Hawaiian Deals With Its First Real Interisland Competition in a Decade (Across the Aisle)

Hawaiian

Welcome back to the second part of my interview with Hawaiian CEO Peter Ingram. If you missed our talk about mainland flying, you can find it here. Today, it’s time to talk about interisland flying. This is particularly interesting since Southwest recently entered the market, and there is true competition for the first time in a decade. Tomorrow, look for the international discussion.

Brett Snyder, Cranky Flier: You have not had a true strong competitor [like Southwest] in neighbor island flying for several years. I mean, Island Air dabbled a little bit, Mokulele on the fringes a little bit, but for the most part those are different markets they’re dealing with it.

Peter Ingram, CEO, Hawaiian Airlines: I joined Hawaiian in 2005 and at that point Hawaiian and Aloha had competed for something close to 60 years. And there were a couple of other airlines that appeared at various points, but it was largely Hawaiian and Aloha and similarly-sized. We have since seen Aloha shut down which was in the early part of 2008; oil prices were accelerating to record levels. We didn’t realize it at the beginning at 2008 but we were on the verge of what hopefully will be the biggest recession of any of our lifetimes. So, obviously a different time for the business.

Aloha shut down, since then we’ve expanded to serve the needs of the market. Before then we had 11 717s. We have 20 717s in our fleet today. At various points we had go! that was already competing in the market. At that point we had Mokulele which went from flying nine seat Cessna Caravans to Embraer 175s that were surplus from airlines that had run into difficulty. Subsequently Mokulele, through various ownership and control changes has, reverted back to flying Cessna Caravans. Island Air, as you mentioned, had been operating for several decades mainly with turboprops flying to smaller islands and expanded a couple of years ago. So there’s been different players coming in and out. Certainly Southwest is the largest airline to take a run at competing in the neighbor island market.

Cranky: I guess with Southwest in the market, the biggest difference compared to Hawaiian is frequency. Other than that you have the loyalty program…. It’s not necessarily Southwest-specific, but how do you adjust the business when you get new competition in these markets?

Peter: Yeah, I mean the airline industry is always competitive, so we certainly… Even if you’re operating for a period of time without a competitor on a particular route, those of us who have been around long enough know that there’s a competitor right around the corner. So we should always be thinking of that. I think one of the ways to think about it on the neighbor islands is thinking about who is on the airplane and what goes into their choice about who they travel with. And there is a real mixture of people on these airplanes.

It’s really unique because we are a chain of islands with no surface transportation options, so people travel on these 200 to 250 mile trips for a variety of reasons that if you have a mainland North America mindset you would think about those as being “well, if I was traveling for that purpose I would I would get in the car and I would drive it.” And no one’s doing that between between here and Maui.

Cranky: Not successfully

Peter: laughs Yeah, it tends to stall…

Cranky: I noticed the exchange on the earnings call about adding capacity for the state paddling championships. For things like that… you have to get there, [so Hawaiian’s capacity advantage makes a difference].

Peter: And that’s one I happen to have a certain passion around, because my kids at various points over the last decade or so have competed in that. So I’ve been on those airplanes on Saturday morning and Saturday night when it’s in Maui or Hilo. But yeah we have that, we have the Merrie Monarch Festival which is the the world’s most prestigious hula festival. For four or five days in April every year our capacity to Hilo doubles, taking the halau who are competing, taking people who are going to watch and be a part of that. So we have those sorts of things.

We have people who travel regularly for business and when you think of business travel between the islands…. If your sort of paradigm around what a business traveler is is someone with a suit jacket and a briefcase that’s not necessarily what we mean. Business travel can be construction workers who are working on a job and checking a toolbox in the morning and commuting back and forth because they’re working on a job on one of the neighbor islands. Business travel for us — and you know when we think about our corporate program — could be the hospitals in the state that are transporting passengers for services that are provided here in O’ahu. So having the frequency that allows flexibility for those regular heavy frequency travelers to have choices of when they travel is valuable.

