What's Virgin America, Inc.'s Next Move in Hawaii?

During the run-up to its IPO in late 2014, Virgin America made no secret of its interest in flying to Hawaii as soon as it got the right airplanes. Last April, the chic low-cost carrier followed through, announcing daily flights from its main base in San Francisco to both Honolulu and Maui.

Virgin America now flies to Hawaii. Image source: Virgin America.

Virgin America started the San Francisco-Honolulu route in early November. The San Francisco-Maui route followed in early December. Not surprisingly, demand for Virgin America's Hawaii service has been strong. As a result, Hawaii is likely to be a key component of the company's capacity growth in the next few years.

Virgin America announces new Hawaii routesBack in August, Virgin America CEO David Cush told me that the company was expecting good results out of the gate in Hawaii. Earlier this month, the carrier gave a strong signal that it hadn't been disappointed.

At that time, Virgin America announced plans to expand its Hawaii footprint by starting daily flights from Los Angeles (its other main focus city) to Honolulu and Maui in May and June, respectively. It wouldn't be growing so quickly in Hawaii unless it saw a big opportunity.

In fact, Virgin America's new Los Angeles routes come at a great time. Market leader Hawaiian Holdings recently revealed that capacity in the West Coast-Hawaii market is scheduled to decline during Q2, when Virgin America's new flights will begin. For the Los Angeles-Hawaii market in particular, the capacity declines have already begun.

Hawaiian Airlines expects West Coast-Hawaii industry capacity to decline next quarter. Image source: Wikimedia Commons.

Virgin America will still face plenty of competition there from Hawaiian, United Continental , and the other legacy carriers. But industry capacity discipline should support high fares.

Management confirms the strong trajectoryOn Virgin America's Q4 earnings call this week, management confirmed the strong start in Hawaii. Cush stated that Virgin America has had more empty seats than planned, but this was more than offset by higher-than-expected fare levels.

Furthermore, Cush noted that early bookings for the next several months look very good. Demand for travel to Hawaii appears to be rising. Given the high fares prevailing in the market, this bodes well for the profitability of Virgin America's Hawaii routes during the spring and summer.

More flights could be comingFollowing Virgin America's earnings call, I had a chance to speak directly to David Cush about the company's future plans in Hawaii.

Cush said Virgin America would likely expand beyond the two most popular islands eventually. He noted that the smaller Kona and Lihue markets are somewhat underserved from San Francisco.

United Airlines has a monopoly on flights from San Francisco to Kona and Lihue. Image source: The Motley Fool.

Sure enough, while Honolulu and Maui accounted for 76% of the capacity from Los Angeles to Hawaii during December -- the last month for which data is available -- they accounted for 84% of capacity from San Francisco. In fact, United Continental is currently the only airline flying to Kona and Lihue from San Francisco. By contrast, United has several competitors from Los Angeles to Kona and Lihue.

Long runway for growthVirgin America has already allocated all of its capacity for 2016, so further growth in Hawaii will have to wait until next year. At that point, it could have several opportunities.

Aside from starting flights from San Francsico to Kona or Lihue, Virgin America could also add flights on the four routes it has already announced. In fact, Cush stated that all else being equal, he would prefer to grow in existing markets, as that is usually more predictable and the extra flights mature faster than brand new routes.

Longer-term, if Virgin America enters Kona or Lihue, it would likely be able to support flights from Los Angeles as well as San Francisco.

Bottom line: By 2020, Virgin America could easily double or triple its capacity in Hawaii relative to the four flights already announced. It's never going to match market leaders like Hawaiian Holdings and United Continental. But Virgin America should be able to carve out a highly profitable niche in the West Coast-Hawaii air travel market.

The article What's Virgin America, Inc.'s Next Move in Hawaii? originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of Hawaiian Holdings,, United Continental Holdings,, and Virgin America and is long June 2016 $25 calls on Virgin America and short April 2016 $38 calls on Hawaiian Holdings, The Motley Fool recommends Virgin America. 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.