‘Southwest Effect’ could lower Hawaii airfares

Hawaiian Airlines chief downplays phenomenon in competitive market

Southwest Airlines announced earlier this month that it intends to enter the Hawaii market in 2018 and will be using the 737 MAX 8 aircraft, which it began flying this month. -- Southwest Airlines photo

Southwest Airlines’ announcement earlier this month that it plans to begin selling tickets for Hawaii flights in 2018 has air travelers and market analysts asking the same question: Will isle airfares fall with the entry of one of the nation’s largest domestic airlines into one of the country’s most competitive air travel markets?

The airline’s announcement refers to the “Southwest Effect” as “a lowering of fares and increase in passenger traffic” whenever it enters a market. A study published in August by the University of Virginia’s Darden Business School showed that, on average, one-way fares were $45 lower when Southwest served a market nonstop.

“The presence and magnitude of the Southwest Effect has endured through time,” the study’s abstract says. “Even today, when new markets have frequently been affected already by Southwest’s fares on connecting services, the Southwest Effect still shows, on average, an additional market fare reduction of 15 percent, and corresponding traffic increase of 28 percent to 30 percent from the introduction of nonstop service by Southwest.”

According to Southwest, before its service began between Houston and Boston in early June 2013, fares were $253 per passenger. Then, after its service began to Boston, fares dropped 27 percent to $185, and there was a 44 percent increase in the number of passengers on the route, it said, citing U.S. Department of Transportation data.

In a videotaped CNBC interview posted online Tuesday, Hawaiian Airlines Chief Executive Officer Mark Dunkerley discounted the “Southwest Effect” in Hawaii.

“I think a lot of the places Southwest goes into there’s sort of limited competition to begin with,” he said. “And so prices may be a little higher than they otherwise would be. That isn’t the situation in the markets that we fly. We fly against lots of competitors. I mean, coming out of places like Los Angeles we fly against already four or five different competitors. It’s a very competitive marketplace. Adding one more competitor into that marketplace is unlikely to have the kinds of effect of adding a competitor when the competitor is sitting on a monopoly, for example.”

Dunkerley said Hawaiian has the “right product for this marketplace,” and there’s no other airline better positioned in Hawaii.

“We compete against, effectively, everybody,” he said. “I mean, Southwest is the latest entrant, but today we compete against most of the major U.S. airlines, most of the Pacific Rim national airlines, and we’ve succeeded against all of them. And we don’t anticipate anything being any different in the new environment.”

In his interview with CNBC, Dunkerley acknowledged that Hawaiian Airlines’ stock has been down more than 30 percent this year, but he said its stock price has performed “better than other carriers” in the long term.

On Friday, Hawaiian Holdings Inc. stock was at 59.37 per share, up 74 cents or 1.26 percent.

Alaska Airlines entered the Hawaii market in 2007 and “after the dust settled . . . our market share went up and our (profit) margins went up,” Dunkerley said.

Southwest Airlines is the nation’s top-ranked airline as measured by 2016 enplanements (aircraft boardings) on U.S. carriers and on foreign carriers’ U.S. flights, according to the U.S. Department of Transportation. The airline recorded 151.74 million enplanements last year, a 5 percent increase over the 144.56 million in 2015.

The Darden Business School study recapped the history of Southwest Airlines, which was formed in 1967 and began operations in 1971.

“From its beginning, the company delivered a simple product with exceptional consumer value — low fares, high frequency of service, single aircraft type, simple product design and a fun and friendly experience,” the study said.

Southwest doesn’t charge passengers for their first two checked bags of luggage, and it doesn’t charge change fees.

Southwest officials declined comment on The Maui News’ questions about anticipated airfares or whether the airline would serve Kahului Airport via Mainland or interisland routes.

State Department of Transportation spokesman Tim Sakahara said that, in general terms, Hawaii airports have the capacity to handle new carriers. However, when there’s airline demand for peak arrival and departure times — from 10 a.m. to 2 p.m. — that “gets trickier,” he said.

During midday hours, airlines want to book flights to land and take off to serve travelers who want to arrive in the islands in the late morning and then depart in the early afternoon to leave their hotels at checkout times and get the most out of their visits to the islands, he said.

During peak hours, Hawaii airports do need additional gates to accommodate demand, he said.

The Kahului and Daniel K. Inouye airports are the busiest in the state, and capacity challenges with peak hours “apply to them most,” Sakahara told The Maui News.

In a prepared statement, he said: “The announcement that Southwest Airlines plans to bring its successful brand and service to Hawaii is already generating tremendous excitement. There is capacity at our airports to accommodate additional carriers. We will work with the new airline to accommodate its logistical needs as it prepares to launch service next year. Adding a major airline to the Hawaii market will bring additional choices for residents and visitors and is anticipated to generate additional revenue for the state.”

Southwest announced its intention to apply for a Federal Aviation Administration authorization for extended operations between the Mainland and the Hawaiian Islands. Service details would be announced later, the airline said.

Southwest Chairman and Chief Executive Officer Gary Kelly said during a gathering of company employees in Southern California: “Hawaii is an important place for Southwest Airlines because so many people count on us to take them everywhere they want to go reliably and affordably. We’re ready and excited to address a request we’ve heard for years.”

The airline is launching scheduled service with the Boeing 737 MAX 8, “bringing increased levels of efficiency and range over next generation Boeing 737 models.”

According to the airline, its 55,000 employees serve more than 115 million passengers annually. It has a network of 99 destinations in the United States and nine other countries.

* Brian Perry can be reached at bperry@mauinews.com.