Brian Sumers does an excellent job laying out the story of how the Alaska Airlines deal to buy Hawaiian Airlines emerged in his subscription newsletter, which I find well worth paying for.
Alaska Airlines originally offered to buy Hawaiian Airlines on August 9th, at $20 per share. The Hawaiian board wanted more money – in the $20s – even though the Alaska offer was already for double where the airline’s shares were trading.
However as Alaska dug into the details of what they’d be buying:
- The airline’s capital spending needs were greater than anticipated
- Their financial performance was projected to be worse
And that was just based on the airline’s own internal plans, which didn’t factor effects of the devastating Maui fires or A321neo engine problems. Furthermore, the airline’s debt backed by its frequent flyer program was trading at a 22% discount to par – would this airline even be able to repay its debts or would it wind up in bankruptcy?
Alaska lowered its offer to $17. The two airlines dickered. Hawaiian asked for $18.50, Alaska offered $17.50, and they finally agreed at $18.
Hawaiian never solicited other offers because,
- The Biden administration was so strongly opposed to airline mergers. Any other airline that could buy them probably wouldn’t be able to get through anti-trust.
- There probably weren’t good private equity deals out there, and if any came in they could still respond to those.
- The airline’s stock was down below $5. Who else would be crazy enough to offer $18?
This all suggests that Alaska buying Hawaiian is a great deal for Hawaiian Airlines shareholders. That much was obvious. It also suggests it’s not a great deal for Alaska Airlines shareholders. That also seemed obvious. What are they buying?
- A Honolulu hub that has no moat. Mainland – Hawaii flying is highly competitive, with United currently the largest player but also significant flying from American, Delta, and Southwest.
- Money-losing intra-Hawaii flying. Southwest Airlines dumps a tremendous amount of capacity with low loads in these markets. Historically there’s not been enough demand to support heavy competition between the islands (at one point the federal government even granted anti-trust immunity to Hawaiian Airlines and Aloha Airlines operate together between the islands).
- Debt and integration costs. Mergers are distractions, they’re expensive to work through, and they rarely generate promised synergies.
- An incompatible fleet and weak market positions in Asia Pacific. But Alaska does get some knowledge about flying to Asia.
Hawaiian Airlines customers will probably see reduced capacity between the islands but that’s reasonable. Their miles will become worth far more, and it’s a great add for mileage members of other oneworld programs so bring Hawaiian into the fold.
The problem here isn’t really anti-trust (monopoly) it’s that Alaska Airlines is overpaying for an asset that will distract them from other execution and growth.
I agree that Alaska Airlines is paying too much, especially when their mechanical inspection of their airplanes is deficient.
So @Gary this begs the question, why would Alaska make/pursue this deal?
Did I miss the upside to Alaska buying Hawaiin Air?
I look forward to this merger or acquisition being blocked by the Biden administration. Oh wait a woke airline (Alaska) I can see it going through with any roadblocks.
At the moment I am flying on AS to FAI. Over Christmas I flew HA HNL-OGG…domestic only. After the deal I will fly HA to Asia and Oceania. Without the AS/HA deal, I would have continued flying TPAC only on *A, not OW. Hawaii is a great stopover on either outbound or return.
Why does SWA dump capacity into the inter-island market?
Well said Gary
There is not much goodwill towards Hawaiian in the islands. Their customer service is awful and theve bern gouging locals for decades on inter island flights… until Southwest cane here. I never fly Hawaiian, snd lm not alone on that. Their fleet is not compatible with Alaska, and the airbuses have serious mechanical and age issues
Joseph…HA has been gouging locals on inter island flights for decades. HA got fat and lazy and now SW is kicking their okoles
I said this on the last article about this, and I’ll say it again – I’m curious about the play of East Asia / ANZ to the Pacific NW and Alaska. In the winter, the ski resorts in Whistler, etc. are what seems like 100% Australians. And in the summer, there is significant tourist interest from Japan to Alaska. So, there’s, at least conceptually, an opportunity for long-haul direct / connecting utilization with existing slots, hubs, and aircraft on potentially profitable routes throughout much of the year.
…not to mention AS has a proven track-record of overpaying for M&A.
Gary, with all due respect I believe there is more to the picture and it’s not a simple numbers game.
