Alaska and Hawaiian Merge: A Combination I’ve Dreamed of For Years

Alaska Airlines, Hawaiian, Mergers/Finance

Before Courtney Miller and I started Cranky Network Weekly, we batted around a few ideas including an analysis company we were calling Contrairy. We never went forward with the plan, but back in October 2019 we did put together a sample analysis called “Strategic Options for Alaska Airlines: Buy or Get Bought – We Suggest Buy.”

In that report, we argued against the conventional wisdom that Alaska should merge with JetBlue. Instead, we both drooled over a combined Alaska and Hawaiian. That is now happening, with Alaska buying Hawaiian for just under $2 billion.

I was skeptical about the Alaska/Virgin America merger, especially considering the price tag. But Alaska and Hawaiian? I love this so much.

What we wrote in the report stands today, but there is even… *cough*… more to love. I’ll have a second post tomorrow with more current thoughts. But for today, you can read through the report below (or click here) and see just what it is we liked — and still like — about this plan.

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39 comments on “Alaska and Hawaiian Merge: A Combination I’ve Dreamed of For Years

  1. Can’t wait to see tomorrow’s post with your updated analysis/take on this. Perhaps even more so than other major news events, I have a feeling that this topic will be “the gift the keeps on giving” for readers of this blog.

    Off topic, but I hope I wasn’t the only avgeek who saw the Pacific route maps on page 16 of your 2019 analysis and went to the Great Circle Mapper to map out ANC-AKL via HNL. Sure, there may be not be much (or any) demand for trips from Alaska to New Zealand, and I imagine the same routing is available on other airlines, but the mere possibility for a mid-Pacific north/south routing from Alaska to Hawai’i to New Zealand on Alaska/Hawaiian makes me smile, especially considering the amazing indigenous cultures in each locale. Add in some additional overnight stays and local flights in each area, and that could make for an awesome extended & varied trip… Wish I had at the time & money to book that trip myself.

  2. Interesting presentation. Now let’s go one step further… if HA & AS merge at the same time as B6 & NK, could we still see a B6/ AS merger at some future date? The ULCC ‘s may have a tough go at it going forward as all the bottom feeding has more or less been wiped out with only G4 & F9 left standing. And who knows those two maybe forced to merge just to survive.

    What do you say Cranky!

    1. B6 and AA will merge, eventually. The financials aren’t there for AA to pull it off, but some sort of structured deal will happen and B6 will merge into AA.

      1. I can’t see the DOJ ever signing off on a B6/AA merger, not unless they divested so much of the NYC and BOS operations to make it not worth AA’s time or effort.

        The only exception would be if B6 financially weakened to the point where it’d be a choice of allowing the merger or B6 failing.

    2. SEAN – I say it’s entirely at the whim of the federal government and the courts. That seems like something they might have more success challenging. The bigger they get, the angrier DOJ gets.

      1. I could see B6 without NK merging with AS/HA without too much serious Fed blowback – adding B6 to the mix doesn’t add a lot of overlap. The main reason DOJ is so adamant about the B6/NK merger (other than just general bigness) is that it removes a ULCC.

        But an eventual combination of what’s now AS/HA/B6/NK? This is where I have to agree with Brett. DOJ is opposed to major size increases as inherently anti-consumer regardless of the underlying logic.

        But administrations and antitrust philosophy change, so who knows where this could sit a few election cycles from now?

    1. I do. Can’t stand Airbuses, especially the random locations of their flush buttons in the lavs.

      1. Airbus’ distinguishing factors lies in its wider cabins. This additional room particularly proves advantageous where every inch matters. And Airbus planes often sport larger windows, allowing natural light to flood the cabin versus a design from 1964.

  3. When I saw the news yesterday, I pictured Cranky half way through whatever article he was working on for Monday and created a new one to talk about this but needing more time to dig deeper.

    At this point, Alaska really need to scrap that “Proudly All Boeing” off. It took years to finally get rid off those VX Airbus in September (?) and now they are getting more Airbus though this… may be they just like the game of getting rid of Airbus.

