In the old days (1993), the Department of Transportation coined a term known as the “Southwest Effect.” The term was used to describe the changes in air travel that invariably result from Southwest Airlines’ entry into new markets. Once Southwest enters the market, it has 2 classic elements:
- Southwest offers dramatically lower air fares than established airlines and;
- The established airlines, in that specific market, lower their prices (and thus, reduce their profits) due to the direct competition with Southwest.
In other words, Southwest shakes up the market in every city that it flies to.
HAWAIIAN AIRLINES IS SUFFERING
At the beginning of the year, Southwest began flying from the west coast to the Hawaiian islands (and intra-island). Since then, they have also increased the number of intra-island flights.
In response, Alaska Airlines terminated a total of 5 routes and now the numbers are in for Hawaiian Airlines and they don’t look good.
Hawaiian Airlines is the most profitable company in Hawaii but their net profit declined 27% during the second quarter of 2019.
Although, Hawaiian reported a net profit of $57.8 million, it is down significantly from the nearly $80 million profit a year earlier.
Hawaiian also has experienced increased competition from All Nippon Airways, which launched A380 service between Tokyo and Honolulu.
Peter Ingram, the CEO of Hawaiian Airlines, acknowledged that competition had increased, but highlighted that Hawaiian Airlines was in better positioned than competitors in all Hawaii markets.
In response, Hawaiian launched new routes including Sacramento-Maui and Boston-Honolulu service. They also announced service to Fukuoka, Japan, and added another daily flight between Honolulu and Tokyo (Haneda).
I’m obviously not a finance professor but 27% decline in one quarter is not insignificant. That’s major!
Fortunately for Hawaiian, the grounding of the 737 Max has slowed expansion for many airlines including Southwest Airlines. If not for this slowdown, I think Hawaiian would be suffering even more than they are now.
I will keep my eye on this situation because I am curious to see how this develops.
What do you make of this development? Have you flown Southwest Airlines to Hawaii yet?