A few years ago, ultra-low-cost carrier Allegiant Travel (NASDAQ:ALGT) began flying to Hawaii. Allegiant's entry into this market seemed like a boon for people looking to travel from smaller cities in the Western U.S. to this popular vacation destination.
However, the budget carrier has had a ton of trouble making its Hawaii flights work. With the fleet of 757s it uses for Hawaii flights coming up for expensive heavy maintenance checks soon, Allegiant plans to stop flying to Hawaii in August 2016.
Hawaii never quite worked
Allegiant first announced its intention to fly to Hawaii in early 2010. It bought a fleet of six Boeing 757 aircraft specifically for that purpose.
It took until mid-2012 for the Hawaii flights to get off the ground. In the intervening years, Allegiant's management built up big expectations for this new market, stating that it could generate an even higher profit margin than the company's mainland routes.
Allegiant started mostly by offering flights to Hawaii from smaller cities like Eugene, Oregon, Boise, Idaho, and Stockton, California. However, the company found that travel demand to Hawaii was even more seasonal than for other leisure markets like Florida or Las Vegas.
As a result, by the fall of 2013, Allegiant had dramatically slashed its Hawaii flight schedule to just four flights a week from two of its larger markets: Las Vegas, Nevada and Bellingham, Washington (which serves as a secondary airport for Vancouver, Canada). While the cuts were initially portrayed as seasonal, some of the routes never came back.
By the end of last year, Allegiant was down to just two Hawaii routes: Las Vegas-Honolulu and Los Angeles-Honolulu. This is hardly sufficient to justify operating a separate subfleet of 757s that are only needed for Hawaii flights.
Allegiant's last two Hawaii routes are big outliers for the company, which mainly flies from small cities to leisure destinations with little or no competition. By contrast, Allegiant competes with two to three daily flights from Hawaiian Holdings (NASDAQ:HA) on both the Las Vegas and Los Angeles routes. From Los Angeles, Allegiant also competes with frequent flights on all three big network carriers.
Allegiant SVP Jude Bricker mentioned increasing competition as a reason for ending the Hawaii flights, according to Airways News. However, this isn't the whole story. Through September, capacity on the Las Vegas-Honolulu route rose just 0.9% year over year. Los Angeles-Honolulu capacity increased 5.8% in that period -- but in recent months, those capacity increases have started to reverse.
Maintenance costs are a bigger issue. Most of Allegiant's 757s will be due for their "D-checks" before the end of 2016. This is an extensive maintenance procedure that essentially entails taking a plane apart to inspect all of the parts, and then reassembling it. A D-check for a 757 could easily cost around $2 million.
In this context, Allegiant's decision to pull out of the Hawaii market makes more sense. Two million dollars per plane is a lot of money to invest for planes that are only needed for two routes, unless those routes are highly profitable. Even a modest increase in competition in the next few years could have made such an investment backfire, so Allegiant will look elsewhere for growth.
Good news for Hawaiian Holdings
Allegiant's decision to exit the Hawaii market is good news for Hawaiian Airlines, which is the only airline competing on both the Los Angeles-Honolulu and Las Vegas-Honolulu routes.
Hawaiian Airlines still has plenty of other rivals in the West Coast-Hawaii market, but any letup in competitive capacity growth is a good thing. Furthermore, Los Angeles and Las Vegas are two of the carrier's top markets from Hawaii. In Las Vegas, in particular -- where there are no other commercial airline flights to Hawaii -- Allegiant's exit could give Hawaiian Airlines some leeway to boost its average fare.
As for Allegiant, it has experienced rising success operating from mid-sized cities in the U.S. This represents a big growth opportunity, because mid-sized cities can support more flights than the small cities Allegiant has traditionally served.
Meanwhile, the increasing availability of cheap used Airbus A320-series aircraft will allow Allegiant to replace the aging MD-80s in its fleet with much more fuel-efficient planes. With plenty of room for highly profitable growth in the U.S., Allegiant investors won't miss the Hawaii flights much after they're gone.