We have people on our airplanes who are connecting from one of our flights from the mainland or internationally and they are looking for convenient connection options at the times that correspond to when their long haul flights arrive. We have people who are connecting from other airlines on an interline or codeshare basis. And so we carry about 6 million passengers a year. They’re coming from various different sources and it’s thinking about… what do we have in place to be competitive for each one of those guests?

Cranky: I went to Lana’i last week and I was talking to the people that live there. They have ‘Ohana service. They don’t have Southwest service, obviously. But even there they’re saying “oh man, Southwest, it’s great.” They brought these cheap fares to other islands; it doesn’t even impact them. But they’re still talking about this. Southwest came in with some really low fares to start. I assume that will increase over time as otherwise probably doesn’t make much sense for them to be flying these routes. How do you try and influence the narrative when people start talking like that?

I remember that happened with go! as well. And then people realized go! was running a horrible operation and wasn’t getting anyone there and instantly turned on them. I don’t imagine you’re going to see that type of thing with Southwest. So how do you influence the narrative for just maybe not the business traveler but the regular travelers just looking to go cheap?

Peter: Everyone loves a bargain. I’m a bargain shopper too. And so I like to be able to purchase the things that I appreciate at the lowest price possible, and I certainly understand that people think that way when it comes to air travel. What I do know is that, look, we’ve got a very competitive cost structure. We’ve done analysis that convinces us that we can supply capacity in the neighbor islands at a lower cost than Southwest can today. You will hear different discussion of that if you ask Southwest I’m sure, but that’s what what our analysis tells us. So we know we can be cost competitive.

We’ve got to provide good value to people. And we’ve got to provide quality service at a reasonable price. We will be competitive in our pricing. And I think when you’re the big carrier in any geography — and here in Honolulu and Hawai’i for neighbor island traffic we’re the big carrier — there’s always a little bit of this love-hate relationship that happens. My former employer was one of the the big network carriers; our headquarters was in a big hub city. People appreciated all the service they got from having that big hub carrier there.

Cranky: They just want it at half the price…

Peter: …there was a sense some time of feeling captive to that carrier. And and I think we’ve got to manage through that. I think it is helpful to remind people we are one of the largest employers here as well. I said earlier over 90 percent of our 7.300 employees are here in Hawai’i. Often people appreciate their friends and what they do. And I think that is part of reminding people that we’re part of the community; we have been an integral part of this community for 90 years. We expect to be for a very long time. But I know we have to compete. We don’t have an entitlement, just because we are based here, to the patronage of any guest. We’ve got to compete for everyone. We’ve got to deliver great service. We’ve got to deliver great value and we’ll earn business over time. Nothing is going to be given to us.

Cranky: It has to be more about playing the long game, right? Because when you see someone coming in with these really low fares it’s easy for someone in the community to say “oh great, finally we have competition and the fares are cheap now.” I believe you’ve been at least matching in time categories to make sure you’re competitive, but it’s hard to explain to people well that this isn’t really sustainable. We can’t have $39 fares on every flight on every seat or anything like that. So it’s just a long game?

Peter: A lot of times people are nostalgic about low fares from past times. People in Hawai’i remember when you could buy a coupon book with $25 tickets and you walk up at any time with a $25 coupon. In one sense that sounds great. It’s not particularly sustainable. Hawaiian was in bankruptcy twice in its 90-year history and we don’t intend to be in bankruptcy again. Aloha was in bankruptcy twice in its history and shut down in 2008. And so you know providing $25 walk up fares year-round is not sustainable.

Cranky: Yeah. So, people, take advantage while you can. Enjoy it.

Cranky: I’m curious about baggage. Southwest always loves to talk about the two bags free. Whether that’s actually free or not is always the debate, right? I mean, it’s part of the fare. On Hawaiian, if I remember right, you get one bag free if you have the credit card or elite status?

Peter: Yeah

Cranky: But otherwise there’s a fee for checking bags. So this is a market that I assume…

Peter: …we charge a slightly lower fee for first and second bags on our neighbor island flights.

