Can Alaska Airlines continue to succeed in Hawaii? – The crazy fool

Alaska Air (NYSE: ALK) is now a major player in the West Coast-Hawaii air transport market. In fact, the carrier says it performs more flights between the West Coast and Hawaii than any other airline – an average of 29 round trips daily.

However, competition is increasing rapidly. Last year, industrial capacity between the western United States and Hawaii jumped 10.7%, mainly due to United Continental and Hawaiian Holdings (NASDAQ: HA) – put pressure on the tariffs. The capacity growth of the industry is expected to accelerate again in 2019, Southwest Airlines (NYSE: LUV) moves to Hawaii for the first time. This action could potentially cause more tariff wars.

Let's take a look at whether Alaska Airlines has the tools it needs to stay prosperous in Hawaii as the competitive environment evolves.

Hawaii is an important market for Alaska Airlines

Alaska Airlines recently entered the Hawaiian market by opening a Seattle-Honolulu line at the end of 2007. In the space of two years, it averaged more than seven daily return trips to Hawaii from its main bases. Northwestern Pacific – Seattle, Portland and Anchorage.

However, about half of Alaska Airlines flights to Hawaii come from California. In fact, Aloha Airlines and ATA Airlines – leading players in the California-Hawaii market – both pulled back in 2008. Alaska has filled this void, adding many routes to Hawaii from cities like Oakland, Sacramento , San Diego and San Jose.

For most of the decade, competition in these markets was limited. Traditional airlines were pulling off the roads outside their platforms, Southwest Airlines was not serving Hawaii, and Hawaiian Airlines could not profitably serve the mid-size markets because it depended on more than 250 passengers for its flights on the West Coast.

As a result, flights to Hawaii now account for nearly 15% of Alaska Airlines capacity. But the conditions that have allowed the great expansion of Alaska to Hawaii are disappearing.

Strategy changes in two major rivals

The first change in the competitive environment occurred with Hawaiian Airlines' decision to order the Airbus A321neo to complete its fleet of wide-bodies. Since early 2018, Hawaiian has used its A321neos to penetrate several markets where Alaska Airlines previously offered the only non-stop flight, including San Diego-Kahului, Oakland-Lihue and Sacramento-Kahului.

More recently, Southwest Airlines has added Hawaii to its route network. At the end of the month, she will make six daily return trips to Hawaii, linking Oakland and San Jose to Honolulu and Kahului. Once his Boeing The 737 MAX 8 fleet regains its rights and plans to add many additional routes, including Hawaii flights from Sacramento and San Diego, as well as non-stop flights to two other Hawaiian destinations – Kona and Lihue.

As a result, capacity to Hawaii is currently increasing by more than 20% annually in Oakland, Sacramento and San Diego. From here next month, capacity between San Jose and Hawaii will likely increase by a similar amount from one year to the next.

Today, about one-third of Alaska Airlines flights to Hawaii come from these four cities, where Southwest Airlines and Hawaiian Airlines are both looking to expand. For now, tariffs seem to be holding steady, but with continued growth in the industry's capacity, this could change – especially during the off season, later this year.

Alaska Airlines wants to stay – but can it afford?

Until now, the management of Alaska Airlines is committed to maintaining the position of the airline in Hawaii. That said, Alaska can not continue to grow at the expense of profitability. Last fall, the company set a pre-tax margin target of 13% to 15%. Achieving this goal will not be easy. Alaska Airlines can not afford to keep less efficient routes.

Departing from Oakland, Alaska Airlines serves only its Seattle and Portland hubs, with the exception of its flights to Hawaii. It just offers a little more service to Sacramento. Alaska is the second largest carrier in San Jose and San Diego, but in both cities, Southwest Airlines holds nearly three times its share of the market.

Thus, Southwest Airlines has a much larger customer base in California cities where it plans to compete with Hawaii flights from Alaska Airlines. It can also capture more connecting traffic in these cities. As for Hawaiian Airlines, its specialization in the Hawaiian market and the connecting service offered in and beyond Hawaii constitute essential competitive advantages.

It is important to note that Southwest Airlines and Hawaiian Airlines also have lower unit costs than Alaska Airlines for Hawaii connections.

Half of Hawaii 's Alaska Airlines flights depart from Seattle, Portland or Anchorage, and these links are going nowhere. But for California-Hawaii flights, Alaska may be struggling to reach its margin target for routes facing unfaltering competition, outside of its larger cities, San Francisco and Los Angeles. Fortunately, Alaska Airlines should have no problem redeploying the aircraft used today on these routes to more profitable opportunities elsewhere.