For years, pundits have speculated about the potential for Southwest Airlines (NYSE: LUV) to start service to Hawaii. Last month, the "Southwest-to-Hawaii" rumors reached a fever pitch, based on a variety of signs indicating that an announcement might be imminent.
Earlier this week, Southwest Airlines confirmed that it plans to launch flights to Hawaii in the near future. Let's look at how this move could affect travel to one of the most popular vacation destinations in the United States.
First, the paperwork
Even though Southwest Airlines now has firm plans to enter the Hawaii market, it still needs to jump through some hoops before it can launch service to the Aloha State.
Most notably, the carrier needs FAA approval for extended-range operations (ETOPS, in airline industry jargon). That's because flying between the mainland and Hawaii involves a long stretch over the Pacific Ocean that is far from any diversion airport. ETOPS certification shows that the aircraft can be safely flown for a long distance with only one engine working, and that the airline's crews are properly trained to handle such a situation.
The ETOPS approval process is bound to take a while. As a result, Southwest Airlines hasn't named a start date for Hawaii service or chosen specific routes. (Management did hint that California will be the main base of operations for Hawaii flights.) In its announcement on Wednesday, Southwest stated that it plans to start selling tickets in 2018. That statement suggests that flights won't begin until the second half of the year.
Altering the competitive environment
While most of the top budget carriers in the U.S. don't fly to Hawaii, there is still plenty of competition. Of course, the three big network carriers offer ample service to Hawaii, led by United Continental (NYSE: UAL). United plans to significantly increase its capacity to Hawaii starting later this year.
Hometown leader Hawaiian Holdings (NASDAQ: HA) also holds a big chunk of the market. In addition to having a dominant share of the interisland air travel market, Hawaiian Airlines flies to Honolulu from 11 cities on the U.S. mainland. It also operates an increasing number of flights from the mainland to smaller airports on the other three major islands of Hawaii.
Alaska Air (NYSE: ALK) -- including its Virgin America subsidiary -- is the last major player in the Hawaii air travel market. It flies from numerous West Coast cities and Alaska to several airports in Hawaii.
However, while there are already many carriers flying from the U.S. mainland to Hawaii, they tend to be fairly similar in terms of the basics, such as aircraft configuration and baggage policy. By contrast, Southwest Airlines will stand out by offering all-coach seating, no bag fees, and no change fees. This will be very attractive to a wide swath of travelers.
Southwest's entry into the Hawaii market will also boost competition outside the major West Coast hubs of Los Angeles, San Francisco, and Seattle. Today, those cities account for more than half of the seats on offer between the mainland and Hawaii, driven by the hub operations of United Continental, Alaska Air, Delta Air Lines, and American Airlines. Southwest will inject more competition in places such as San Diego, Oakland, San Jose, and Sacramento, all cities where Alaska Airlines and Hawaiian Airlines currently hold a duopoly for Hawaii flights.
What this means for Southwest Airlines and its rivals
Flights to Hawaii will be an important addition to Southwest Airlines' franchise. The carrier has a huge fan base throughout the U.S., but especially in California, and many of these customers want to fly their favorite airline to Hawaii. That said, Southwest is so large -- with annual revenue of more than $20 billion -- that Hawaii flights won't have much of an impact on its bottom line in the next few years.
The three legacy carriers are even larger, and their geographical diversification means that the changing competitive dynamic in Hawaii shouldn't affect their profitability very much.
At the other end of the spectrum, Hawaiian Airlines gets about half of its revenue from the West Coast-Hawaii market. However, it is in good shape to compete with Southwest Airlines, because flying long-haul routes to Hawaii is its specialty. For example, the carrier offers ample inventory of extra-legroom seats and serves complimentary meals on most of its flights. Features like this help Hawaiian Airlines maintain a revenue premium over its competitors.
Alaska Air might have the most to lose. Flights to Hawaii represent a significant proportion of its revenue, but it gained that position almost by accident. Many of the customers on its Hawaii flights probably fly Southwest Airlines more often in the domestic market and might switch to Southwest for Hawaii trips in the future. Depending on how aggressive Southwest Airlines is about growing in Hawaii, Alaska Airlines may be forced to retrench there in the next few years.
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