Cranky: Oh right, as opposed to long-haul. But is this something that you talk about to travelers that are here? Maybe this is a little bit less as the neighbor islands become more developed, but I have heard plenty of stories of people flying to Costco and bringing back the trunk of something. So I imagine you get a fair number of people who want to check bags that are doing these types of things. Do you have any concern or do you see any impact when you’re going against an airline that includes the bag in the fare?

Peter: You know the propensity for people to check bags on neighbor island flights is considerably lower than it is on long-haul flights. Long-haul flights are often traveling for a week at a time and they’re more likely to check a bag…. There are some people who do check bags on neighbor island. There’s not as much of what you were just describing of people traveling for shopping purposes. You might see some of that on places like Moloka’i and Lana’i where there isn’t as much infrastructure, but there’s a Costco in Lihu’e now. So some of that has evolved. Certainly for Southwest that’s been a differentiating message for them since they were the last major carrier to provide the first and second bag included in the price of the ticket. And we fully expected that would be something that would be part of their promotional messaging when they started flying to neighbor islands.

Cranky: But you haven’t seen anything that would cause you to change your strategy at this point?

Peter: At this point we’re comfortable with how we’re positioned. There are some things we provide included with our ticket that are not included in the Southwest ticket like an advance seat assignment on the airplane. There are some things they provide, and we think overall we’ve got a very competitive product.

See the mainland discussion here. The international discussion will follow tomorrow.

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32 comments on “Hawaiian Deals With Its First Real Interisland Competition in a Decade (Across the Aisle)

  1. It is not a surprise that WN is going into Hawaii with a vengeance. They need to fly more longhaul flights to help push their unit costs down and have generally not done well in opening ethnic markets in Latin America and the Caribbean, but do have success in markets that are heavily US originating tourism.

    WN has also not done well in other airline hubs, leaving a lot of its buildup over the past 5 years in legacy carrier hubs at risk. EWR was just the first casualty but their presence in ATL continues to shrink as it does in other legacy carrier hubs, esp. in single airport cities where it has to compete directly with the legacy carrier.

    That makes Hawaii a natural place to expand – heavily leisure and also with a large presence by non-US3 airlines. Fares have crept high on intra-island service and WN still has the ability to stimulate traffic w/ low fares. HA and AS are much easier for WN to push on than the big 3.

    AS is perhaps as vulnerable as HA and perhaps more so. AS doesn’t have the intra-island service but WN and AS have directly competed in a number of markets in the west and WN’s size alone gives it the ability to win a war of attrition in the mainland to Hawaii market; WN is choosing to focus on secondary cities which is where AS has a disproportionately large presence.

    One of the big determinants of how well WN and HA fare in competition will be on-time. HA’s on-time is usually at the top of the industry but a deeper look at DOT statistics show that HA’s mainland service runs lower on-time than many of its competitors. The sheer number of intra-island flights pushes up its system on-time numbers. AS also does not do near as well to Hawaii as its system numbers. DL is at the top of the list of mainland to Hawaii on-time while UA isn’t far behind. WN has done fairly well in its first 3 months (released by the DOT) and also does well with on-time on its intra-island service. In a shuttle environment, on-time matters.

    WN is bound to take traffic from HA as well as stimulate new traffic and will also push down fares, esp. intra-island. WN’s unit costs on 737-800s and MAXs (when they return) will be much lower than HA on 717s. There is no quick structural fix for that for HA which will have to continue to make changes or it will cede significant shares of its hometown market to WN. AS is more vulnerable to WN’s growth than the big 3.

      1. E195-E2 (slight down-gauge) or the A220-300 (up-gauge) seem like reasonable fits from a capacity and efficiency perspective, but it may be reasonable to let other airlines be the “guinea pigs” to shake out any problems before making a big investment in either program.

        1. It’s not clear to me if the E195-E2 would be able to take off from LIH in all expected conditions with a full load, though.