    Without knowing better, I can see many possibilities this combined new airline can do. They can tap into the transpcific market (Northen Pacific Airways, I mean New Pacific Airines anyone?). They can consolidate some Hawai’i flying and shift capactiy to markets in mainland. Alaska can potentially (but very unlikly) use some of the A330s to up their game in transcon premium routes with flat beds.

    Looking forward to deeper articles tomorrow.

    Lastly, I think Alaska really missed something when they put “ Preserving the Hawaiian Airlines brand” as the first highlight in the announcement email, yet failed to insert a single Aloha in that email…

    1. Keeping separate brands, as they’ve said they’ll do, helps that: Alaska Airlines can technically remain all Boeing even if the parent company isn’t. (In fact, the parent company already isn’t all Boeing thanks to Horizon’s Embraers.) And I get it in a lot of ways, given the unique natures of the namesake states (even if AK is only a minority of AS’s flying these days, albeit an important one).

      1. Except they’ve already said the mainline airline will be merged on a single certificate. So that certificate will have Boeings and Airbuses on it once again.

        1. Sure, but “proudly all Boeing” is just marketing anyway. They can stick “proudly all Boeing” on the Alaska-painted planes, at least unless/until the Hawaiian brand eventually does go away. Or maybe they’ll be like LATAM and become Hawaiialaskan.

  4. Interesting read. Any guesses how the decision to keep separate brands will affect utilization opportunities? Presumably HA metal flying routes within the Lower 48 makes less sense if they retain the HA brand? Ditto AS 737s flying interisland to improve utilization and/or schedules.

    1. Alex – I don’t think they even know at this point. But yes, utilization should be able to climb. The ability to flow airplanes through both networks will be a big win. This doesn’t mean doubling utilization, but it does mean squeezing more out of the fleet.

    2. I don’t know…Alaska flies from LAX to NAS nonstop and that has nothing to do with the state of Alaska. And Southwest flies everywhere, including Maine which sure isn’t in the southwest of anything.

      1. The Alaska brand has been beyond Alaska for a long time now. I assume if they’re keeping two brands that Alaska would be the primary continental North America brand (which it already is) and Hawaiian would be the Hawaii-focused brand. Given that both Hawaii and Alaska (the states) are (justifiably) wary of outsider corporations taking over their local brands. This doesn’t seem that different to me than AF/KLM or BA/IB (at least pre-Brexit!), where there are strong local reasons to keep the geographically-identified brand.

        1. Agreed in the short term.

          That said, brands and local identities tend to get muddied with time, especially after mergers like this. While the locals (and especially local officials) in Alaska and Hawai’i won’t like it, I suspect that 5-10 years (and likely 1 or 2 additional attempted or successful mergers with the combined Alaskan/Hawaiian airline) after the merger, there won’t be a ton of the regional/state identity left, beyond the liveries (and maybe only special/heritage liveries at that) and maybe a few special foods/drinks (POG, anyone?) on key flights.

          Things really trend towards sameness when two brands/entities are run by the same parent company, especially when an industry downturn hits and management starts pushing for efficiencies behind the scenes.

  5. I can’t help but think that any decision to move planes from Hawaii-Asia to Seattle-Asia will erode margins rather than improve them.

  6. I can’t imagine Alaska making any kind of *actual* commitments to keep Hawaiian’s route structure and fleet in place, long-term, because Alaska is afraid of its own shadow and will view the Airbuses and the long-haul flying as threats to margins.

    I know they have to say the things they’re saying in this kind of regulatory/anti-trust environment, but let’s be honest about what Alaska is and what it is not: they would rather shut the airline down than manage long-haul international flying on wide bodies. They want to be a high-margin company with a high-margin business model, and they’re not going to be the first airline in America to figure out how to sustainably do long-haul, wide-body flying at high margins.

