It has now been six months since Southwest Airlines (NYSE:LUV) formally announced plans to fly to Hawaii. While the popular low-cost carrier still hasn't started selling tickets for Hawaii flights, it is clearly making progress in that direction. Last month, it secured space at Honolulu's airport. More recently, it applied for space at Lihue Airport on the island of Kauai.
As a result, speculation about when flights will begin is ramping up. Additionally, many Hawaii residents are rooting for Southwest to add interisland flights within Hawaii. This would break the near-monopoly held by Hawaiian Holdings (NASDAQ:HA) subsidiary Hawaiian Airlines.
On the flip side, investors appear to be very worried about how Southwest Airlines interisland service would impact Hawaiian Holdings. Yet Southwest is unlikely to mount a serious challenge to Hawaiian Airlines in the interisland market -- and if it did, it would probably lose.
The likelihood of interisland flights is rising
Southwest Airlines' initial announcement about flying to Hawaii didn't include anything about entering the interisland market. However, when asked by reporters, Southwest executives acknowledged that the company was also studying the possibility of interisland flights.
Since then, Southwest Airlines appears to have gotten more serious about flying within Hawaii. Indeed, CEO Gary Kelly stated earlier this month that the carrier is "strongly considering" operating interisland flights to complement its service between the mainland and Hawaii.
There's a simple explanation for Southwest's increased interest in the interisland market. Island Air -- Hawaiian Airlines' last major competitor within Hawaii -- folded last November, leaving Hawaiian with a virtual monopoly on interisland routes. (The only remaining competition comes from Mokulele Airlines, which flies single-engine planes with just nine seats.) Not surprisingly, this reduction in competition has made the interisland market more attractive.
Two potential paths in the interisland market
Even if Southwest Airlines has decided to enter the interisland market, it could mean two very different things depending on the carrier's ambitions.
One possibility is that Southwest will operate a limited schedule of interisland flights timed to connect with its flights between the mainland and Hawaii. This would entail an interisland flight schedule concentrated in the early afternoon, with flights from the mainland arriving around noon and most flights back to the mainland departing between 2 p.m. and 4 p.m.
There is plenty of demand in the early afternoon hours, so fares tend to be high. Additionally, offering connections in Honolulu to the other islands would allow Southwest to serve customers traveling between city-pairs that can't support nonstop service. These two factors could make early afternoon interisland flights attractive for Southwest Airlines -- but they also mean that such flights wouldn't hurt Hawaiian Airlines very much.
At the other end of the spectrum, Southwest Airlines could look to challenge Hawaiian Airlines directly with a full schedule of interisland flights throughout the day. This would likely lead to a fare war, driving down Hawaiian Airlines' profit margin. This is the scenario that would really be worrisome for Hawaiian Holdings shareholders.
Going big would create huge logistical problems
Many pundits seem to assume that it would be easy for Southwest Airlines to profitably operate a robust schedule of interisland flights throughout the day. After all, short-haul routes of less than 250 miles have been a staple of Southwest's business model since the 1970s. However, the reality is more complicated.
For example, while Southwest Airlines could operate early afternoon interisland flights with the same planes used for mainland flights, it would need a fleet of Hawaii-based aircraft to support a full interisland schedule. Indeed, Southwest has said that it primarily wants to use the 737 MAX 8 for mainland-Hawaii flights, but the 737-700 is far more appropriate for short-haul flights.
Southwest Airlines could address this issue by basing a small fleet of 737-700s in Hawaii. That said, it doesn't have any crew bases in Hawaii, so staffing a robust schedule of interisland flights could be challenging. The carrier also lacks a maintenance facility in Hawaii, and it would take years to set one up. In the meantime, it would have to send its Hawaii-based fleet of 737-700s to the mainland for maintenance, driving up costs.
Furthermore, while the 737-700 is more appropriate for short-haul routes than the 737 MAX 8, it's still inferior to Hawaiian's 717s. Southwest's historical success in short-haul markets was driven in part by its use of smaller, lighter versions of the 737 (i.e., planes with specifications closer to those of the 717) that have since been retired.
Of course, Southwest Airlines still operates plenty of short-haul flights, particularly within its home state of Texas. But it dominates these markets, and starting fares are currently around $100 one-way. By contrast, starting fares in most interisland markets are in the $70 to $80 range one-way -- especially outside of peak hours -- and Southwest would have to undercut these prices to gain a foothold in the market.
In short, while offering limited interisland service in the early afternoon might make sense for Southwest Airlines, mounting a true challenge to Hawaiian Airlines in the interisland market would be difficult. There are plenty of more promising growth opportunities to keep Southwest busy for the foreseeable future.