          1. The A220 is too heavy for Hawaiian’s inter-island operations. Heck, I think even the E2 might be too. Remember, intra-Hawaii travel has zero cruise time, so those GTF engines don’t do much in terms of efficiency. Most of these aircraft will spend their time climbing and descending, so weight is the key here. The lighter the aircraft, the less fuel it’ll burn during takeoff, and thus, the more efficient it’ll be during inter-island flying.

            1. Not only do those GTFs not really help much, but they also can’t do quick turns very well. They need more time in between flights. It’s not clear that there will be an ideal solution here.

            2. Yup. The best solution I see right now is the E195. But, I’m not sure how the CF34s will handle that type of flying. I wonder if it would be technically and financially feasible to modify an existing aircraft to utilize the BR700? RR still makes the engines.

            3. The original E195 (or E190) wouldn’t be able to operate with a full load at LIH – runway is too short. That’s probably a deal-breaker for HA.

              If you want a plane that:
              – Is a jet
              – Is currently in production
              – Is lighter than an A220
              – Can take off from LIH
              – Doesn’t use GTF engines,

              then I think your only option is… The CRJ900 (or CRJ700). Yuck. I can understand why they’re sticking with their 717s as long as they can.

              Ultimately I think they will have to bite the bullet and buy jets with GTF engines, because it doesn’t seem like any manufacturer has anything in their roadmap that would meet their needs of 1. Efficient short hops and 2. High performance for takeoffs from LIH.

              Turboprops like the Dash 8 Q400 would also be an option, but probably not a very attractive one. It would be a significant down-gauge, and passenger prefer jets. If they went this route they would probably just buy a couple passenger ATR 72s for Ohana (who already fly the cargo version), use those for LIH, and use a small jet for the other airports which have longer runways.

            4. > I wonder if it would be technically and financially feasible to modify an existing aircraft to utilize the BR700? RR still makes the engines.

              Unless there would be other (much bigger) customers, there’s no way this would be worth the certification expense.

            5. Excellent points! And, yeah, any CRJ is terrible. In the immediate future, Hawaiian will likely pick-up lower cycle 717s from Delta as they add the A220 to their fleet, or maybe even from Volotea. The irony in Hawaiian acquiring Delta’s 717s is, if I recall correctly, that they lease them from Southwest?

  2. Last year when I was taking a rental car shuttle back to LAX, I just happened to be in the back with a bunch of Hawaiians and every one of them said they couldn’t wait for Southwest to arrive and they took a dim view of their home state carrier and its high prices. I was a little surprised that they’d be so thrilled with a “Haole airline” coming in and setting up shop on their turf but I guess in the end it’s always about the dollars and cents…

  3. I think Southwest could make a big dent into their inter-island business. Their free baggage allotment is useful for us tourists that want to go from on island to another. HA charges $60 or $70 for two bags on a short island hop, and WN won’t. That’s a huge savings. Also, seat assignments are meaningless on flights that are less than 30 minutes in the air.

    While I would never fly WN from the mainland to Hawai’i, I would consider them for flying around Hawai’i.

  4. As much as I like HA, they are in a lot of trouble here. It’s great that they are so optimistic about mainland and intra-island flying, but things are definitely trending in the wrong direction. WN is not even half way through in their HI expansion and HA is already close to the bottom in margins. The second round of HI expansion to got announced by WN. After that, there will be more capacity added out of SAN and probably LAX/LAS/PHX down the road. I don’t see how HA stays in the black 18 months from now. It’s a giant disaster ahead.

  5. It’s interesting to hear (read) Ingram’s perspective on all this. And, frankly, I think he’s simply trying to keep his cool. Yes, we in Hawaii understand that Southwest’s intro fares are simply that, intro fares. But, 6 months into their service here, we’re still seeing $49-$59 one-way fares with return fares averaging around $107 if you book out far enough. That’s significantly lower than Hawaiian’s fares of, usually, about $169 roundtrip. Hawaiian does have some lower fares, though, coming in at $98 roundtrip, but you still have to pay for your first checked bag. That’ll easily add on $30 for a single HawaiianMiles member on a roundtrip itinerary.

