What happened

It's been four days since the news first dropped: The Federal Aviation Administration has officially cleared Southwest Airlines (NYSE:LUV) to begin serving the Hawaiian market.

Investors in rival Hawaiian Holdings (NASDAQ:HA) -- which (surprise!) serves the same market with its carrier Hawaiian Airlines -- took the news with equanimity last week, shaving only a few pennies off Hawaiian's stock price. Today, however, the second shoe dropped: Southwest has begun selling tickets to Hawaii for just $49.

Southwest Airlines airplane

Southwest Airlines is challenging Hawaiian Airlines with $49 fares. Image source: Southwest Airlines.

So what

Southwest announced the fare in a press release this morning: "Flights between both Oakland and San Jose, Calif., and the Islands, now available for purchase through March 5 for as low as $49 one-way." And inter-island service, to begin April 28 between Honolulu and Kahului (Maui), and May 12 between Honolulu and Kona, is now available for purchase through March 5 for as low as $29 one way, Southwest added.

To see what this means for Hawaiian Airlines, I just priced a one-way trip from Oakland to Honolulu on the first Friday of May, and the lowest-cost Hawaiian fare available was $207.80 -- about four times what Southwest is charging.

Check out the latest earnings call transcript for Hawaiian Holdings.

Now what

Granted, Southwest is trying to make a big splash. It's unlikely Hawaiian's new rival will consistently underprice it by 75%. At the very least, though, Southwest's move is likely to pressure Hawaiian to match fares in the second quarter of 2019. Farther out, competition from Southwest might be a bit less cutthroat, but it will certainly exist.

Seems to me like this is a good reason to give Hawaiian stock a 10% haircut. Investors are making the right call today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.