Hawaiian Holdings (NASDAQ:HA) absolutely dominates the local air travel market in Hawaii. It already holds a more than 85% seat share for interisland travel, and more than 90% market share on some routes.
Hawaiian Airlines will further expand its capacity in Hawaii this year -- but not by adding planes to its fleet. Instead, it is following the example of numerous other U.S. airlines and retrofitting its existing fleet with more seats. This move should help reduce the company's unit costs and further solidify its dominance of interisland travel in Hawaii.
A dominant franchise
Dominance of the Hawaiian air travel market fell into Hawaiian Airlines' lap in 2008. The combination of rising oil prices and a price war with new entrant go! forced Hawaiian's top rival, Aloha Airlines, to go out of business. Hawaiian further improved its position last year when persistent losses drove go! out of the market as well.
As a result, Hawaiian Airlines only faces one major competitor in the interisland market: Island Air, which is owned by billionaire Larry Ellison. Island Air mainly focuses on bringing visitors to Lanai, an island owned by Ellison, which further limits its challenge to Hawaiian Airlines.
That said, Hawaiian's rock-solid market position doesn't make it invincible. If it becomes too complacent, there is always a possibility that another major airline would try to gain a foothold in the interisland market.
Reconfiguring the interisland fleet
As a result, adding seats to existing planes is a smart move on Hawaiian's part. Last week, the carrier finished retrofitting the first of its 18 Boeing 717s with a new 128-seat configuration. Previously, 11 of the planes were outfitted with 123 seats and the other 7 had 118 seats. Hawaiian plans to finish the retrofits by the end of the year.
When the modifications are complete, all 18 aircraft will feature a standard seat, galley, and lavatory configuration. This will simplify operations and ticket sales, since Hawaiian Airlines will be able to seamlessly swap out any of the Boeing 717s in the interisland fleet for any other one.
Best of all, the added seats won't compromise passenger legroom. As you can see from the picture above, the new slim-line seats will be much thinner than traditional airline seats. As a result, passengers will actually get about half an inch of extra legroom, according to Hawaiian's management. On the other hand, the new seats will not recline.
Improving the cost structure
Undoubtedly, some passengers will complain about the changes, such as the thin seat cushions or the lack of recline. However, these airplanes are only used for flights within Hawaii, which means that most customers spend an hour or less on the plane. Most people flying these routes want cheap transportation, not premium service.
Furthermore, all of Hawaiian Airlines' competitors in the interisland market fly turboprops, which are smaller and tend to be less comfortable than mainline jets. So aside from having far more flight options than competitors, Hawaiian also (still) has the best product in the interisland market.
As a result, I don't expect passenger backlash against Hawaiian's changes. Adding more seats to the Boeing 717s will reduce Hawaiian's unit costs on interisland routes, allowing the carrier to improve its profit margin without raising prices. That's a win-win for both Hawaiian Airlines and its customers.
Adam Levine-Weinberg owns shares of Hawaiian Holdings, and The Boeing Company. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.