    Of course, there’s also the issue of captive pricing. Hawaiian charges exorbitant fares on routes it doesn’t currently have competition, especially Honolulu – Hilo. This is true of other routes too like Honolulu – Las Vegas, etc. So, having a competitor, especially one as strong as Southwest, is welcomed by virtually everyone in Hawaii.

    Regarding on-time performance, Hawaiian is a strong performer in the U.S. market, but they’ve been having serious operational issues lately. And, while I typically experience delays with them, employees tell me operations are currently a mess. Aircraft maintenance seems to be the primary culprit, as those aging 717 (that I dearly love) are becoming far less reliable. Plus, there’s also the labor issue that looks like it might begin to get ugly. Hawaiian is in negotiations with their FAs over a new contract (they’ve been without one for over two years) and the last offer was a net CUT in compensation.

    Oh, and on loyalty programs, if you can get Southwest’s lowest-available (non-introductory special) cash fare, you can easily redeem 7,000 or less Rapid Rewards points for an inter-island flight, roundtrip. Hawaiian charges, at minimum, 14,500.

    I get it, Southwest isn’t the low-cost savior many people believe them to be. And, yeah, I’ve seen fares creep up to be as high or higher than Hawaiian. But having a competitor, and one with pockets as deep as Southwest, is a good thing for the people of Hawaii. Especially since they’re world better than Mesa operationally and comfort-wise (I hate those CRJ 200s…).

    1. Yeah, the “business as usual, nothing to worry about” tone is unconvincing, as is the idea that there’s nothing useful HA can do to address locals’ love-hate relationship with them because that’s normal for dominant carriers in a market. Southwest’s entry into the interisland market is a major competitive threat. The fact that HA and AQ competed semi-successfully for decades doesn’t say anything very useful about what Southwest’s entry means for HA in the market as it exists today. It would be nice to see evidence that HA is thinking seriously about how to earn locals’ business with the changing competitive dynamics, but apparently Ingram is satisfied that they have nothing new to learn. We’ll see how that works over the next couple of years.

      (And not to be peevish toward a couple of earlier commenters — OK, a little bit — but we’re talking about “interisland” flights not “intra-island.” There is no scheduled service ITO-KOA, OGG-JHM, etc.)

      1. Right? Even AQ cannot compare to the type of competitor WN is. The Airline had an increase in net income last quarter, whereas Hawaiian did not. And this is despite the 737 MAX issue and associated flight cancelations. Plus, come one, comparing AQ with its two dozen jets to a carrier with over 750? Yeah right.

        I have little faith Ingram will do what’s necessary. Thus far, his performance has been far from impressive. Heck, I’ve heard employees say they wish Dunkerley were still at the helm. It’s disheartening to see Hawaiian’s further decline, and as a major locally-based company, I wish them all the best. But, I’m not holding my breath. And I will continue to take my business elsehwere unless Hawaiin makes major improvements.

        1. I don’t understand the doomsday thing here. There should be room for two competitors in the state of Hawai’i. Southwest is going to create competition for Hawaiian, but I can’t imagine how it would put Hawaiian out of business. As of now, Southwest doesn’t have designs on huge growth in the state. That doesn’t mean it can’t change in the future, but at this point, it will hope it can raise its fares enough to make some good money. But there will be room for two.

          1. Not really meant to be doomsday thinking here, just lack of strategic vision from Hawaiian. And that’s Hawaiian’s own employees telling me this. The Airline is, admittedly, mired with more than a few issues at the moment, none of which will be easy or cheap to fix.

            That said, Southwest’s service in Hawaii is in its infancy. Next year we see them expand their reach to all major islands. But what happens when the add more West Coast gateways in the future? All those aircraft aren’t going to sit on the ground between flights. I’m sure they’ll boost frequencies considerably between the islands when the build out their Hawaii – West Coast network. Remember, they intend to serve Hawaii from far more cities in California than they’ve commented on so far. And, they’re also considering service from Las Vegas and Phoenix. If they’re willing to take more risks, we could see PNW service too. Who knows.

