Unless there’s another extension, we’ll learn today whether the Department of Justice signs off on an Alaska Airlines – Hawaiian Airlines merger, or files suit against it. The parties have been negotiating feverishly over conditions that Alaska would agree to in order to avoid government opposition. And there’s some suggestion now about what concessions may be demanded.
The Biden administration has opposed most business combinations. They’ve had mixed success at best – except in the airline industry. They won verdicts against the JetBlue partnership with American Airlines and against JetBlue’s acquisition of Spirit, leaving the New York market less competitive and ultra-low cost carrier Spirit Airlines on the brink of collapse.
- The deal doesn’t create monopoly or consolidation on inter-island flights within Hawaii, though many observers expect Alaska to reduce seat capacity on these frequently money-losing routes (though Hawaiian outperforms Southwest flying between the islands). These are brutal routes with low fares, and Alaska might offer fewer seats on regional jets which could lower costs and boost fares.
- It would create some consolidation between the mainland and Hawaii, but these are highly competitive routes. United, American and Delta all are big players here as well.
- There’s been no clamoring of opposition to the deal. Hawaiian politicians have been supportive. Unions haven’t been outraged.
All this suggests that a deal should be possible, notwithstanding that the Biden administration has opposed most forms of consolidation and cooperation (successfully in the airline industry, less so outside of it).
While it’s unclear what a deal could look like that allows Alaska Airlines to move forward with its acquisition of Hawaiian without DOJ opposition, I suggested two possibilities directly related to the acquisition.
- Route guarantees. Alaska could agree to maintain existing flying between the islands for a certain period of time, or not to drop capacity for a period of time where Hawaiian and Alaska currently compete.
- Gate space in Honolulu. They could be forced to give up some of their prime real estate to foster competition.
And I offered two potential, unrelated remedies that DOJ could seek.
- Gates and slots at other congested airports. There’s no reason that remediation has to come in the form of routes or assets directly implicated by the merger. When US Airways wanted approval of its deal to acquire American one of the things it gave up was gate space at Dallas Love Field (ironically to Virgin America, since acquired by Alaska, though partially now utilized by Delta rather than a small low cost airline).
Alaska’s assets in this regard are limited – beyond-perimeter slots at Washington’s National airport, some slots at New York JFK, but they could be asked to give up prime real estate in Seattle or San Francisco (for instance).
- The West Coast Alliance Alaska partners with American Airlines, DOJ could be asking Alaska to choose – Hawaiian or American. Dropping American Airlines codesharing wouldn’t be especially impactful to passengers. While status members would miss reciprocal upgrades, as long as Alaska remains in oneworld most of the benefits for customers would remain. And American hasn’t really taken advantage of the partnership – they haven’t built up the Pacific hub in Seattle they had planned.
Beat of Hawaii suggests that the two items under discussion are, in fact, the two directly-related items that I offered.
DOJ might impose conditions on the merger, such as a commitment to maintain current seat capacities and flight frequencies on interisland routes for a certain period, possibly for up to a decade. This would ensure that Alaska Airlines does not reduce service levels, which could lead to increased pricing and diminished accessibility for Hawaii’s residents.
…DOJ could require Alaska to relinquish some of its control over key airports like Honolulu (HNL) and Seattle (SEA) to prevent anti-competitive behavior. To us, that appears a less likely concern than the interisland issue.
Hawaiian shareholders are on edge – the deal gets them a huge premium, and share price will likely drop markedly if DOJ files suit. The airline is on shakier ground than the largest carriers.
Alaska is overpaying for relatively limited assets, but gains widebodies and some experience in transpacific flying.
HawaiianMiles members will see their miles become much more valuable, assuming an almost inevitable 1:1 conversion into Alaska’s Mileage Plan. But there might be some needed consolidation along the way, as well as presaging Alaska’s expansion into long haul, as long as DOJ doesn’t kill this like they killed competition in the Northeast and the ultra-low cost carrier market.
This is indeed a critical week for AS and HA.
It is doubtful that the merger will be approved without conditions.
There is likely to be some sort of requirement that HA considers to codeshare on intra-Hawaii routes with multiple carriers regardless of ownership.
It is also likely that there will be some sort of minimum amount of intrastate capacity that HA will have to operate even though WN’s entrance into the market is a major part of the reason why HA is in financial trouble.
The other piece of HA’s problems that AS can’t fix is the reduction in tourism to Hawaii from the Japanese because of the weak yen. HA committed to a fairly large international fleet by retaining the 330s while bringing on the 787s which aren’t really needed for HA’s current Pacific operations. HA has overcapacity across its network with a lot of fleet complexity and AS will have to figure out to fix it – this is Virgin America on steroids.
