Last fall, Southwest Airlines (NYSE:LUV) announced plans to begin flying from the West Coast to Hawaii, confirming long-swirling rumors. At the time, the airline didn't release many specifics, other than that ticket sales would begin in 2018, and California would be its main launching point for flights to Hawaii.
Since then, Southwest's Hawaii plans have slowly come into focus. The popular low-cost airline is still on track to begin ticket sales later this year. However, while Southwest had previously hinted that it hoped to operate its first commercial flights to Hawaii by year-end, it now seems virtually certain that its Hawaii flights won't take off until 2019. That will provide a little bit of breathing room for rivals such as Hawaiian Holdings (NASDAQ:HA).
Southwest has revealed its general plan
Back in April, in conjunction with its first-quarter earnings report, Southwest Airlines announced that it will eventually fly to four destinations in Hawaii: Honolulu, Maui, Kona, and Lihue. These airports cover the state's four major islands.
In early May, Southwest Airlines announced that it plans to use four gateway cities in California for Hawaii flights: Oakland, Sacramento, San Diego, and San Jose. These choices made sense because Southwest is the dominant carrier in those cities. Southwest will compete directly with Hawaiian Airlines and Alaska Airlines in all four. By contrast, the big legacy carriers' flights to Hawaii are concentrated in large-hub markets.
There's still work to be done
As of late April, Southwest's management hoped to begin Hawaii flights by the end of 2018. Chief revenue officer Andrew Watterson is still hoping for at least a token launch by year-end. However, based on an update provided on the company's second quarter earnings call in late July, that target is starting to seem unrealistic.
In response to an analyst question, Southwest Airlines' chief operating officer estimated that the FAA would sign off on the carrier's ETOPS manual -- a set of procedures for operating long overwater flights -- within 30 to 60 days. That means Southwest will probably be allowed to start training its pilots for ETOPS flights next month.
Next, Southwest Airlines will move on to validation flights to Hawaii, after which it would be eligible for a final sign-off from the FAA. Under the current timeline, this is likely to occur in October or November. At that point, Southwest could begin ticket sales.
Southwest Airlines typically begins ticket sales for new routes at least four or five months before the first flight. Given the amount of pent-up demand for Southwest flights to Hawaii, it could potentially compress this lead time to three months or even a little less. But that would still put the first flight in 2019.
Competitors will get a breather
Earlier this year, Southwest's management disclosed that the carrier is likely to serve just one West Coast-Hawaii city pair initially, but it will ramp up service rapidly thereafter. One possible scenario is that Southwest Airlines will start in January or February with a single route to Hawaii, add additional routes in time for spring break and Easter, and reach a full schedule of Hawaii flights by June, in time for the summer peak season.
If this timeline holds, it means that competitors like Hawaiian Airlines will get a much-needed breather from competitive capacity growth over the next few quarters.
Last quarter, Hawaiian reported a high-single-digit unit revenue decline on its North America routes. Part of this drop was driven by the timing of Easter, but an even bigger headwind came from competitive capacity growth. Industry capacity to Hawaii from the rest of the U.S. increased 13.4% year over year in the first half of 2018.
Fortunately, industry capacity growth is already slowing to high-single-digit territory in the back half of the year. If Southwest Airlines had been ready for a full launch of Hawaii service by the beginning of 2019, industry capacity growth would have reaccelerated quickly. Instead, industry capacity growth is now likely to slow further in the seasonally weaker first quarter, before rebounding as the year progresses.
Another big jump in West Coast-Hawaii capacity during the first quarter -- when it is harder to stimulate demand -- could have led to substantial margin pressure at Hawaiian Airlines. But if most of Southwest Airlines' Hawaii flights begin during the spring and summer, it will be much easier for the market to absorb this new capacity.