The Hawaiian brand is a substantial marketing tool, both the image and the employees….Alaska plans to keep both intact, unlike most mergers. For instance SWA jumped on HA inter island..$39 fares. Didn’t work out well for them… SWA has half the flights HA does,.HA has a 40% higher load factor then SWA. HA also averages a 30% higher yield from the tickets they sell. Despite higher ticket prices HA outsells SWA by a substantial amount. Tickets now average over $100 dollars inter island. As I said, “Hawaiian” is a very strong competitive advantage for people traveling to or around Hawaii. The combined airlines will be an even stronger operation with Alaska’s input, a Hawaiian Air with Alaska’s U.S based call center and Alaska’s IT will be a big upgrade. Before Covid, Japan was HA’s most lucrative market, they made a lot money flying Japanese tourists to Hawaii. That market is just now starting to return. Hawaiian was most certainly not weak in that market, it’s my understanding they out carried UAL and DAL between Japan and Hawaii. Anybody have those figures from 2018/2019
No mention of the Amazon contract? HA has started flying the first of 10 Amazon freighters they operate under contract for Amazon with an option to go to 60. A profitable operation with little risk to HA…Amazon supplies the planes and fuel. 60 freighters operated at a profit and not vulnerable to the same issues as the passenger operation is a coup for AS.
Everyone has their bias’s and some people love Hawaii and some don’t. This merger appeals to those that recognize the mergers strengths and the potential it brings to the Pacific Rim…it’s not just about gates and a lounge. It’s about the AS/HA strengths that will combine to create a whole that will be greater than the sum of the parts.
I’m guessing there is substantial behind the scenes push to block this merger by it’s competitors…..
Auwe! I forgot the most important piece of all!….a 1929 Bellanca Pacemaker!
Hawaiian started with this airplane in 1929 as Inter Island Airways.They found and restored it and still fly it. In 1935 it was sold to Star Air Service, which became Alaska Airlines. Looks like it’s coming back to AS….will they keep it in it’s original Inter Island Airways livery or repaint in Star Air Service colors? That’s what everyone should be asking…..
As someone who lives in Hawaii, HA sucks and this merger is necessary. The airline is failing, horribly. If the merger doesn’t go through, HA will likely claim bankruptcy and will go out of business. It’ll be another Aloha Airlines story. HA flights are already much more expensive than its competitors. SWA was able to provide CHEAPER airfare interisland for kama’aina. Come on, HA, that’s so sad that local residents don’t even want to use you.
And sure, HA has branding and nice flight attendants, but the branding will stay the same after the merger and the FA will be offered fantastic early retirement packages and/or continue to work. It’s not as big of a deal as everyone is making it out to be. I personally stopped flying HA after numerous delays, faulty airline conditioning, RUDE FA, and the high cost of travel for BASIC economy. The only thing that keeps HA going are the bandwagoners who fool themselves into believing that HA is superior.
JohnW:
Brand? It’s not creating any meaningful revenue difference lower 48 or Japan to HI. The legacy US and Japanese airlines are tough competition.
Inter island? I’d be totally shocked if that part of the operation is anything better than break even. Old hardware with High cycles, and flights that only climb and descend (eating tons of Jet A). Southwest wants to run some thru flights past Oahu for originating passenger traffic – whatever $ they pick up inter island is bonus cash and basically irrelevant, and not enough volume to move the needle.
Nobody pays tens of millions for a call center.
Piloting freighters? Doubtful thats meaningful cash flow, otherwise why would anyone ever own or lease their own planes…
HI isn’t on the way to ANYWHERE except Australia, Fiji etc. Well established competition there.
Certainly not on the way to Japan. So I can’t imagine what traffic this combination would garner to the “Pacific Rim”.
In imagining all hypothetical airline mergers, I cannot come up with one than would have less operational or fleet synergy. NEITHER airline operates even ONE plane series in common!!! That’s real hard to do in a world with essentially just two aircraft manufacturers.
In short I disagree with literally everything you stated.
CW:
“I’m curious about the play of East Asia / ANZ to the Pacific NW and Alaska … (also) there is significant tourist interest from Japan to Alaska.”
Unless you want a beach layover, that is one HELL of a long detour to go via HI. Not to be overly snarky, but maybe check out the great circle map.
ALPHA_FLOOR
Really ALaska is a WOKE airline?
What airline isn’t and what is the big deal?
It’s said that AD will leave Hawaiian Airlines intact as a separate airlines owned by AS. Don’t believe it. That’s what they said to Virgin America. They will change everything to AS. Bet on it.
Enough of this chatter about I like or dislike Hawaiian!!
