Shares of Hawaiian Holdings (NASDAQ:HA) have plunged this year due to worries about new competition from United Continental (NASDAQ:UAL) and Southwest Airlines (NYSE:LUV). United plans to significantly increase its flight schedule to Hawaii next month, while Southwest hopes to enter the West Coast-Hawaii market in late 2018 or 2019.
However, capacity fluctuations aren't all moving in the same direction. Furthermore, Hawaiian Airlines is making savvy moves to insulate itself from the impact of greater competition.
Some airlines grow -- others shrink
The big growth announcements by United and Southwest have gotten a lot of attention. But the West Coast-Hawaii market isn't seeing capacity growth across the board.
For example, ultra-low-cost carrier Allegiant Travel ended its service between Las Vegas and Honolulu last month. While Allegiant only operated two flights a week on that route, it still provided a check on Hawaiian Airlines' pricing on one of the carrier's busiest routes. Delta Air Lines will offer seasonal service for a few weeks around Christmas and New Year's Day, but for most of the year, Hawaiian will be back to having a monopoly in this important market.
In several other cities, Hawaiian Airlines will be the one shrinking. The carrier is just starting to transition to its new A330 configuration on many domestic routes. The reconfigured A330s will each have 16 fewer seats than they previously did (helping to offset other carriers' growth) with more premium seating (helping to differentiate Hawaiian from its rivals).
Reacting to capacity and demand trends
In 2018, Hawaiian Airlines will get a new tool to help it react to competitors' moves: the Airbus A321neo. The A321neo has 25% fewer seats than the smallest planes that Hawaiian flies today on West Coast-Hawaii routes. (It also has a higher proportion of premium seating, like the carrier's reconfigured A330s.)
Hawaiian Airlines' first A321neo route will be Oakland-Maui. This will right-size its capacity on this route just after United Continental dramatically increases its capacity from nearby San Francisco International Airport to Maui, mitigating the impact on Hawaiian's unit revenue.
Meanwhile, Hawaiian will also use the A321neo to tap markets that weren't quite big enough for its widebody fleet. It will begin daily service from Portland, Oregon, to Maui in mid-January. This is an underserved market right now: capacity between Portland and Hawaii is down more than 4% year to date. In the future, potentially attractive growth options for the A321neo fleet include flights from San Diego to Maui or from the Bay Area to Lihue and Kona.
Lastly, the A321neo will enable Hawaiian Airlines to offer daily flights on routes like Oakland-Lihue and Los Angeles-Kona that had previously been served a few times a week. Offering more frequent nonstop flights on these routes will help Hawaiian gain market share from rivals.
Plenty of room for competition
Looking ahead, the beginning of Southwest Airlines flights to Hawaii could cause some short-term disruption. However, the market is big enough to absorb quite a bit of additional capacity.
In September (the most recent month for which statistics are available), airlines offered more than 559,000 seats from the western U.S. to Hawaii. If Southwest were to operate a dozen daily flights from the West Coast to Hawaii, it would add another 63,000 monthly seats, an 11% increase. That wouldn't dramatically alter the supply-demand balance, especially if other airlines adjust their capacity in response.
Lastly, Hawaiian is better positioned than any of the other incumbents to hold its ground in the face of new competition from Southwest Airlines. Of the airlines serving Hawaii, only Hawaiian Airlines provides a seating configuration and inflight service tailor-made for West Coast-Hawaii flights. This should enable it to remain successful for many years to come.