Alaska’s decision to buy Hawaiian Airlines and save it from a bankruptcy filing — or […]

Alaska’s decision to buy Hawaiian Airlines and save it from a bankruptcy filing — or worse — was not something that happened overnight.?Over the last five years, Hawaiian has gone through some of the most challenging times any airline has ever faced, and the hits just kept on coming.?Let’s take a look back at what this management team has had to endure.

On March 4, 2019, Southwest Airlines announced that it would begin flying to Hawai?i on March 17 with an inaugural flight from Oakland to Honolulu.?Southwest had been planning on entering the Hawai?i market for awhile but had to wait until it received ETOPS certification to begin operations, so for Hawaiian, this was like watching a slow moving freight train barreling toward the airline.?While a new competitor from the mainland was always concerning, the bigger problem was that Southwest would also start flying interisland with Honolulu – Kahului starting April 28.?All the other big routes would follow.

This wasn?t the first time that Hawaiian had faced stiff interisland competition, but this time was different.

The interisland market has always been huge and hugely important.?With the exception of Maui to L?na?i (and Molokai which ended in 2016), no two islands had been connected by passenger ship in decades.?For that reason, air travel is vital.?Locals fly to other islands for shopping, doctor appointments, and high school sports meets.?This kind of thing doesn?t happen on the mainland, and it means a lot more seats are needed than one might expect. Hawai?i is the third largest intrastate air market in the US behind much larger California and Texas.

For ages, the interisland market was a duopoly run by Hawaiian and Aloha with the occasional competitor coming in to try and disrupt the market before failing. Then, in 2008, the Great Recession brought already weak carriers to their knees.?Aloha would never recover, going out of business that year.?The failure of Aloha was a lifeline for Hawaiian, as you can see by the average fares in the market over time.

Hawai?i Interisland Average Fare

Data via Cirium

When the short-lived and much-hated Mesa entered into the market with its go! brand, interisland fares plunged to around $40.?Once go! killed off Aloha for good, fares began to rise. By the time it left the market in 2014, fares had doubled to the $80 range.

At the time Southwest said it was coming to town in 2019, Hawaiian undoubtedly had a sense of déjà vu, but it also knew it would have a much tougher fight on its hands.?Southwest, after all, was unlike Aloha in that it was an enormous airline that didn’t have its world centered on Hawai?i. In fact, Hawai?i was a tiny part of the airline’s network, though a strategic one that Southwest desperately wanted to enter. It didn?t have to make money or run away.?It could spend years funding a money-losing operation if the airline decided that was worth doing.

It didn?t take long before interisland fares began to plummet.?In Q4 2018 before Southwest arrived, the average interisland fare was $72.?That had dropped to $59 by Q4 2019.

If only that was Hawaiian?s biggest problem.?As we know, a mere year after the entrance of Southwest, the COVID-19 pandemic arrived.?This all but grounded the entire airline industry around the world, but some places would recover more quickly than others. Hawai?i was not one of them.

Seats vs 2019 by Region

Data via Cirium

Hawai?i was on track for notable growth vs 2019 until the pandemic arrived, and then traffic disappeared overnight.?Naturally, interisland flying continued at a higher level but comparing flying to the mainland vs flying within the continental US shows just how dire things were.

The state of Hawai?i had effectively banned travel to the islands, requiring a 14-day quarantine for anyone flying in.?There was no way around it until October 15, 2020 when the state allowed travelers to visit without quarantine if they tested negative using the Safe Travels program. This program was cumbersome, but it did allow airlines to return seats to the market.?Let?s stretch that chart above out a few years.

Seats vs 2019 by Region

Data via Cirium

The change was swift and massive.?By summer of 2021, seats from Hawai?i to the mainland were well above pre-pandemic levels.?You might think that this would be good news for Hawaiian, but it wasn’t.

With US flag carriers unable to fly their widebodies to most places internationally, they started pouring those airplanes into Hawai?i, adding a ton of seats and depressing fares.?There was an increase in demand, but the state’s infrastructure couldn?t handle it.?Maui County asked visitors to stop coming.?They were tired of people resorting to renting U-Hauls since there were no other cars available.