    I think Alaska will do what they always do: retrench to Fortress Seattle and replace each wide body with two 737 MAXs. This is another example of “eliminating a competitor” while, at the same time, reducing cash reserves so you’re less attractive to hostile takeovers. Alaska *loves* patterns. This is a pattern. Honestly, I think most people are falling for “what might be” rather than “what is most likely.” Alaska is not particularly innovative in terms of business model. This isn’t going to change.

  7. It’s getting into the tactical, I do agree with management that keeping two brands makes sense here.

    Honestly, if they’re serious about it they’d change the holding company name and the mainline operating name to something else. Either Alaska-Hawaiian Air Group/Airlines.

    Or something completely new, like Mendocino Airlines. (Mendocino being a geographic feature between HA/WA/AK/OR/CA in The Pacific..)

    That just has the problem if additional paint for every plane, and an additional announcement onboard.

    What they shouldn’t do is what UA did when their name was United Continental group, without any intention of keeping the Continental name..

  8. This statement in your analysis succinctly sums up the why this makes all the sense in the world.

    “Imagine a flight from San Diego at 11:30pm that arrives Chicago at 5:30am. It could turn at 6:30am and get back to San Diego at 8:45am in time for the current 10:25am departure back to Honolulu. Chicago, we note, is a market Alaska currently serves from San Diego only as a codeshare through its quickly-disappearing partner American.”

    Moving to 17 or 18 hours of A/C utilization from 12 hours will greatly improve their unit economics.

    1. Alaska’s decision to fly low utilization is a planning decision, not due to a lack of options. They could fly higher utilization. But no airline touches 17-18 hours of utilization. It’s completely impossible.

      1. 17 to 18 hours of utilization fleet wide on average is a horrible idea and impossible.

        But what about a few frames here and there within a 24 hour period?

        I’m pretty sure I’ve tracked planes that have had that much utilization at times.

  9. The airline that loves being single fleet just bought four more types, one of which needs prompt replacing with a fifth. There’s going to be years of popcorn from this one. I wonder if they’ll ever fold in QX to get access to Embraers unencumbered by scope.

  10. Hopefully you’re also going to evaluate the potential Southwest response to this Merger. WN made a huge investment in its Hawaii operations. I don’t see WN idly watching this merger happening. While WN backed off the PNW advancements since the MorrisAir days it still fiercely battled AS in California to remain dominant. Now in Hawaii WN is fighting Hawaiian fiercely for the inter island market.
    With 145 ETOPS aircraft at it disposal with another hundred or So MAX7 ETOPS coming in 2024/25.
    I think WN gonna double down on Hawaii.
    It temporarily reduced L48 flying from at the request of the Hawaii government to lessen the impact on the island following the reopening post Covid due to lack of hotel and infrastructure staffing. I think a huge battle for Hawaii coming from WN,UA and DL with this announcement.

    1. This is a great comment. Overall this should be a bonanza for consumers in the short run. Flying Southwest metal to Hawaii (BYOB entertainment, no seat based power as of today) leaves something to be desired. Can Hawaiian/Alaskan create market separation?

    2. Southwest can’t really double down on HI more than it has already. They’re already flying empty airplanes around burning millions of $$ inter-island.

    3. Runway30 – I don’t expect a huge response from Southwest. They may keep adding frequencies, but there’s only so much they can do with the fleet they have. They’ll try to grow it either way, but I don’t know that this merger changes their strategy.

  11. Very interesting. I wonder if this will give Amazon Air another opportunity to pick up its own certificate? I’m not sure how many A330’s they operate for Amazon today, but it was forecast to be 10 initially.
    Lots to contemplate – looking forward to the analysis tomorrow!

    1. ejwpj – I think they’re only flying 1 A330-300 right now for Amazon, but the plan is still to ramp up to 10.

