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2 Smart Moves Will Boost Hawaiian Holdings' Financial Performance

By Evan Buck – Jul 23, 2014 at 1:00PM

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Hawaiian Holdings has been facing competition from Alaska Air. But now Hawaiian Holdings is in a much better position than its competitor.

American travelers who wish to take an excursion from the "lower 48" to Hawaii or Alaska often turn to those states' namesake airlines: Hawaiian Holdings (HA 1.55%) and Alaska Air (ALK 2.25%). Hawaiian Airlines has an incredibly strong presence in Hawaii after the 2008 bankruptcy of rival Aloha Airlines. But recently Alaska Air has been gaining ground in the region and this has forced Hawaiian Airlines to respond. Let's look at what Hawaiian is doing to maintain its dominance in its home market, and how these developments will impact investors' portfolios.

Why Alaska Air gained ground
After Aloha Airlines closed down in 2008 because the economy tumbled into recession and fuel prices increased, Hawaiian Airlines quickly filled the void that was left behind. The airliner enjoyed an ability to operate almost unopposed in the Hawaiian air market for some time, but soon Alaska Air also joined in the fun. Alaska began to rapidly expand its Hawaiian flight services, and by 2012 flights to Hawaii represented roughly 20% of Alaska's capacity.

How did Alaska Air accomplish this? For starters, Alaska Air began to offer flights to select secondary non-Honolulu locations in Hawaii. With a well-managed fleet and a good cost structure, Alaska Air is a relatively inexpensive, attractive option for travelers who wish to fly from West Coast locations to secondary airports in Hawaii.

Alaska Air also holds several 737-800 long-range narrow-bodied airplanes which are configured to hold fewer passengers for smaller markets. Hawaiian Airlines, on the other hand, almost exclusively flies its West Coast customers to Honolulu and does not have narrow-bodied airplanes. Thus, Alaska has been able to gain an important foothold in non-Honolulu air travel that Hawaiian currently does not have, which has allowed Alaska to gain some market share in the region.

But while Alaska Air has made some important headway in Hawaii, Hawaiian Airlines is still poised to dominate the region for two primary reasons. 

First, Hawaiian Airlines enjoys a comfortable virtual monopoly on inter-island travel.

Second, Hawaiian Airlines has just purchased a fleet of smaller-bodied planes to better compete with Alaska Air and improve its financial results.

Hawaiian Airlines' virtual monopoly
Fellow Fool Adam Levine-Weinberg explains the importance of inter-island travel to Hawaiian Airlines:

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.

So while Alaska Air does have flights from the West Coast to secondary locations in Hawaii, Hawaiian Airlines has a virtual lock on all inter-island travel due to the lack of serious competition as well as important partnerships with large airline companies like Delta Air Lines and American Airlines. Both Delta and American offer flights from major cities like Atlanta, Los Angeles, Phoenix, and Salt Lake City to Honolulu. But Delta and American don't offer flights to other smaller Hawaiian airports from as many cities; in fact, Delta only flies passengers to smaller Hawaiian airports from Los Angeles.

What is the solution then? Both Delta and American fly their customers to Honolulu and then put them on Hawaiian Airlines planes that fly to smaller locations, instead of flying them to Los Angeles and then on to smaller Hawaiian airports. By partnering with Delta, American, and other airlines, Hawaiian gains a stable, strong source of revenue which will remain profitable due to the importance of inter-island travel.

The new fleet
Hawaiian Airlines is also ratcheting up competition by purchasing a new fleet of smaller-bodied planes. Hawaiian Holdings placed a firm order for 16 Airbus A321neos last year and also holds purchase rights for nine more A321neos. The planes are very fuel-efficient and will help Hawaiian profitably serve its customers' needs when it rolls out the fleet in the coming years. 

Before it decided to purchase the A321neos, Hawaiian Airlines couldn't serve routes with lower demand due to the large sizes of its planes. But now Hawaiian Airlines can now more profitably serve existing routes and add new routes that wouldn't be possible with wider-bodied planes. These new planes will allow Hawaiian Airlines to compete strongly with Alaska Air on non-Honolulu flight paths.

Overall, with increasing earnings, a bolstered fleet, and consistent revenue derived from partnerships, Hawaiian Airlines is poised to continue delivering good financial performance and thus to return value to its shareholders over the long term.

Evan Buck has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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