And picking between AA and HA is very likely a choice AS will be forced to make. From AS’ own future, HA just makes more sense and will deliver more financial benefit even if the cost to get that benefit is much harder.
“It is doubtful that the merger will be approved without conditions.”
I love how you added in those 2 words at the end. Your endless comments on the previous articles were “It is doubtful that the merger will be approved”….
Agree with much of what was said in the article here and pretty good synopsis Tim D! I think the biggest hit Hawaiian has taken was from the collapse of the Japanese market. Inter island is no longer a cash drain for Hawaiian as fares have returned to a sustainable level for their 717 operation. SWA continues to lose though. Hawaiian has a 30% higher yield on the tickets they can sell seats at and also has a 40% higher load factor, despite, or helped by the fact that HA has twice as many flights.
What isn’t mentioned is the premium Alaska is paying for the “Hawaiian brand” the local knowledge and image that is so marketable for people wanting to travel to Hawaii is a big deal. Should Alaska toss that out (Ala Virgin A as some are speculating when there is nothing to indicate that other than pure speculation, this is really a completely different deal) then yes they would be overpaying. If they keep and nurture the Hawaiian brand they will be quite the powerhouse in the market.
What hotel is that with those unique pools?
Look closer, that’s high tide.
Don’t forget pre Covid HA stock hit 60 a share. One year Hawaiian had the highest operating profit margin in the industry(during the Dunkerly years) this coincided with their entry into the Japanese market. The Japanese travelers to Hawaii love Hawaiian Air. As Tim D correctly pointed out, the biggest driver in that market is the Yen….I suspect Alaska can hold out till it does, when that happens they earn more than enough to justify the purchase. My take is AS is paying for the marketing advantage the HA name gives them, the Hawaii expertise they get and when Japan returns, they will be on the pole position for the Hawaii/Japanese market
I’m not really sure that being Hawaii based is as much of an advantage as people want to believe. It is just another state in the US – even with a unique culture.
Most of the US market comes from the mainland where HA – and AS – are small compared to the big 4.
The reason why WN has had as much of an impact on HA’s intrastate network is because air travel is just as much of a commodity as it is on the mainland where excess capacity is involved.
WN only has to justify its capacity dumping in the intrastate market to its investors – but the amount of WN’s network that is intrastate Hawaii is very small. Add in that WN planned to use MAX 7s rather than MAX 8s on those routes and yet still can’t get that plane, and WN’s performance will improve.
AS has a history of overpaying for merger partners in order to try to gain strategic advantage which does not materialize. They spent years after the Virgin America acquisition underperforming financially and are just now returning to on-par financials with the best run airlines. HA will be by far the messiest merger among small airlines and, even if approved, AS will face enhanced competition from much larger competitors with deeper pockets including DL, UA and WN.
If a breakup or restructuring of the AA-AS is required, AA could, once again, turn out to be the biggest loser where it already has the smallest position on its own metal on the west coast.
It’s an interesting short trade if you are willing to take the risk DOJ does not approve. $2 in downside but maybe $12 in upside (assuming stock goes back to $4) if it is not approved. Little downside risk but huge upside. Any percentage chance this does get approved? Market is pricing as if it is.
@ Brac: Kuhio Beach, a public park. Basically a man-made lagoon.
As someone who takes great advantage of the AA/AS partnership, this is something I had not considered and certainly a concern. We fly AS quite a lot and credit to AA. Assuming it’s likely that AS stays in OW, this will not change. But we’ve also been able to book AS award tickets via AA codeshare where we have many miles. We don’t do it often, so not a huge deal.
There was a comment about losing reciprocal upgrades. We routinely get upgraded on AS based on AA status, even on flights not booked as codeshare. Is it believed that this perk could go away if they need to eliminate/reduce codesharing?
In the end, as long as we can still credit AS flights to AA, the concern is smaller. But any diminution of the relationship is not good for us, being in the Bay Area.
Cheers.
In 2016, I was in the Virgin America loyalty program. After the acquisition by Alaska Air, my Virgin America miles/points was transferred to MileagePlan with a 10,000 miles/points bonus. Curious if the same will happen with Hawaiian Air loyalists should the acquisition be approved..
I see no issue with the interisland flights surviving
The combo Alaska/Hawaiian wil introduce more fllights to islands from say Denver, Minneapolis, Atlanta, Chicago, Detroit, etc, in time. There wont be multiple flights to multiple islands, there will be one flight to Honolulu and then those passengers will get to go interisland to their island….