  12. I’ve long felt that this would be a good combination. It should produce a very strong regional carrier centered on the west coast. I’m thinking Hawaiian is a bit too small and specialized to compete long term in the highly consolidated airline sector with the extensive beyond Hawaii networks that larger carriers can bring to bear. This piece was written before Alaska joined oneworld, so tomorrow’s piece should be interesting from that perspective.

  13. Well done on thinking through and analyzing AS-HA years in advance and sharing your analysis w/ readers.

    While we all want to ask “what now” the bigger question might be “how did AS and HA get to this point” in trying to understand what they hope to get out of the merger.
    For AS, they have a seasonal revenue model because of the seasonal nature of Pacific Northwest and Alaska tourism. While there might have been enough business travel on a year round basis to offset that and they do fly to some warm spots, their revenue model post covid is likely not sustainable. Add in that the PNW is seeing significant loss of business for political and economic reasons and AS had to be reinvented.
    Their multi-codeshare partner model, just like B6’, doesn’t deliver the benefits that online international connections for the big 3 or what JVs can do. (similar for HA interisland). They serve as regional carriers w/o the benefits.
    The big 3 are seeing strong international growth which will continue and they are investing in it but AS doesn’t participate in much of the international market and HA has a very small part of it.
    For HA, the covid lockdowns in Hawaii and across the Pacific Rim were devastating. Add in that WN had just entered Hawaii including the interisland markets before covid and HA was dealt a blow that they probably could not have overcome. HA’s international flyng is too heavily tied to Japan given that tourism to the US is heavily tied to the value of the Yen relative to the USD. HA has very little unique markets which means a host of larger airlines in Asia/Pacific and the US make life very difficult for them.

    There are a couple realities also. Mergers below the big legacy tier have not been terribly successful – niche carriers thrive based on their niches (and yes, AS and HA are technically legacies but both have long been “niche”)
    At least 3 of the big 4 have strong reasons to do all they can to make sure this merger does not succeed. AA is the only one that could potentially benefit and that is because of their west coast weakness and willingness to outsource more of their flying than DL or UA which minimizes the benefit for AS/HA relative to DL, UA and WN.

    AS is likely reacting to a threat to its future – just as it did with Virgin America while HA is financially at the end of its ropes.

    1. I think you’re misunderstanding Alaska’s business model if you think it’s that highly dependent on summer tourism to Alaska. AS is one of the biggest carriers to Hawaii and Mexico, smoothing the seasonality there. AS benefited hugely from SEA and SJC’s growth over the past decade – growth which is now slowing – but there isn’t infrastructure available to grow SEA much further anyways domestically. Gaining HA’s widebody fleet is a fast-track way to start flying international from SEA and competing with Delta in that manner (who knows if this will be profitable or not for AS or if they even care if they can stick it to DL). Especially compared to B6/NK (and AS/VX) before, this transaction is for Pennies on the dollar. Probably won’t revolutionize the industry but it’s a savvy investment and an opportunity to buy-low.

      1. I do understand how ALK allocates their resources and they do disclose their revenue sources by N. American region, similar to what the global carriers do on a global basis.
        ALK’s revenues on a quarter to quarter basis show greater peak to off-peak differences in the post covid era than the global carriers report.
        There is potential to decrease the cyclicality of ALK’s revenues through an HA merger and access to more long-haul revenue markets.

        That is just one factor that needs to be considered for why ALK is taking on another merger less than five years after completely its last acquisition – which, admittedly, was costly was did not produce the outcome that was stated at the time of that transaction.

        I don’t think any of the second tier (in terms of size) are financially in a position to “stick it” to any of the big 4 esp. if it involves a merger for the smaller carrier.
        And as much as people want to believe that DL is losing money in SEA, they show no signs of walking away and they still are leading the industry in financial metrics on a system basis. Other airlines would love to be in a position to set up hubs in other carrier strongholds and still be in as strong of a position as Delta is.

        Alaska and Delta are both well-run and rational competitors. They have figured out how to co-exist better than alot of people give them credit for. They doesn’t mean both won’t step on each other’s toes but they will tiptoe more than stomp.

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