The BIGGEST & MOST IMPERATIVE issue is integration of the two airlines:
– every moment of hesitation is another million dollars down the drain
– each VP in the C – Suite should be working on the final draft of their battle plans as we speak
– any “synergy” is identifying redundancies in the back office (accounting, IT, finance, legal, purchasing, dispatch, FF programs, etc)
– most operating personnel will survive or thrive if flexible about moving around the Pacific Rim or Mainland
– should JetBlue get the tap on Spirit, the resistance to Alaska and Hawaiian should be minimal (ie: forego a few slots or gates)
– rationalization of the fleet is key to economy of scale. Pick & choose, but stop dithering
– reliability and excellent customer service will sell seats, logos only go so far
I’ve experienced several integrations in a completely different business environment. Lots and lots of talk of synergy. However, the biggest benefit is economy of scale while controlling costs. In the current airline environment, that’s what matters for long term survival.
Great article and great comments ! Learned a lot more background on this. @JohnW, thanks for mentioning the Amazon contract, @steve is also correct that we would need to know more about the profitability. Amazon (and Apple for that matter), are notoriously tough to be Suppliers to, it would be interesting to drill down on their motivation for this (guessing it’s access to Pilots).
I don’t have a full grasp of the dollars and cents of this deal, but I see potential for significant marketing synergies.
As these posts indicate there are different perspectives on it…imagine that!
The fact remains that Hawaiian has a very strong fan base. A lot of people love Hawaiian and Hawaii, some obviously don’t. It appears that Alaska management, when this was announced, is well aware of the synergies this deal creates, otherwise this would be just another airline merger of disparate fleets and a bump in destinations served. The people doing this know more about the Financials than any of us, perhaps I am naive thinking they know what they are doing, but they are better equipped to make that call than me. The resulting Brand will though have an edge over the competition, for the same reason HA is the preferred inter island carrier.
AS buying HA has several advantages for AS.
1) eliminates one competitor in the crowded Hawaii-Mainland markets
2) allows same airline connections to/from Pacific Northwest to South Pacific destinations
3) AS acquires HA 787s that can allow AS to expand the SEA hub reach into Asia, particularly Japan, and possibly LHR/CDG, understanding slots will be an issue.
Highly doubtful AS will retain the HA brand. I would not be surprised to see a new name for the combined carriers.
” I would not be surprised to see a new name for the combined carriers.”
As I mentioned before when they acquired VA they employers were told they would continue to fly under the Virgin Name. That was a lie. Within a year everybody was Alaska down to the uniforms and the planes. So yes I would agree HA will have a name change
Alaska Airlines will just pass the losses onto the state of Alaska like they usually do. It sucks to have an airline named after ya and have them just abuse you.
Thank you JohnW, Exit Row Searing and Randy for your rational, market and business based perspective comments and opinions.
Here are a few facts to add to the conversation:
Until Gov Ige locked down the state due to the COVID-19 pandemic, HA was the number one on-time US air carrier for 18 consecutive years.
Since being founded in 1929, Hawaiian Airlines has survived two bankruptcies, stiff competition interisland and overseas from numerous airlines, has flown US government military contract flights globally off and on since the early 1980s, operated DC-10, B-767 then A-330 charter flights for the Oakland Raiders and Seattle Seahawks, and shares with Quantas the unique distinction and blessing of zero fatalities.
If the HA shareholders vote for approval of the acquisition/merger AND the Biden DOJ does not sue to block the merger, then hopefully the Alaska Air Group will somehow keep the Hawaiian Airlines brand alive post-merger, as promised.
The AAG Board of Directors and the shareholders decided that HA is worth $18 per share. I am sure the BoD and executive management of Alaska Airlines learned the pros and cons of an airline merger since they recently acquired/merged with the much younger Virgin America Airlines.
I personally would prefer HA to continue and thrive as an independent airline based in Hawai’i but things always change. If the deal is approved, hopefully the employees of HA and the residents of Hawai’i will benefit in the long run after the merger with Alaska Airlines.
Good points VeeOne…..essentially HA racked up 900 million debt through no fault of their own.
Take that debt away and they would return to the solidly profitable airline they were pre Covid as the Japanese market rebounds. The Alaska deal does just that. It resets HA to the airline it was pre Covid , with added synergies, and it gives AS a very strong second hub in HNL to grow from. AS seems to well understand the marketing edge that the HA brand and employees bring and seem sincere in capitalizing on it. This strengthens AS and protects both brands as providers of higher quality air travel against their competition. It’s not just Hawaiian that will be less vulnerable going forward, it’s also Alaska.
The $900 million debt was heavily influenced by Covid, but to say it is no fault of their own is incorrect..
The company leadership has made many poor decisions with Ingram at the helm.
For instance, investing a reputed $10 million in Seagliders. An unknown, unproven concept over a decade away while already losing money. Growing management positions when belt tightening would have been prudent. Continuing Japan routes while losing money to hold the slots. Maybe Haneda, but not all the other ones.
Too bad Dunkerley was already gone.