@Gary–I was a bit surprised to read your comment that AS might be forced to give up gates at SEA in order to gain approval for this merger. Yes, AS is the dominant carrier at SEA but with just a bit over 50% market share. Even as a DL loyalist, I fly AS quite a bit, primary because they offer nonstops from SEA to every commercial airport in California and almost every major city across the USA. These routes often have multiple daily frequencies, making AS a convenient choice. As a consumer based in Seattle, I would hate to lose that level of convenience.
If AS were to give up gates in Seattle, to whom would they give them that would increase competition, improve service, and/or reduce fares? SEA is not a slot-controlled airport so I am unsure how this would change anything. DL’s market share here is about half of AS’s already. If DL were to get AS gates and increased market share, their history at other hubs does not suggest lower fares.
As for AA, they have never been a big player in the SEA market and I don’t fly them. They have shown very little interest in long haul operations out of SEA, dropping all TATL and TPAC service pretty quickly after starting it. And, of course, the highly anticipated SEA-Bengaluru service never happened, albeit due to external factors beyond AA’s control (pandemic, Russia sanctions, competition from UA from SFO). So, from my personal perspective, loss of AA benefits with AS would not be missed.
The only person that has been harping on how AS will have to divest from OneWorld or its partnership with AA is Tim Dunn, someone who until last week was happily commenting away on how this merger is very unlikely to happen.
The reason why he’s not happy is b/c while AA is assuredly weak on the West Coast, this would put Delta at a massive disadvantage in the Honolulu – Tokyo route (which anyways Delta was performing very poorly in – OneWorld will have 2x Delta’s capacity on this route plus an alternative in United), Seattle – Honolulu, and to a lesser extent in Los Angeles – Honolulu. Alaska would get new markets coast to coast and widebodies.
All in all, it just makes Delta’s Seattle hub as its major WC hub that much more difficult – anyways as Enilria recently shared we’re already seeing a big drop in LF and yields for SEA – TPE as China Airlines and Starlux add capacity.
I don’t think that AS will be required to divest gates at SEA other than the S concourse gates that HA uses.
Those flights could easily operate from AS’ gates.
If the DOJ has any interest in SEA, it is to make sure that AS doesn’t gain any more gates.
I believe the gates that HA uses can be used for international operations – they are on the S gates with other widebodies – so freeing up the little time HA uses those gates would add international capacity at that airport.
Thanks, @Tim Dunn. That makes a certain amount of sense.
At SEA, with the relatively new international arrivals facility, both A (some, not all) and S gates can handle international arrivals. Currently, AS doesn’t have any dedicated gates on either concourse. I believe they use S gates for international arrivals now but then have to tow aircraft elsewhere for departures. If post-merger HA ends up flying internationally out of SEA, it would be a huge inconvenience not to be able to operate out of S or A. I don’t know if HA currently has dedicated gates at SEA so they might be shared already. I also don’t know which gates can handle widebodies (I think just A and S and maybe N if the recent renovations didn’t alter that). The bottom line, though, is that there probably aren’t dedicated HA gates at SEA to give up.
There is no ferry service among the Hawaiian islands (except Maui to Molokai). The only way people can travel from island to island is to fly (and this is also why the rental car business is so huge in Hawaii – you can’t take your car with you from island to island unless you are moving and it costs thousands). So interisland service is going to have to remain strong as it is the only way to travel from one island to another.
My concern is that Alaska, wanting to maintain its “Proudly All Boeing” status, is going to drop Hawaiian’s A330s in favor of 787s. We took Hawaiian to Maui from Seattle and greatly appreciated the A330’s 2-4-2 seating. We could sit together with no third stranger sitting with us. It was as good as traveling first class in terms of seat comfort.
Roger,
if you read the article, it is Gary who accurately SUGGESTED that the DOJ could tell AS to rollback parts of its agreement with AA.
No other alliance has 2 domestic carriers, one of which is still one of the largest domestic carriers.
HNL-HND is a rounding error for DL and AA/AS/HA will not all be allowed to be in a JV with JL. these are precisely the things the DOJ is focusing on.
and DL has more capacity at LAX than at SEA.
AA walked away from dozens of west coast markets including from LAX which is how DL managed to grow to the largest carrier there post covid.
As much as some want to fixate on how AS-HA will change SEA, there will be little to no impact AS merger or not. The AA-AS relationship doesn’t deliver anything of significance in SEA and neither will HA.
roberto,
feel free to provide links where I said that the AS-HA merger would be denied.
Uh oh! Did Brian Hanna have his way in HNL? Or is the merger/acquisition approved?
Deal passed DOJ muster apparently with no conditions……there is about to be a powerhouse airline serving Hawaii…good for the State, good for the travelling public and good for the employees
100% agreed with you!!
@John W–how do we know there are no conditions? I have not seen anything describing details of the approval. Also, could DOT still impose conditions before final approval?