in a check-in line or had a flight delayed more than ten minutes. Chairperson John Ueberroth claimed 98 percent on-time performance in 1992 but felt frustrated by the firm’s inability to attract customers, exclaiming at the time, “Word of mouth takes a while to get around.” By March 1992, market share rebounded to 45 percent.

By the end of 1992 losses abated, but the company was still in the red, with a net loss of $98.5 million or $33.49 a share in 1991, compared to a net loss of $121.3 million or $55.60 a share in 1990. Revenues were also up by seven percent to $365 million from $341 million over the same period.

HAL still sought to revive its mainland routes. It cut fares by 50 percent on its Honolulu-Los Angeles routes and increased capacity and ran full flights while other airlines reduced services. By the end of the second quarter of 1992, traffic on HAL’s mainland-Honolulu flights grew at an accelerating rate, and capacity utilization was pushed up to a profitable level—an estimated 88 percent.

As the company moved into 1993, it turned a profit, its first in six years. Furthermore, it was beginning to recover its reputation for good service and safety. In fact, Hawaiian Airlines was rated as one of the ten best U.S. airlines by readers of Conde Nast Traveler, the international travel and hospitality publication. As the only airline able to provide single-carrier service from the western United States and the South Pacific to each of Hawaii’s islands, Hawaiian Airlines began to expect a profitable future and long-term growth. The airline and its holding company survived the competitive warfare brought on by deregulation and emerged a major player in a more concentrated and centralized airline industry.