Yesterday I gave you my rationale for why I loved the Alaska/Hawaiian merger back in 2019. But it’s 2023, so something has changed, right? Also, there’s an actual deal on the table to evaluate. So today I’ll get into more specifics about why I like this particular marriage today, not just in 2019.
Let’s start with the deal specifics.
- Alaska will pay $18 a share — or about $1 billion — which is about 4x what Hawaiian was trading for before the deal was announced. That means Alaska will pony up about $1.9 billion in total for Hawaiian, including the $900 million in net debt it will take on.
- Alaska will be the surviving entity with headquarters remaining in Seattle.
- The Hawaiian brand will live on in tandem with the Alaska brand, but everything under the hood will be a single operating airline.
- Alaska has agreed to sign a 100-year deal to keep POG juice on all Hawaiian-branded flights. (Ok, that’s not true… wishful thinking.)
A Good Deal for Both Airlines
From a Hawaiian perspective, this is likely the best possible outcome coming out of a very difficult time for the airline. It started when Southwest entered Hawaiʻi in March 2019. Then, COVID was horribly painful even compared to other airlines thanks to the airline’s geographic footprint. The twin recent hit of Pratt & Whitney engine issues grounding chunks of the A321neo fleet along with the fires in Lāhainā decimating demand have just continued the streak of pain. The airline has debt piling up, and it is running out of cushion.
On top of this, Hawaiian is getting ready to induct a brand new fleet, the Boeing 787-9, which will add complexity and accelerate growth at the airline during a time when growth doesnʻt really make sense. So, for Hawaiian to find a sugar daddy that will buy the airline at a level the stock hasnʻt seen for over a year has to be a welcome lifeline, if not a bittersweet one.
So why is Alaska willing to pay this? Itʻs really not all that much in the scheme of things. Alaska included these two slides in its investor presentation.
Alaska has the cash available, so it can make this happen with minimal impact to the balance sheet. That may be a notable premium over what Hawaiian was trading for, but if Alaska had made that bid two years ago it would have been laughed at for offering something less than the share price at that time. Hawaiianʻs stock has been so depressed that it created a real opportunity for both airlines to notch a win.
A Double Brand Strategy to Fit a Unique Market
Whatʻs probably the most unique thing about this whole deal is that both the Alaska and Hawaiian brands will survive. To be clear, this will be a single airline behind the scenes. There will be one operating certificate, and all employees in each workgroup will be integrated into a single workgroup. Presumably a current Alaska pilot could end up flying you from Honolulu to Līhuʻe while a current Hawaiian pilot could get you from Anchorage to Kotzebue.
We’ve seen separate brands with international groups like Air France-KLM, but those are also separate airlines and operating certificates across international borders. The only thing I can think of like this is when Southern Airways Express bought Mokulele and kept the Mokulele brand flying in Hawaiʻi. That, however, was easier because the networks of the two airlines didn’t touch. This is more complicated, but Alaska clearly thinks it’s worth it. I tend to think it’s right.
What this shows is that Alaska understands something very unique that only it and Hawaiian share in the US. When you are an airline that represents a place thatʻs hugely dependent upon air travel as a lifeline, you take on a completely different standing. Alaska knows this from how it operates in Alaska, so it fully understands what this means to the people of Hawaiʻi.
Yes, the people of Alaska hate Alaska and the people of Hawaiʻi hate Hawaiian, but it’s THEIR airline to hate. They also love their airlines, or at the very least they rely on them. Keeping the Hawaiian brand in Hawaiʻi will help from the beginning to show that Alaska takes its responsibility there seriously. It’s a gesture, yes, but it’s a meaningful one.
The devil here is in the details. Will this be divided by fleet type? Will it be by network? Will the physical onboard product be the same across the fleet or will it vary? There are so many ways to skin this cat. I’ve listened to a couple of calls by the airlines on the merger announcement, and my best guess at this point is that they have no idea how they’ll handle this just yet. They know they need to keep the two brands, but the actual plan will unfold over time.
