Virgin America (NASDAQ: VA) has been in the midst of a growth hiatus for more than 2 years, but it is planning to start expanding again later this year. To kick of this new growth initiative, management has already stated that adding flights to Hawaii is a key priority once it returns to growth.
Many analysts and investors seem to be skeptical of this plan. After all, Hawaiian Airlines (NASDAQ:HA) and other top carriers in the West Coast-Hawaii travel market have recently discussed their market's existing overcapacity.
However, San Francisco and Los Angeles -- Virgin America's two hubs -- are both huge markets for travel to Hawaii. Furthermore, Virgin America has lots of loyal fans in both cities. As a result, it should have no trouble carving out a nice market niche with its premium offering on flights to Hawaii.
When Virgin America begins its flights to Hawaii, it will join a crowded market. Today, 3 carriers fly nonstop from San Francisco to Hawaii, while 5 fly nonstop from Los Angeles to Hawaii.
At first, this might make Hawaii flights seem unpalatable. However, the large number of competitors is an indicator of the massive size of these markets. This summer, airlines will operate more than 3 dozen daily flights to Hawaii from Los Angeles alone.
At present, Virgin America does extremely well on the similarly busy transcontinental routes from New York to San Francisco and Los Angeles, where it is one of 5 airlines offering nonstop service. Its unique premium offering -- with Wi-FI, mood lighting, an innovative seat-back entertainment system, and other amenities -- has allowed Virgin America to hold its own against much bigger rivals.
The same attributes should make plenty of travelers pick Virgin America when planning trips to Hawaii. Indeed, loyal Virgin America customers have been requesting flights to Hawaii for years. (As a stopgap measure, the company implemented a codeshare arrangement with Hawaiian Airlines in late 2012.)
If Virgin America's entry into the Hawaii market creates a capacity imbalance, other airlines are likely to pull back on their own Hawaii flying to foster a supply/demand balance. They would probably do so by switching to smaller planes for their Hawaii flights.
But even this may be a moot point. Hawaiian Airlines told investors this week that its Q1 unit revenue will not decline as much as originally expected. This implies that demand for West Coast-Hawaii flights may already be catching up with supply.
More reasons to love flights to Hawaii
Virgin America won't have to charge outrageous fares to make money flying to Hawaii, either. The new planes it is receiving beginning in July will be modern 149-seat Airbus A320s, equipped with fuel-saving Sharklet winglets.
These planes will have lower unit costs than many of the planes currently flying to Hawaii, including medium-sized widebodies like the Boeing 777and older-technology planes like the Boeing 757.
Virgin America will also offer arguably the best first class seats for West Coast-Hawaii flights. Competitors have leapfrogged Virgin America's premium product on transcontinental routes by installing lie-flat beds, but almost all of the first class seats on Hawaii routes are the "domestic" variant.
These are no match for Virgin America's wide, white leather first class seats with 55" of legroom. This superior offering should help Virgin America drive strong sales of its lucrative first class seats.
Virgin America's routes to Hawaii may not be immediately profitable -- new airline routes seldom are. However, the company's relatively low costs and differentiated product should allow it to compete for the long haul on flights from its San Francisco and Los Angeles bases to Hawaii.
In fact, by bringing a premium atmosphere to Hawaii flights, Virgin America could force its competitors to up their standards -- just as it did in the transcontinental market not too long ago.