            1. Agree again. I don’t expect HA to go out of business. But the question about “room for two competitors” is “to do what?” Right now, HA’s interisland operation is built to serve 90%+ of the interisland demand. I may be wrong, but it looks to me like they’ve been a fairly responsible monopolist in their pricing. If that’s correct, there’s probably some room for two carriers to make money flying somewhat more people at somewhat lower prices, but beyond that, more butts in Southwest seats has to mean fewer butts in HA seats. What does HA do then? Fly the same schedule with fewer seats sold? Cut back the schedule? How far can they cut the schedule before they give up one of their major competitive advantages?

              Like Island Miler, I want HA to be successful. I’m disappointed that they don’t compete harder for my business, and the business of people like me, on routes where I have a choice of carriers, and I worry that doesn’t bode well for their maintaining their current market position long term.

            2. Wright – Well that is a good question. Hawaiian had huge growth when Aloha went bust, so it grew quickly. But I don’t think there’s a ton of stimulation opportunity, so new seats from Southwest have to take market share from Hawaiian. Maybe the new normal is a smaller interisland schedule. Not sure. On the other hand, maybe the most profitable thing to do is to keep the schedule as is and just make less profit than before.

          2. WN is not about to say that it has the intention of being the dominant airline in a market that it is entering but they are either the dominant carrier in markets they serve or they shrink back from #2 or 3 fairly quickly.

            WN’s business model is built on being the dominant carrier. Let’s not pretend that their goal is anything else whether they say that or not.

            HA and AS – both much smaller carriers than WN – could be collateral damage in WN’s Hawaii buildup

            And, yes, to the post above, WN is providing competition in the intrastate or interisland, not intra island market.

            1. Choosing to serve Hilo fairly early in the buildup does suggest something a bit more than cherry-picking.

      2. I can think of one market with intra-island flights: MKK-LUP, offered by both Mokulele and Makani Kai.

        I also once did ITO-KOA on a Hawaiian DC-9, connecting to a DC-10 to LAX. The flight continued to HNL; there weren’t many passengers for the ITO-KOA segment and I was the only one that got off in KOA.

  6. A few things don’t jive for me here:

    How can WN have the equipment advantage for both the interisland and for one of the longest overwater runs in the world without an enroute diversion airport? Doesn’t make sense. The 738’s and their engines are not the perfect interisland high-cycle high humidity low weight plane, otherwise HA would have been on that train a long time ago.

    I think HA’s decision on 717 replacement will be the defining decision. And I’m going to suggest a different strategy – instead of 20 717’s, (if the new GTR engines arent made for the quick turn) why not run 30 or 40 ATR 72’s – increase frequency and lower HA’s unit costs to rock bottom. The flights are so short, there’s hardly an appreciable difference in time – and the new ATR’s are no louder sitting over the wing than the 717. Flew on an EI ATR recently and I was really surprised at how comfortable they were. the plane is tailor made for island hopping.

      1. Because locals have largely rejected turboprop aircraft. That’s why HA and AQ were all jet, and why Mahalo, Island Air, etc. didn’t survive. Even though it makes the most economic and strategic sense, it’ll be hard to convince the customer base to change.

    1. WN doesn’t have an equipment advantage for interisland flying. The 717 is better suited for it than the 737NG or MAX. For WN’s current operation the 737NG is workable because they schedule longer turn times and the planes only fly in Hawaii for a day or to before heading back to the mainland. The problems really come when you’re trying to use the planes on high frequency short hops day after day.

    2. Steve – The way Southwest runs the airplanes now, they come in, fly around the islands for a couple days, and then fly back to the mainland. That mix keeps any one aircraft from taking the beating that regular interisland flying delivers. Props are a great idea in theory, but it has never worked, as others have said. There is just this huge passenger preference issue within the islands. In theory, it should absolutely work. The ATR is slow but cheap and you don’t need speed on these short routes. The Q400 is faster but more pricey. Either way, people just will book away.

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