Ever since the 2008 demise of its main rival, Aloha Airlines, Hawaiian Holdings, Inc has maintained a dominant position in the Hawaiian interisland travel market.
Continue Reading Below
Hawaiian Airlines is by far the top airline for travel within Hawaii.
While Hawaiian Airlines has thrived lately, its smaller competitors have been hard-pressed to stay in business. As they downsize or exit the market, Hawaiian Airlines is becoming even more dominant in its home market. This should provide a significant, stable long-term earnings stream that will help fund Hawaiian's growth in long-haul markets.
Another one bites the dust
Last March, regional airline go! -- which was a distant second in interisland market share -- announced that it would shut down at the end of the month. go! had been struggling due to a combination of high fuel prices, heavy competition from Hawaiian Airlines, and a growing pilot shortage. Accordingly, its parent company, Mesa Air Group, decided to redeploy its resources to more profitable regional airline flights in the continental U.S.
Island Air, the only other interisland carrier to fly airplanes with more than nine seats, has been just as unsuccessful. While it was purchased in 2013 by Larry Ellison -- founder of Oracle and one of the richest men in the world -- Ellison has shown no inclination to pour lots of cash into his money-losing airline.
Continue Reading Below
Whereas it originally seemed possible that Island Air would grow significantly using capital from its billionaire owner, it is instead shrinking. Last week, Island Air canceled plans to update and enlarge its fleet, citing a record loss of $21 million in 2014 and its inability to reach an agreement with its unions on revised work rules that would have improved productivity.
Additionally, Island Air is cutting its staff by 20% and dramatically slashing its route network. Today, it operates five daily nonstop round trips between Honolulu and Lanai and six daily nonstops between Honolulu and Kauai (Kauai and Lanai are two of the smaller islands). As of June 1, it will drop both routes.
A shell of its former self
This is not the first time that stiff competition from Hawaiian Airlines has forced Island Air to retrench. In 2009, it dropped its flights to Hilo, and it eventually cut its flights to Kona -- the other main airport on Hawaii's Big Island -- as well. In 2013, it stopped flying to West Maui due to a change in its fleet, and in 2014 it dropped all flights to Molokai after Hawaiian Airlines announced a competing service.
As a result, Island Air is now down to just seven daily flights between Honolulu and Maui during the week (10 on weekends), with two of those flights continuing on to Lanai. That hardly constitutes effective competition when Hawaiian Airlines operates an average of 166 daily flights within Hawaii.
Good news for Hawaiian Airlines
While Hawaiian Airlines is already many times the size of Island Air, it will still benefit from its rival's cutbacks.
Island Air had been offering nearly 400 daily seats each way between Honolulu and Kauai -- far less than Hawaiian Airlines' 17 daily round trips and more than 2,000 one-way seats each day, but still a meaningful amount. Meanwhile, Island Air had been the leading carrier to Lanai, but it is dropping its nonstop Honolulu-Lanai flights, essentially ceding that market to Hawaiian Airlines.
A Hawaiian Airlines spokeswoman told local news outlets that the airline would evaluate adding flights to Kauai to make up for the lost Island Air service. While Hawaiian utilizes its fleet of Boeing 717 interisland jets pretty heavily -- they each operate nine or 10 flights on a typical day -- it may have some flexibility to increase utilization. It could also reallocate some capacity from other routes for Kauai flights.
The downsizing of its last significant competitor makes Hawaiian Airlines' decision to add seats to its Boeing 717s look even more prescient. By the end of this year, each 717 will have 128 seats,up from either 118 or 123 originally. This move will boost Hawaiian's interisland capacity by nearly 6% at a minimal cost.
Hawaiian Airlines is adding one or two rows of seats to each of its Boeing 717s. Photo source: Hawaiian Airlines.
With less competition in the market, Hawaiian should have no trouble filling those extra seats, driving higher profitability. It may also be able to raise fares modestly thanks to the reduction in competition. However, it can't be too aggressive on that front, or else another airline might be tempted to enter the market.
Falling competition in its home market will ultimately benefit Hawaiian Airlines. Without the threat of periodic profit-sapping fare wars, the interisland market should be a source of steady profit for Hawaiian. That's a good thing in its own right, and it will also help fund the company's growth investments.
The article Hawaiian Airlines Consolidates Its Dominance in Hawaii originally appeared on Fool.com.
Adam Levine-Weinberg owns shares of Hawaiian Holdings, The Motley Fool owns shares of Oracle. 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.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.