In March 2019, Southwest Airlines (LUV 0.65%) launched service to Hawaii with great fanfare. Since then, the low-fare airline giant has built up a sizable business flying customers to, from, and within Hawaii.
But despite Southwest’s growth in Hawaii and its displays of confidence in the market, there are signs that parts of its Hawaii route network aren’t working. Barring a turnaround in its performance, that could lead to retrenchment sometime down the road, benefiting hometown airline Hawaiian Holdings (HA 2.78%).
Big growth, but not in a straight line
In the first year after it began service to Hawaii, Southwest Airlines expanded rapidly there. By the time the COVID-19 pandemic brought air travel to a standstill in March 2020, Southwest was flying nonstop to several destinations in Hawaii from three California cities while operating a mini-hub in Honolulu with flights to each of the state’s other four major airports. It was also on the verge of beginning nonstop service between San Diego and Hawaii.
Despite the pandemic, Southwest continued its Hawaii expansion during 2020 and 2021, adding new service to the popular vacation destination from Long Beach, Los Angeles, Las Vegas, and Phoenix. It now operates about two dozen daily roundtrips between eight mainland cities and Hawaii, plus additional flights during the peak season.
Southwest has grown even more aggressively in the interisland market. This month, the airline increased its interisland schedule to 60 daily flights (30 roundtrips), up from 38 daily flights previously.
That said, Southwest has also scaled back its ambitions in certain markets. During 2022, the carrier has discontinued half a dozen mainland-Hawaii routes that served secondary markets in Hawaii (Kona and Lihue). It also downgraded several other routes from year-round to seasonal service.
Can Southwest compete in the interisland market?
These schedule changes show that Southwest is being responsive to route-level performance and cutting underperforming mainland-Hawaii routes. Those that remain are probably quite successful, at least during the current leisure travel boom.
By contrast, Southwest’s rapidly growing interisland operation looks like a vanity business. In May – the most recent month for which government statistics are available – Southwest Airlines reported subpar load factors below 70% for departures from its secondary destinations in Hawaii (i.e., excluding Honolulu).
Image source: Southwest Airlines.
In response, Southwest launched an interisland fare sale in late July. For the rest of 2022, the airline’s basic “Wanna Get Away” fare has been set at $39 for all interisland flights, including peak-day trips and last-minute travel. After deducting taxes and fees, Southwest collects just $26.10 one-way: enough to cover fuel and airport costs but not much else. Unless a large proportion of customers buy pricier refundable fares or pay for early boarding, there’s no way to make money with this kind of fare structure.
The low-fare carrier is spinning the promotion as a way to get locals who are used to flying Hawaiian Airlines between the islands to try Southwest.
However, Southwest Airlines entered the interisland market more than three years ago. Even accounting for the pandemic’s impact on interisland travel, Southwest shouldn’t need to price all of its flights below cost after this much time. The fact that it is still resorting to unsustainably low fares to fill its planes calls its interisland strategy into question.
Southwest is just stubborn
Whereas Southwest’s mainland-Hawaii routes average over 2,500 miles, its interisland flights are less than 150 miles on average. So even if they are consistently losing money, the losses are fairly manageable for a company the size of Southwest Airlines.
Yet it’s not clear what Southwest hopes to achieve here. Hawaiian Airlines won’t retreat in the interisland market. Hawaii is its home turf, and it has no choice but to defend its position through targeted price matching and other tactics. And if Southwest raises fares to try to bring its interisland routes to profitability, it will have even more trouble filling all of the capacity it has dumped in the market.
Southwest Airlines has a track record of remaining in money-losing markets longer than it should. The airline served Newark Airport with generally poor results for nearly a decade before finally pulling out in 2019. And the only reason it exited the market then was that the global Boeing 737 MAX grounding had created an artificial fleet shortage for Southwest.
Sooner or later, Southwest Airlines will realize that its Hawaii interisland business will probably never make money consistently at its current scale. Shareholders of Southwest and Hawaiian Holdings should both hope that Southwest’s management doesn’t spend a decade throwing good money after bad in Hawaii as it did in Newark.
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