One thing is clear. This is a big deal for pleasing the local government. Keeping the name, preserving jobs, and maintaining service are the most important factors. Alaska knows this and isn’t going to mess it up. If there’s anything Alaska could do to ingratiate itself even further, it would be the find a way back into Molokai and Lānaʻi. The airline would be celebrated as a hero if it could pull that off. (And I should note… the Embraer 175 requires less landing distance than a 717. Just saying….)
Throw in a return of nonstops from Hilo to anywhere on the mainland and the airline could do no wrong. Those may not make economic sense, but that’s the price of doing business in a place like Hawaiʻi or Alaska. Sometimes it’s worth the investment in the state in order to protect the business.
Will the Feds Fight It?
Even if Alaska and Hawaiian can get the state on board, considering the track record of the US Department of Justice (DOJ) as of late, it’s a safe bet that the administration will try to block this merger. It hates all airline combinations, and it has not hesitated to challenge them. So how does this look from that perspective? Not too bad, but there are issues.
As of now, the airlines overlap on 12 routes:
But here’s the thing. Of those routes, only three have no other competition. Kahului to San Diego along with both Honolulu and Kahului to Portland (OR) are the only routes with no other airlines. Delta covers Seattle, United handles San Francisco, and Southwest handles the rest. (Ok, EVERY airline handles LA.)
The Southwest competition is really a key to the competitive dynamic right now. Compare this situation to what the story would have been 10 years ago in 2013. At that time, Alaska and Hawaiian overlapped on 11 routes, which isn’t much different.
Alaska left Oakland once Southwest arrived, and it and Hawaiian dominated most secondary markets on the West Coast. Of the overlap routes back then, only two — Honolulu to Los Angeles and San Diego — had other competition.
The reality is that in many of these markets, there isn’t room for three airlines. This will help create a stronger airline to compete with all those others on this myriad of routes. This is a similar rationale to that which American and JetBlue used in the Northeast Alliance, but the difference is that Hawaiian is losing money and may have trouble staying afloat on its own.
The other difference is that none of these markets are slot-controlled. They can’t divest slots or runway timings. Can they divest gates? I guess, but since the Mauka concourse opened in Honolulu, gate availability hasn’t been as much of a problem. It’s really just not difficult for another airline to enter any of these routes, if the demand was there.
I don’t know if DOJ will challenge this, but I’d expect it to happen if I were running these airlines.
The Fleet Conversation
People love talking about fleet. If airlines have the same fleet, it’s somehow a match made in heaven. If not, then it’s a terrible idea. As much as I love the memes about Alaska getting Airbuses again, I don’t worry too much about this. The combined airlines can always rationalize over time.
The most obvious question that needs to be resolved the soonest is what to do on interisland flying. Hawaiian says it can keep flying the 717s through the end of the decade, but a replacement is needed. As the investor presentation says, that airplane “could eventually be replaced by the 737.” Just imagine Alaska flying more 737s into the islands and rotating them in and out of interisland service, similar to what Southwest does today.
The 737s obviously will remain the backbone of the fleet, but will the Airbuses stay as well? They might stick around this time, unlike with Virgin America. It looks like the 737 MAX 10 which competes with the A321neo has about 100nm less range than a 737-900ER. Is that good enough to make it to Hawaiʻi? Iʻm honestly not sure. The A321neo is certainly more capable, but maybe it wonʻt be capable enough for Alaska to decide itʻs worth keeping.
The final decision is around widebodies. Hawaiian is flying 24 A330-200s today plus one A330-300 in operation flying packages for Amazon. (The A330-300 fleet will grow to 10 when fully built out for Amazon.) It also will be taking delivery of its first of 12 787-9s next month. Itʻs hard to know exactly how this will be rationalized, but that is likely to be a longer term question.