Amazon will use Hawaiian Airlines to fly its first Airbus freighters on primary cargo routes and to Hawaii beginning in the second half of 2023, the airline’s top executive said late Friday.
The retail giant selected Hawaiian Airlines because of the carrier’s familiarity with the A330-300 aircraft, cargo handling experience, track record completing flights and on-time performance as a passenger airline, according to President and CEO Peter Ingram.
For Hawaiian, the outsourced transportation deal represents a sizable new revenue stream and growth opportunity. It will use the next six to eight months preparing for the contract to start.
READ MORE: Hawaiian Airlines wins Amazon contract to fly Airbus freighters
In a late Friday conference call with analysts, Ingram said Amazon (NASDAQ: AMZN) approached Hawaiian Airlines (NASDAQ: HA) several months ago about a potential partnership.
“These attributes made us the best candidate to work with Amazon to fulfill its delivery promised to its customers,” he said.
The companies announced earlier in the day that Amazon had hired Hawaiian to operate 10 Airbus A330-300 converted freighters between airports near Amazon fulfillment centers for at least eight years. Amazon will rent the planes from Seattle-based lessor Altavair, which is sending the used passenger aircraft to Airbus’ maintenance and overhaul partner to be remodeled for carrying cargo containers.
Amazon has the option to place additional aircraft with Hawaiian and extend the contract beyond the initial term.
“Our expectation is that our performance will earn us the opportunity to provide additional flying,” Ingram said.
An Amazon official said the A330s are replacement aircraft for older Boeing 767s that will exit the fleet in the next two years as their leases expire.
Hawaiian, which has 24-passenger A330s in its fleet, expects to receive the first A330 converted freighter next summer. It will enter service later during the second half of the year after completing regulatory and operational preparations. The rest of the aircraft will be delivered sequentially in late 2023 through 2024, according to the companies.
Ingram confirmed the A330s primarily will be operated on the U.S. mainland, but added they likely will also serve the Hawaii market.
The A330-300s have excellent volume characteristics for carrying large amounts of packages in express delivery networks, industry experts say. The Airbus freighters occupy the top end of the medium-size widebody category and are slightly larger than the Boeing 767s that currently dominate Amazon Air’s fleet.
Amazon established a private-label airline to make sure fulfillment centers were stocked and it could guarantee one or two-day delivery to Prime customers. In six short years, Amazon Air has expanded to 110 aircraft and an expansive network of airports, including in Europe. Amazon doesn’t operate any aircraft itself, choosing instead to rely on contractors to provide the crews, maintenance and insurance.
Two other Amazon partners, Sun Country (NASDAQ: SCNY) and Silver Airways, which flies turboprops to smaller airports, are also predominantly passenger airlines that saw cargo as a new opportunity. Hawaiian doesn’t operate cargo aircraft, but does transport cargo through its passenger network.
As the flagship of Amazon’s fleet, the A330s are likely to be deployed on the highest demand routes. “Where Amazon is going to want to use this airplane is at the largest volume points of its network,” Ingram said.
Extensive planning is underway to ensure the airline can meet Amazon’s timeline for launching service.
Jim Landers, Hawaiian’s senior vice president of technical operations, will manage the Amazon cargo activity. Integrating the Amazon aircraft within existing flight maintenance, dispatch and other areas for the A330 passenger operations will enable the airline to generate cost savings.
Helane Becker, an equity analyst at Cowen investment bank, estimates that Amazon needs at least 200 aircraft to fly its network. She said in a client note Amazon turned to the A330 because the supply of 767s available for conversion is dwindling and passenger airlines are holding onto some longer than intended because Boeing and Airbus are experiencing delivery delays with 787 and A330neo passenger jets.
“None of Prime Air’s existing [lease and service] providers operates the A330, so if it was going to branch out into another plane type, it had to go out and find another operator for this plane type,” she said.
Air Transport Services Group (NASDAQ: ATSG), which plans to have 49 Amazon 767s under its operating certificate by year’s end, last year reserved 29 conversion production slots for A330-300s to lease out to customers. The company has not indicated whether it will just lease the aircraft to customers or also provide operating support, as it does with the 767s.
Benefits for Hawaiian
The Amazon deal reduces Hawaiian’s dependence on passenger travel while significantly increasing revenue and cash flow potential.
“This agreement provides Hawaiian a meaningful revenue stream distinct from our core business, and has the potential to materially improve and diversify our business with a different risk profile,” Ingraham said during the briefing.
Amazon will pay a fixed monthly fee per aircraft, a per flight hour fee and a fee for each flight cycle operated. It will also reimburse Hawaiian for operating expenses, including fuel, certain maintenance and insurance premiums.
There is more growth potential from the freighters than traditional passenger business because Hawaiian will be paid based on the volume of block hours and departures it operates, revenue won’t be susceptible to swings in travel demand, and most costs will be passed through to Amazon. Labor, maintenance, overhead and procurement costs will gain efficiency through the scale afforded by the passenger side of the business, Ingram said.
Hawaiian said it intends to establish a pilot base on the continental U.S., grow existing maintenance bases, but capital outlays will be minimal since Amazon is providing the aircraft. It will expand the hiring of pilots, mechanics, dispatchers, supply chain employees and others to support the new cargo operation.
Ingram said an agreement with the pilot’s union enabled it to take on the additional Amazon business because there are differences in how freighters and passenger aircraft are scheduled. Hawaiian will hire hundreds of new pilots and maintenance employees to support the Amazon flying. The new captain and first officer positions with larger aircraft, which offer greater earnings potential, are expected to help Hawaiian attract pilots in a tight market.
Pilots are “thrilled” by the Amazon partnership, which should add 100 to 200 pilots to the ranks, said Captain Larry Payne, the head of Hawaiian’s Master Executive Council at the Air Line Pilots Association, in a statement.
“ALPA has been working closely with Hawaiian management for more than a year to make this deal a reality. Partnering with Amazon will provide even greater growth and advancement opportunities for the Hawaiian pilots, as well as critical diversification of both our airline’s operations and route network alike.
“Ultimately, we expect this new operation to fuel tremendous new opportunities and gains for our pilot group, while simultaneously powering long-term sustainability for Hawaiian Airlines,” he said.
As part of the agreement, Amazon will receive warrants to acquire up to 9.4 million Hawaiian Holdings common shares, equivalent to 15% of the total shares, over the next nine years.
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