Is Hawaii Paradise or a money pit for Southwest Airlines?

Is Hawaii Paradise or a money pit for Southwest Airlines?

In March 2019, Southwest Airlines (LUV -3.30%) The service was launched to Hawaii with great fanfare. Since then, the low-fare giant has built a huge business that transports customers to, from and within Hawaii.

But despite Southwest’s growth in Hawaii and its show of confidence in the market, there are signs that parts of Hawaii’s road network are not working. Except for a shift in its performance, it may cut expenses sometime down the road, which benefits the airline in its hometown. Hawaii Holdings (HA -5.79%).

Significant growth, but not in a straight line

In the first year after service to Hawaii began, Southwest Airlines rapidly expanded there. By the time the COVID-19 pandemic halted air travel in March 2020, Southwest was flying nonstop to several Hawaii destinations from three California cities while operating a small hub in Honolulu with flights to each of the state’s four other major airports. . It was also about to start a non-stop service between San Diego and Hawaii.

Despite the pandemic, Southwest continued its expansion in Hawaii through 2020 and 2021, adding a new service to the popular vacation destination from Long Beach, Los Angeles, Las Vegas and Phoenix. It now operates about twenty daily round trips between eight cities on the mainland and Hawaii, as well as additional flights during the high season.

Southwest has grown more aggressively in the interisland market. This month, the airline increased its inter-island flight schedule to 60 daily flights (30 round trips), compared to 38 daily flights previously.

However, Southwest has also scaled back its ambitions in certain markets. During 2022, the carrier halted half a dozen mainland and Hawaiian routes that served secondary markets in Hawaii (Kona and Lihue). It also reduced the classification of several other routes from year-round to seasonal service.

Can the Southwest compete in the inter-island market?

These schedule changes show Southwest is responding to track-level performance and cut off poorly performing mainland and Hawaii routes. Those who stayed are likely to have had a hit, at least during the current leisure travel boom.

By contrast, the country’s rapidly growing Southwest operation looks like a cocky business. In May — the latest month for which government statistics are available — Southwest Airlines reported load factors of less than 70% for departures from its secondary destinations in Hawaii (for example, excluding Honolulu).

A Boeing 737 Max belonging to Southwest Airlines.

Image source: Southwest Airlines.

In response, Southwest launched an inter-island fare sale in late July. For the rest of 2022, the airline’s base fare “Wanna Get Away” is set at $39 for all inter-island flights, including peak day trips and last-minute travel. After taxes and fees, Southwest collects only $26.10 one way: enough to cover fuel and airport costs but no more. Unless a large percentage of customers buy refundable rates or pay for early boarding, there is no way to make money from this type of fare structure.

The low-fare airline is spinning the promotion as a way to get locals who used to fly Hawaiian Airlines between islands to experience the Southwest.

However, Southwest Airlines entered the inter-island market more than three years ago. Even considering the pandemic’s impact on inter-island travel, Southwest shouldn’t have to price all of its flights below cost after so long. The fact that it still resorts to unsustainably low wages to fill its planes puts its inter-island strategy into question.

Southwest is just stubborn

While the routes southwest of the mainland and Hawaii average over 2,500 miles, their inter-island journeys are less than 150 miles on average. So even if they’re constantly losing money, the losses are fairly manageable for a company the size of Southwest Airlines.

However, it is not clear what Southwest hopes to achieve here. Hawaiian Airlines will not hold back in the inter-island market. Hawaii is its home, and it has no choice but to defend its position through target price matching and other tactics. And if Southwest raises prices to try to bring its inter-island routes to profitability, it will have more trouble filling all the capacity it dumped on the market.

Southwest Airlines has a track record of staying in losing markets for longer than they should. The airline served Newark Airport with poor results overall for nearly a decade before finally withdrawing in 2019. The only reason it was out of the market at that time was because the world Boeing Grounding the 737 Max led to an artificial fleet shortage in the Southwest.

Sooner or later, Southwest Airlines will realize that its business in the Hawaiian Islands will probably not be profitable consistently on its current scale. Shareholders of Southwest and Hawaii Holdings should hope that the Southwest administration does not spend a decade throwing good money after good money in Hawaii as it did in Newark.

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