Saturday, February 24, 2018

As Southwest Airlines Enters Hawaii, Alaska Airlines May Be the Biggest Loser

Over the past decade, Alaska Airlines has built up a nice business flying to Hawaii from California's second-tier airports. However, Southwest Airlines' entry into the Hawaii market may force Alaska to retreat.

Southwest Airlines is steadily working through the regulatory process so that it can start flying to Hawaii near the end of 2018 or in early 2019.

When its Hawaii service finally arrives, the biggest casualty probably won't be either of the current market leaders -- Hawaiian Holdings and United Continental. Instead, Alaska Air appears to be the most vulnerable carrier to Southwest's growth in Hawaii.

An accidental leader in the California-Hawaii market

A decade ago, Alaska Airlines had just begun flying to Hawaii from its core hubs in Seattle and Anchorage. However, the twin bankruptcies of Aloha Airlines and ATA Airlines within the span of a week in early 2008 created a massive void in the California-Hawaii air travel market, particularly outside of the big hubs, San Francisco and Los Angeles.

Beginning in 2009, Alaska Airlines seized this opportunity by adding numerous routes to Hawaii from the top secondary markets in California. Today, it flies to Hawaii from Oakland, San Jose, Sacramento, and San Diego. (Meanwhile, Alaska Air's Virgin America subsidiary flies to Hawaii from San Francisco and Los Angeles.)

Alaska Airlines capitalized on two 2008 airline bankruptcies to grow in Hawaii. Image source: Alaska Airlines.

In total, flights to Hawaii -- mainly from California -- now account for 14% of Alaska's capacity. Alaska Airlines has particularly high market share from Oakland, San Jose, and San Diego to Hawaii.

A formidable competitor is coming for this traffic

Southwest Airlines CEO Gary Kelly has stated that the company plans to enter the Hawaii market with flights from one or two cities in California. Unfortunately for Alaska Airlines, Oakland and San Diego are two of the most logical Hawaii gateways for Southwest Airlines.

Los Angeles, Oakland, and San Diego are Southwest's largest bases in California. The carrier currently operates between 115 and 130 daily departures at each of the three airports. However, while Southwest will probably fly from Los Angeles to Hawaii sooner or later, L.A. not quite as attractive a departure point for Hawaii flights as Oakland or San Diego for two reasons.

First, Southwest Airlines controls just 13 gates in Los Angeles, which limits its ability to expand. This means that adding flights to Hawaii would come at the expense of flights to other cities, at least to some extent. Second, there are already five airlines flying from Los Angeles to Hawaii. By contrast, Alaska Airlines and Hawaiian Airlines are currently the only airlines offering scheduled service to Hawaii from Oakland and San Diego.

Southwest Airlines may soon start flying from Oakland and San Diego to Hawaii. Image source: Southwest Airlines.

Southwest absolutely dominates Oakland International Airport, with roughly 70% market share. As a result, it has a huge built-in customer base there. It will also be able to draw connecting traffic from the nearly three dozen other cities it serves nonstop from Oakland, whereas Alaska only offers flights to Hawaii and its Seattle and Portland hubs from Oakland.

Alaska Airlines has a more defensible position in San Diego, where it operates about 40 flights a day. Still, Southwest has nearly three times as many flights there and a commanding market share of nearly 40%. This will give it a natural advantage in competing for Hawaii-bound traffic.

Will Alaska Airlines retreat?

As noted above, Southwest Airlines' strong market position in Oakland and San Diego should give it a revenue-production advantage over Alaska if it flies from those cities to Hawaii. Southwest will also have a unit cost advantage due to its somewhat denser seating configuration, purchasing scale, and overall cost discipline.

In recent months, Alaska Air's management has emphasized that it will be aggressive in cutting capacity when necessary to improve profitability. In the long run, Alaska may significantly reduce its capacity from California to Hawaii if Southwest's growth puts too much pressure on pricing and load factors. Alaska Airlines could even exit the Oakland-Hawaii market entirely, as it doesn't seem to have a competitive advantage there relative to Southwest Airlines.

The good news for Alaska Air shareholders is that the company's acquisition of Virgin America has given it a strong foothold in San Francisco and Los Angeles. As a result, Alaska Airlines should have plenty of options for profitably redeploying planes that are no longer needed for flights to Hawaii in the coming years.

Original article can be found here ➤ https://www.fool.com

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