Southwest Airlines Is Chasing Growth in Hawaii -- Here's Why

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Rumors had been flying around for years that Southwest Airlines (NYSE: LUV) might start flying to Hawaii. The airline finally confirmed this speculation in late 2017, and a route between Oakland and Honolulu began just a few weeks ago. Several more routes to Hawaii will start up in the next two months, with more likely to follow later this year and in 2020.

In addition to its flights between the West Coast and Hawaii, Southwest Airlines is also entering the inter-island market, challenging Hawaiian Holdings (NASDAQ: HA), which currently has a near-monopoly on flights between the islands of Hawaii.

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Flying to Hawaii is a natural extension of Southwest's business. And short-haul routes have been the carrier's bread-and-butter for nearly half a century. Yet Southwest Airlines does face some hurdles to success in these markets. Industry Focus: Energy host Nick Sciple and Motley Fool contributor Adam Levine-Weinberg debate the pros and cons of Southwest's ambitious growth plans for Hawaii.

A full transcript follows the video.

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This video was recorded on April 4, 2019.

Nick Sciple: Southwest announced that it's going to expand its routes by adding flights to Hawaii. What do these new routes mean for the company? What do we know about what Southwest is doing with these routes today?

Adam Levine-Weinberg: There's been a lot of speculation about Southwest Airlines flying to Hawaii for many, many years. Southwest first confirmed the speculation in October of 2017. At that point, it said that it was planning to start flights to Hawaii from California. It didn't provide much further detail beyond that.

Now, in order to fly to Hawaii, it's about a 2,500-mile flight from the west coast. Southwest doesn't have routes that are that far from other airports right now. That requires an additional certification for its planes, certify them to be able to fly more than an hour and a half from a diversion airport. Southwest had to work through that process, which typically takes at least a year.

It finally got toward the end of the ETOPS certification process in late 2018, then the government shutdown hit. Southwest thought it was about to be able to begin ticket sales, and then it had a five-weeks delay in being able to complete its testing process. Once the government reopened in late January, and the FAA got back to work, Southwest Airlines finished the process, got its certifications, launched some test flights, then had a big sale in early March to start filling up its first flights to Hawaii.

The first flight went from Oakland to Honolulu on March 17th. Over the next several months or so, Southwest Airlines is going to be adding additional routes from Oakland to Maui; from San Jose to Honolulu and Maui; and then also some inter-island routes within Hawaii. At some point in the future that hasn't been set yet, Southwest also plans to add some additional routes in the mainland, particularly from San Diego and Sacramento into Hawaii.

Sciple: Adam, we're really talking in two buckets when we're talking about Hawaii. I want to break this apart, how the economics work and how Southwest is thinking about them. You have this long-leg flight from California to Hawaii. There are several competitors in that market today. Hawaiian Airlines is the biggest one. Then, you have these inter-island flights, hopping from island to island. To date, Hawaiian Airlines has basically had a monopoly on those flights. The Southwest will be one of the first competitors to go in. When we look at the opportunity for Southwest in these flights to Hawaii, both the long-haul route from the mainland as well as these inner-island flights, how should we think about that opportunity for Southwest? How big can that opportunity be for them over time, and how much might it affect their business?

Levine-Weinberg: If we start with the overseas flights from the West Coast to Hawaii, there's definitely a few big advantages for Southwest in flying to Hawaii. The first is that Southwest has a huge built-in customer base throughout the United States, particularly on the West Coast. It's the top airline in California, has more flights within the state of California than any other carrier. There are already a lot of customers that fly Southwest frequently in California. Many of these people are already going to Hawaii. Up until now, they've had to go with a different airline. That's a clear opportunity to win that business and to better serve those travelers.

A second related issue is that a lot of people will sign up for Southwest Airlines' credit card, which is quite lucrative to the company, if they know they can use the rewards points for an experience that they are looking for -- like being able to fly to a really trendy destination like Hawaii. That could certainly help Southwest Airlines by getting more people to sign up for that rewards credit card, using it to accumulate points, and then eventually use the points for a Southwest Airlines flight to Hawaii.

It's also, frankly, a very big market, the West Coast Hawaii travel market. There are dozens and dozens and dozens of flights a day from many different cities on the West Coast on many different airlines to Hawaii. Southwest Airlines is definitely looking to grow, so this is a really great opportunity to put a lot of additional airplanes to work.

Looking now into the inter-island market, as you mentioned, it's really a Hawaiian Airlines monopoly right now. That hasn't always been the case. There have been competitors in the past. But Hawaiian Airlines has essentially chased them out of the market. So, the other question is, whether Southwest Airlines, being a national carrier, having a low cost structure, and then offering them these goodies like free checked bags, open seating policy, also having no change fees, is the combination of those features and low prices enough to get customers to switch their loyalty and start flying Southwest rather than Hawaiian Airlines within the state of Hawaii? We'll just have to see whether that works. It's certainly been a type of business that's been successful for Southwest. The airline actually started with very short-haul flights within the state of Texas between Austin, Dallas and Houston. So it's pretty similar, actually, to be flying between the different islands in Hawaii. They're short distances, but there's a lot of people traveling. So it's an area where Southwest Airlines could have success.

But if you look at Hawaiian Airlines' position in Hawaii, the carrier has between 180 and 200 daily flights between the islands. It's really a very substantial presence. On some of these routes, Hawaiian Airlines is flying 20 or even more than 25 times a day. That could be a flight every half hour. Whereas Southwest Airlines can't get started with quite so many flights. That'll just be a question of whether the additional schedule flexibility that Hawaiian Airlines has, is that a competitive advantage that Southwest Airlines can overcome? Or, are people willing to be more flexible on what time they travel in order to get a lower fare or get free checked bags or something of that sort?

If you look at the West Coast to Hawaii market, the risks are a little bit different. In that market, it's much more competitive than flying within Hawaii. There are already five airlines that fly frequently between the West Coast and Hawaii. So, the fares really aren't that high even before Southwest has come to the market. While consumers certainly expect lower prices with Southwest Airlines being a factor, it may not actually have as much room to undercut other airlines as it has had in some other markets it's entered, where the prices were higher to start out with.

Southwest us also doesn't have the same amenities as other airlines. It doesn't have extra legroom seats. It doesn't even serve meals on its flights, which could be a disadvantage for people when they're flying five or six hours. Hawaiian Airlines, for example, actually still offers free meals and coach, which is really quite a rarity in the airline industry today.

Sciple: Yeah. Really good job, Adam, laying out the competitive dynamics there as we look. In Hawaii, the advantage that Southwest is going to be looking for is on price, vs. Hawaiian Airlines is going to have the advantage when it comes to convenience, more flights more often. Again, likewise on that long-haul route, Southwest is going to be competing on price again. But if you're a traveler who wants to have the five-star vacation, fly first class both ways, and get the luxury treatment, Southwest is probably not going to win that customer. But as Southwest moves into this more vacation-oriented traveler, it's going to be interesting to see how they fit into the competitive landscape.

Adam Levine-Weinberg has no position in any of the stocks mentioned. Nick Sciple has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Southwest Airlines. The Motley Fool recommends Hawaiian Holdings. The Motley Fool has a disclosure policy.