Though these people were paying a lot once in the islands, part of the reason they could do that is because fares were cheap to get there. The average fare between the mainland and Hawai?i in Q2 2019 was $309.?By Q2 2021, it was down 15 percent to $264.

This capacity would stabilize eventually as international markets reopened, but there was still more pain coming for Hawaiian.

By 2022, the mainland operation was getting back closer to normal.?Demand was up, and March brought the end of the Safe Travels system which required pre-registration and testing.?While the domestic market was doing well, however, the international world was still locked up.

Unfortunately for Hawaiian, its focus on the Pacific Rim left it serving some of the most restrictive countries toward the tail end of the pandemic.?Australia and New Zealand opened in 2022, but they had a hard closure until that point.?It was good for Hawaiian to get back into this market, but the biggest and most important international market for Hawaiian by far is Japan.

In 2019, six percent of Hawaiian’s total seats touched Japan.?That, however, was more than 20 percent of total seats offered on the A330 fleet.?Hawaiian had service to five airports in Japan and was getting closer and closer with Japan Airlines until the government shot down a joint venture just as the pandemic began.?There aren’t a lot of Hawaiians flying to Japan.?This is almost entirely about Japanese tourists visiting Hawai?i.

Japan kept its doors closed until later in 2022, but even after that there were rules about testing that helped deter Japanese travelers from coming to the islands.?According to ARC/BSP data via Cirium, for the first nine months of 2019, there were 3,600 travelers per day coming from Japan to the Hawaiian islands.?Looking at the first nine months of 2022, that had plunged to about 350 per day.?This was a huge increase compared to the 43 per day during that period in 2021, but it was still almost nothing for an airline flying several widebodies a day to Japan.

As the final restrictions went away in Japan, it was believed that traffic would come back very quickly.?It didn’t.?Looking at the first nine months of 2023, there were only about 1,350 travelers per day originating in Japan.?What happened?

There are plenty of theories including Japan being a more cautious culture and wanting to stay closer to home post-pandemic, but the reality is probably much simpler.?It’s economics.

Inflation made things a lot more expensive in the US.?Hotel rates skyrocketed, but food costs were up as well.?As if that wasn’t enough, the yen lost a lot of value compared to the dollar.

Japanese Yen per US Dollar Over Time

Data via www.macrotrends.net

Back in 2019, the yen was fairly steady against the dollar with 1 USD equaling about 110 JPY.?In 2022, the climb began.?It has gone up and down, but the range has been between 125 and 150.?It’s been closer to 150 as of late.?So, expenses go up in real dollars but then yen aren’t worth as much either.?A vacation to Hawai?i is significantly more expensive for the Japanese right now, and that makes it much less appealing.

At least Hawaiian had the mainland business running ok… until the summer of 2023 hit.?It was then that Pratt & Whitney started sounding ominous messages about its engines that powered Hawaiian’s A321neo aircraft.

The upshot of that mess was that Hawaiian didn’t have enough airplanes to fly its bread-and-butter west coast routes.?It had to cancel several flights, and going into 2024 the expectation was of more pain before things got better.

The only saving grace here — in a horribly twisted way — is that Hawaiian didn’t need all those flights thanks to a massive decline in demand for tourism on Maui when fire destroyed L?hain? in August. All of West Maui remained closed for two months before slowly reopening, and there has been real concern about when demand will fully recover. Some airlines have already reduced capacity well into next summer.

Eventually, the Japanese will return, Hawaiian will get paid by Pratt & Whitney and Maui demand will bounce back, but with all these problems hitting the airline from all sides for a sustained period of time, it was questionable how long the airline could make it without resorting to a bankruptcy filing.

Investors knew this was all bad news, and the share price suffered.?Hawaiian was backed into a corner, so if it’s true that Alaska was the one that actually approached Hawaiian, it must have seemed like a blessing from K?ne that would allow the airline to survive in this new, combined creation.?I’d imagine that nobody from Hawaiian wanted to sell, but after such a difficult few years, this had to have seemed like the best possible option by far.

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