Late last month, news leaked that Hawaiian Holdings (NASDAQ: HA) planned to dump its order for the slow-selling Airbus (NASDAQOTH: EADSY) A330-800neo, in favor of Boeing 's (NYSE: BA) popular 787-9 Dreamliner.
The airline initially denied that it had made any final decision on its fleet. However, it formally announced its plans to switch to the Dreamliner earlier this week, contingent on reaching contract amendments with its pilots and flight attendants to incorporate the Dreamliner into its fleet. Hawaiian hopes to place a firm order for 10 787-9s during the second quarter, with options for an additional 10. Deliveries are set to begin in 2021.
The advantages of the Dreamliner
Given that Hawaiian Airlines operates an extensive fleet of Airbus A330-200s, the carrier would have benefited from significant efficiencies if it had stuck with the A330neo family for its fleet upgrades. Nevertheless, Boeing's 787-9 does have some advantages, particularly if Hawaiian continues to add longer routes to its network.
The general consensus among aviation experts is that the A330neo doesn't offer much of a fuel efficiency improvement over current-generation A330s on routes shorter than 2,000 miles. For West Coast-Hawaii flights -- which average about 2,500 miles -- there wouldn't be much benefit to upgrading from the A330-200 to either an A330neo or a 787-9.
By contrast, the benefits of new engine technology will shine through on longer-range routes. For missions like Hawaii-Japan, the A330neo and 787-9 would both offer big improvements over Hawaiian Airlines' current fleet and would be roughly evenly matched against one another.
However, the 787-9 will have appreciably lower unit costs than the A330-900neo, its direct competitor, on Hawaiian's longest routes. Part of this stems from superior fuel efficiency, as the A330neo's underlying design is almost two decades older than that of the Dreamliner.
In addition, the 787 family has a higher cruise speed of Mach 0.85, compared to Mach 0.82 for the A330 and A330neo. On 5,000-mile routes like Honolulu-New York and Honolulu-Sydney, this could cut flying time by 20-30 minutes, reducing crew costs and potentially enabling higher utilization.
How will Hawaiian Airlines use its Dreamliners?
Honolulu-New York and Honolulu-Sydney are likely to be first in line for Hawaiian Airlines' Dreamliners. Aside from the unit cost benefits of upgrading to the 787-9 on these longer-range routes, Hawaiian shouldn't have any trouble filling the 787-9's extra seats for these flights.
The 787-9's extra capacity relative to the A330-200 could also make it a good aircraft for serving Tokyo's slot-constrained Haneda Airport. Among Hawaiian Airlines' existing destinations, Beijing, Seoul, Osaka, Brisbane, and Auckland would all probably be lower-priority candidates for getting the Dreamliner at some point in the future.
Finally, the 787-9 will enable Hawaiian Airlines to explore longer-range routes to places such as India, Southeast Asia, and Europe. Additional routes to China, Australia, and the U.S. East Coast could also be in store.
Freeing up cash in the near term
Hawaiian Airlines had been scheduled to receive its first two Airbus A330-800neos next year, with two more aircraft coming in 2020 and the final two arriving in 2021. The move to the Dreamliner could significantly alter Hawaiian's growth rate and cash flow in the next three years.
Hawaiian Airlines is now scheduled to add 17 Airbus A321neos to its fleet between late 2017 and 2019. They will replace the carrier's last eight Boeing 767s, while also enabling mid-single-digit capacity growth during that period. However, growth will slow dramatically in 2020 based on the new fleet plan, as Hawaiian will add just a single A321neo to its fleet.
Still, this growth pause might be well-timed, as Southwest Airlines ' entry into the West Coast-Hawaii market will change the competitive dynamic there , potentially necessitating cutbacks on some of Hawaiian's routes.
In addition, with no widebody deliveries planned until 2021, Hawaiian will probably see its 2019 and 2020 capex decline relative to the $375 million-$425 million of spending planned for this year. This would free up cash that the company can use to pay a higher dividend or to buy back more stock. With Hawaiian Holdings shares trading for just seven times earnings, the potential for higher capital returns in the next three years is a big plus for investors.
10 stocks we like better than Hawaiian Holdings
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Hawaiian Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of March 5, 2018
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.