Last year, more than 1.5 million visitors traveled from Japan to Hawaii. That makes Japan the biggest source of international tourists to Hawaii, nearly equaling all other international markets combined.

For more than seven years, Hawaiian Holdings (NASDAQ:HA) and Japan Airlines have been fierce competitors in this massive travel market. However, they recently decided to team up. On Sunday, the two carriers began code-sharing -- selling flights on each other's aircraft -- for dozens of routes.

A Hawaiian Airlines plane flying over the ocean, with mountains in the background

Hawaiian Airlines recently began code-sharing with Japan Airlines. Image source: Hawaiian Airlines.

This marks the first step toward a comprehensive partnership between Japan Airlines and Hawaiian Airlines. Hawaiian's management believes that this will allow the carrier to build on its success in the Japanese market.

Two strong competitors with different strengths

Since starting service to Tokyo's Haneda Airport in late 2010, Hawaiian Airlines has steadily grown its presence in Japan. It now offers 31 weekly flights to Hawaii from four airports in Japan. In 2017, Hawaiian surpassed Delta Air Lines (NYSE:DAL) to become the No. 2 airline in the Japan-Hawaii market, with 23% seat share. Japan Airlines remains the market leader with seat share of 28%.

Hawaiian Airlines and Japan Airlines have relied on very different strengths to achieve their positions of prominence. Hawaiian Airlines' main assets are its ability to provide seamless connections from Honolulu to the other major islands in Hawaii and its ability to create a genuine Hawaiian experience onboard, so that customers feel like they have already started their vacations. It can also offer multistop vacation itineraries including other key U.S. tourist destinations like Las Vegas, Los Angeles, New York, and San Francisco.

Meanwhile, Japan Airlines benefits from its ability to connect passengers from throughout Japan and much of Asia to Hawaii through its hubs. Additionally, Japan Airlines' position as one of the two dominant airlines in Japan gives it a built-in customer base. Finally, its subsidiary JALPAK is a major Japanese tour operator.

Teaming up for further gains

The new alliance between Hawaiian Airlines and Japan Airlines aims to leverage the strengths of each airline to help them extend their competitive advantages over Delta and top Japanese carrier ANA in the Japan-Hawaii market.

A Delta Air Lines plane landing

Delta has fallen back to third place in the Japan-Hawaii travel market. Image source: Delta Air Lines.

First, as of this week, Hawaiian Airlines customers can seamlessly book travel between dozens of cities in Japan and Hawaii thanks to the new code-sharing agreement. Access to connecting traffic should help Hawaiian keep its airplanes full on Japan-Hawaii routes, supporting its profitability. On the flip side, Japan Airlines customers now have access to easy connections between the islands of Hawaii.

Additional perks of the partnership include reciprocal lounge access for elite-level frequent fliers and the ability for customers to earn their preferred carrier's reward miles, no matter which of the two airlines operates a given flight.

Looking ahead, JALPAK will offer Hawaiian Airlines flights for tour packages, starting on April 2. Previously, it used Japan Airlines exclusively. This will give Hawaiian an opportunity to win a portion of the JALPAK business, which represents 7% of travel from Japan to Hawaii.

Code-sharing will also extend to 11 international destinations served by Japan Airlines in the near future, pending government approval.

Even deeper cooperation could be coming

Hawaiian Airlines and Japan Airlines plan to apply for antitrust immunity next month. If their application is successful, the two carriers would form a joint venture, sharing either revenue or profit on their routes between Japan and Hawaii.

A joint venture would help the two carriers consolidate their dominance in the Japan-Hawaii market. Antitrust immunity would allow them to coordinate on schedules and pricing. This could give them meaningful competitive advantages over Delta and ANA.

For example, both Hawaiian Airlines and Japan Airlines currently have multiple Tokyo-Hawaii flights departing around 9 p.m. Once they don't have to compete with one another, they could potentially gain market share by offering more departure time choices.

There's a slight chance that Hawaiian Airlines' and Japan Airlines' antitrust immunity application will be rejected. Given that the two carriers already claim slightly more than half of the market, regulators could reasonably worry that they would gain too much pricing power if they were allowed to cooperate. That said, other airlines have successfully argued in similar situations that the competitive benefits of cooperation outweighed the potential for prices to move higher.

Even without the full benefits of a joint venture -- which isn't likely to be approved this year in any case -- Hawaiian Airlines will reap significant rewards from its partnership with Japan Airlines. Investors are likely to see a small tailwind in the company's Q2 results, but the bulk of the financial benefit should start showing up in the second half of 2018.