Hawaiian Holdings (NASDAQ:HA) subsidiary Hawaiian Airlines has been the top airline in the island chain ever since being founded 85 years ago. Nevertheless, for most of its history, it faced significant competition, primarily from Aloha Airlines.

However, the demise of Aloha Airlines in 2008 removed Hawaiian Holdings' main competitor. This allowed the company to fill the vacuum and gain a dominant position in the interisland travel market almost overnight. Now Hawaiian Holdings is poised to solidify its dominance by expanding its Ohana by Hawaiian turboprop operations in Hawaii.

Why the interisland market matters
Hawaii may be one of the smallest U.S. states by population, but it has one of the largest markets for intrastate air travel. With its population spread across several islands and without a state ferry service, a significant proportion of travel within Hawaii is by air. Additionally, most long-haul flights land in Honolulu, so tourist itineraries to the outlying islands often require an interisland flight.

For example, Delta Air Lines (NYSE:DAL) flies to Honolulu from several of its major U.S. hubs, including Atlanta, Minneapolis/St. Paul, and Salt Lake City. However, today Delta flies to other Hawaii airports only from Los Angeles.

Many big carriers like Delta Air Lines have interline partnerships with Hawaiian Airlines. Photo: The Motley Fool

The ready availability of interisland air seats means Delta can route customers traveling to the other islands through Honolulu on "interline" tickets. Rather than sending all Hawaii-bound customers to Los Angeles, Delta can send them from its larger hubs to Honolulu, and then put them on Hawaiian Airlines flights to their final destinations within Hawaii.

Hawaiian Holdings expands in Hawaii
In recent years, Hawaiian Airlines has operated an all-jet fleet. However, in late 2012, Hawaiian Holdings bought a pair of 48-seat turboprops to serve airports in Hawaii that cannot handle jet aircraft and routes with lower demand. The combination of these new planes and its existing jet fleet is bolstering Hawaiian's dominance of its home market.

Hawaiian Airlines in March inaugurated service for its new turboprop subsidiary, adding two new islands (Lanai and Molokai) to its network within Hawaii. Not too long after it announced plans for the new service, much smaller rival Island Air decided to pull out from Molokai, giving Hawaiian Airlines a virtual monopoly there.

Ohana by Hawaiian has seen strong demand in its early days. Photo: Hawaiian Holdings

Hawaiian Airlines furthered its dominance as Mesa Air Group shut down its Hawaiian subsidiary, go! in April. Since Aloha Airlines ended passenger service in 2008, Island Air and go! have been the only real competitors to Hawaiian Airlines for travel within Hawaii. With one rival retrenching and another one disappearing, Hawaiian Airlines has unprecedented dominance of the market today.

Keeping competition out
Instead of boosting prices significantly in an attempt to exploit this situation in the short run, Hawaiian Airlines is taking a long-term view. It is expanding its flight schedule and keeping fares at reasonable levels so that other airlines don't show up in its backyard. This will ensure that global airlines such as Delta remain dependent on Hawaiian for interisland connections in the state.

Accordingly, Hawaiian announced a major expansion of its interisland service last week. The initial schedule for Ohana by Hawaiian had five daily round trips. Now it is adding another four daily round trips on three additional routes, along with an extra summer seasonal flight on the first Ohana route (Honolulu-Molokai).

Ohana's new turboprop routes include one route that is all-new for Hawaiian Airlines, connecting Maui and Molokai. The other two routes -- from Maui to Kona and Maui to Hilo on the Big Island -- are already served by Hawaiian's mainline jet fleet.

Starting turboprop service on these two routes will allow Hawaiian to add frequencies with smaller increments of capacity. This is important because Hawaiian Airlines operates a small hub in Maui with flights to all of the other islands and to a few West Coast destinations. The new turboprop service from Maui will enable additional connections while also supporting the local travel market.

Foolish final thoughts
Since 2008, Hawaiian Holdings has grown to occupy a dominant position in Hawaii's interisland travel market, forcing other carriers like Delta Air Lines to partner with it for flights within the state. Hawaiian Airlines holds more than 90% market share on most major routes within Hawaii, and it has expanded its flight network this year with the addition of turboprop service on several routes.

Hawaiian's growth is very timely. With one of its two competitors having pulled out of Hawaii this year and the other one retrenching, Hawaiian Airlines is creating a defensible position on the islands that will produce strong profitability for years to come.