Comments a year later on HSF Business Viability notes for Eco-Roundtable

May 21, 2009

A copy of the analysis a year ago is below. Some comments and additions a year later.

First, the analysis was pretty much correct. Got the forecast of the ups and downs of their business for the rest of the year correct. Most useful in the analysis was the comparison to air travel and breaking down the cost ineffectiveness of their vessel's 3rd and 4th hours of transport under the same revenue generating load. Fuel prices from the last quarter of 2008 forward turned out not to be their biggest problem, which was Act 2's unconstitutionality, although marine diesel fuel prices and HSF's heavy use of it in transits of more than 2 hours is still cost ineffective and their single biggest operational problem on these routes.

Second, I left out an analysis of cargo. HSF's competitors in cargo are Aloha Air Cargo and Young Brothers barges. Of the two HSF more closely competed with Aloha Air Cargo. Still Aloha Air Cargo delivers mostly at night and HSF delivered during the day. There was a little bit of a nitch there. I have sense heard from industry insiders that if HSF returns, they will be targeting the cargo market, and not necessarily passenger or vehicle traffic per se. With slightly different pricing and transport arrangements (including driver not required to go with delivery), the cargo nitch could be noteworthy.


HSF Business Viability notes for Eco-Roundtable
Thursday, May 22, 2008

Subject: Roundtable notes
Date: Tue, 20 May 2008

1) I'm honored to be here, was inspired by events here on Kauai last August and September, 2007.

2) Last fall I decided to start a research project and evaluation of HSF making use of standard company, industry, and economic analysis...to try and read beyond the headlines and between the lines of what the likely real situation is on this issue.

3) Was asked to speak today about the economic and business viability of Hawaii Superferry. I have only a few minutes here, so I'll try to be brief, but I will post a more complete version of this on my blog within a few days.

4) First, the events of the broader global economy have much to do with the increasing cost of energy, namely oil-derived energy and fuel, but also the declining value of the U.S. dollar and ballooning U.S. debt., and the increasing economic status and energy consumption of China and India. Quoting the AP, the increasing global demand for oil is being driven by China and India, 'which guarantee a market into the long term.'

5) Crude oil prices have more than doubled in the past year, from $62.50 a barrel in May 2007 to $100 a barrel in February 2008 to $125-$126 late last week, and $129 today. Most transportation companies are hoping that this is just a speculative run-up and that prices will subside some and soon. But, oil experts and Wall Street industry analysts have voiced opinion in the media over the past few weeks that they expect oil prices to stay in the $100 to $150 per barrel for the rest of this year.

6) Here in Hawaii transportation companies, including Aloha and ATA, are having terminal difficulty with these escalating oil/fuel prices. In fact, all transportation companies would be having difficulty with this. As a result the state has lost 10% to 15% of the flight capacity in and out of the state and projections from the Council on Revenues and almost all economic research bureaus within the state have changed their forecasts within the past few months to little or no growth in the state's economy for the next year or two.

7) Regarding the Superferry, from Pacific Business News last year, "Whether Hawaii Superferry will be profitable is something that concerns Alan Lerchbacker, the former CEO of Austal USA, which built the ferry. 'I just worry about them getting enough business to cover costs because of the sheer size of it,' said Lerchbacker. Lerchbacker said he suggested a 72-meter vessel only to see the company order the 100-meter model. 'For a smoother ride on the ocean, that ferry will have to go over 35 knots, and it costs a lot of money on fuel to go that fast,' he said."

8) Late last year HSF disclosed their operating costs were $650,000 per week, with the increase in marine diesel oil (MDO) fuel cost to over $1000 per metric ton or over $3.75/gal* for MDO at the retail level, their weekly costs since last fall have increased at least an additional $105,000 per week due to fuel alone. That means the 1/4 ridership/vehicle capacity they needed before just to cover fuel costs has increased now to about 1/3 capacity just to cover fuel costs. HSF has been running recently at loads of 1/4 to 1/3 capacity for the early runs and a 1/4 or less for the evening runs. A little more than their second and third quarters of ridership are needed to cover the rest of their expenses, leaving less than the top quarter of full capacity to net income, at current prices. If HSF doubled their current prices per person from $39 to $80 and per vehicle from $55 to $110, their ridership breakeven levels would be half what they are now, but demand would likely drop off for their services.

9) HSF competitors for transporting people interisland are Hawaiian, Island Air, and Go Airlines (with parent co. Mesa expecting financing difficulties soon). All are currently charging about $100 to $125 and more for one-way tickets actually available online. HSF is currently charging 1/3 of that. HSF's competitor for transporting cars interisland is Young Brothers. YB currently charges about $250 to move a car interisland. HSF currently charges 1/4 of that. Of those two the one with the greatest disparity and the greatest market potential for HSF is the fast movement of cars interisland.

10) HSF burns about 6000 gallons of marine diesel oil fuel one-way from Oahu to Kauai in 3 hours. I spoke with Hawaiian pilots yesterday and they burned 400 gallons of jet fuel (about the same price as MDO, 3.60 to 3.80 per gallon*) from Oahu to Kauai in 30 to 35 minutes, transporting 123 people. That's 1/15th of 6.5% of the fuel that HSF takes to do the same route. If you multiply 15 times the 123 people, Hawaiian transports 1845 people burning the same amount of fuel cost that it takes for HSF to transport a maximum of about 866 people. Hawaiian Air is at least twice as efficient at moving people interisland as is HSF.

11) Regarding this vessel's cost ineffectiveness at these route distances. With the 4 diesel jet engines and the amount of fuel they burn, the Alakai and other vessels like it around the world in the past have been cost effective on one-way routes of 1 to 2 hours or distances of 30 to 75 miles per revenue generating load. Distances further than that with the same revenue generating load are cost ineffective. HSF's planned one-way route distances in Hawaii are 105 to 160 miles, with the 3rd and 4th hours of fuel expense under the same revenue generating load being cost ineffective.

12) HSF also appears to have close working relationships with Roberts Hawaii, Loves, Fedex, Commodity Freight Forwarders (CFF), Expediters and recently increasing military and civil service personnel on vacation from Oahu bases. Individual commercial businesses (not making use of CFF) from Maui (or an outer island) to Oahu would have to stay overnight. Currently, only businesses from Oahu to Maui can return later the same day. Hertz, Alamo/National, Dollar, and Thrifty all allow their cars to be transported on HSF. HSF does not have a fly-drive arrangement with Hawaiian Air, verified with HSF's reservations department, referred to by CEO Fargo in PBN.

13) In recap, HSF is unlikely to ever be profitable as a commercial business only. Furthermore, it is only marginally competitive moving people interisland. HSF's most noticeable market potential is in rapid transport of vehicles interisland, quite likely at the expense of Young Brothers. Little to no road improvements on islands such as Kauai do not appear to be ready to receive that kind of influx. HSF may have an uptick in ridership in June, July, and August, but will likely have a drop off in Fall 2008 and problems again with high surf in Winter 2008-9. In the meantime HSF investors appear to be willing to accept operating losses at current levels provided progress continues on other related investments.

Aloha, Brad