Alaska Airlines buying Hawaiian is good for Hawaiian‘s shareholders, who earn a premium for their shares they have little likelihood of achieving with the carrier as a standalone.
It shouldn’t really raise competitive concerns despite route overlap between the mainland and Hawaii. It probably will anyway, but getting Hawaii’s politicians behind the deal should help with this.
It is even neutral to good for customers. It just isn’t great business for Alaska.
Is This Deal Good Or Bad For Customers?
If there’s an airline that buys Hawaiian and doesn’t make it worse, it’s Alaska. While there aren’t a lot of mergers that have been good for customers, there’s enough upside here that I’m give it a 70-30 chance of hitting that mark.
- Hawaiian needs more and better food in their premium cabin! And they sure could use the help delivering bags promptly at their Honolulu hub. Bringing Alaska’s bag delivery guarantee to Hawaiian would be game changing for passengers. Alaska is a good airline and Hawaiian leveling up would be a net benefit.
- Unquestionably Alaska’s Mileage Plan is leagues better than Hawaiian’s HawaiianMiles, except that Hawaiian’s option to spend extra miles for better upgrade availability will be missed. Assuming that miles will fold 1:1 from Hawaiian into Mileage Plan, and how could they not, that’s a win for HawaiianMiles members. I’m looking forward to my own Hawaiian miles becoming Alaska miles.
Mileage transfers from American Express and Bilt to Hawaiian may ultimately be converted into Alaska Airlines Mileage Plan 1:1. Alaska has an exclusive co-brand relationship with Bank of America, and doesn’t directly partner with other card programs. They partner with Marriott, though, and presumably could partner with Bilt (a renter’s loyalty program that happens to have a co-brand, not a bank transfer program) if they were to aggressively interpret their BofA deal.
- This is good for oneworld members who will gain more earning and redemption options. Hawaiian has partnerships today, but they’re bilateral, and an alliance membership would be a plus for customers.
The concern that will be raised from a customer standpoint is pricing – taking a competitor out of the market. There’s tremendous overlap in routes from the West Coast to Hawaii between Hawaiian and Alaska, but there’s no dearth of airlines flying these routes and more importantly there are few barriers to their doing so.
If the combined carrier pairs back capacity, or raises prices, that’s an opportunity for others to enter a given market. Even a Boeing 737 can make West Coast – Hawaii trips. Other airlines will seize opportunities that the combined carrier walks away from.
Ultimately I’m not worried about Alaska acquiring Hawaiian, even though Continental taking over United didn’t make either carrier better; US Airways taking over American didn’t make either carrier better (and clearly made American worse); Alaska taking over Virgin America was a net loss; as hard a time as I have missing Northwest Airlines clearly Worldperks was superior to SkyMiles. Mergers almost never benefit customers, but I really don’t see much customer downside here.
If you’re looking for some kind of bad omen, though, you might hang your hat on the line from Alaska’s CEO that a loyalty program that would cover two different brands would be like Marriott Bonvoy.
So think of something like Marriott Bonvoy, right? You’re part of Marriott Bonvoy, but you could stay in different hotels right under this house of brands. So that’s how we’re thinking about it.
Ben Minicucci is thinking about a loyalty program covering multiple brands. But of course that’s common. Indeed, for a long time Alaska really operated Horizon as if it was a separate airline. Air France KLM has Flying Blue, which also covers Transavia, Aircalin, and TAROM. Don’t ever say you want to turn your loyalty program into Bonvoy and expect members to somehow see that as a good thing.
Why This Deal Doesn’t Make Sense For Alaska
Hawaiian Airlines has been a challenging carrier because the intra-island market is rough. There are always carriers starting up and driving down fares. At one point Hawaiian managed to convince the federal government to let them enter into a joint venture with then rival Aloha Airlines because anti-trust immunity was the only want to make intra-island flying work. Now they face huge capacity from Southwest Airlines.
Meanwhile their Pacific routes have been money losers as Asia was slow to open. Hawaii itself is a small market, with just 1.5 million residents. And they compete against American, Delta, United, Alaska and Southwest between the mainland and Hawaii and those airlines can connect traffic over their hubs to fill planes while Hawaiian’s opportunities here are more limited.
Instead, the logic I’ve seen arguing for this deal goes along the following lines.
- Alaska can’t grow in their current hubs. They’re gate-constrained in Seattle, can’t grow in the Virgin America hub they gained at San Francisco. To grow they need another hub.
However, Honolulu hub doesn’t make sense. It certainly doesn’t make sense for connecting Asia traffic, both because most places they’d serve in the U.S. mainland can offer nearby non-stop options and because Honolulu is poorly placed to reach key Asian destinations. Why connect – and why connect there?
- Alaska needs international because Delta. Delta can offer international customers to corporate customers in Seattle, and Alaska can’t.
Yet Delta is losing money on Seattle international. It’s the same reason why American seems to be abandoning its plan there. Why buy Hawaiian to add capacity to routes that are already losing money? And corporate deals to Asia aren’t as big as they were pre-pandemic anyway.
- Alaska needs to grow to lower unit costs. Alaska already has a cost advantage against their biggest competitors.
There’s been a talk of lowering unit costs with scale, but they’re buying a complex international operation in Hawaiian, they’re leaving a substantial management presence (duplication) in Hawaii, and they’re keeping the Hawaiian brand.
Moreover there’s talk of reducing losses on intra-island flights by sending Alaska Embraer E-175 regional jets to operate these flights but the smaller planes will have higher unit costs competing against Southwest’s 737s in the market.
Alaska probably shifts widebody capacity from Honolulu to Seattle for Asia flying but Seattle has been killing Delta long haul and American is abandoning the idea as a big money loser. They could move to San Francisco and get killed by United which has corporate contracts and way too many long haul planes coming into the fleet.
Oddly, page 23 of the investor presentation about the merger lists Alaska’s hubs as Seattle, Portland, and Anchorage. It does not list San Francisco as a hub any longer. San Francisco is the only real thing they got when buying Virgin America, since they walked away from the planes and mostly from the slots and gates at congested airports.
The Market Seems To Agree
On a day when airlines were generally up – American (2.53%), Delta (0.29%) and United (0.7%) – Alaska Airlines stock fell nearly 15% following the Hawaiian Airlines announcement.
That seems like an overreaction, but the market understands that Hawaiian isn’t worth $2 billion in terms of its expected return, and also that an acquisition like this will be a huge distraction – closing the deal, defending it against the Department of Justice, and ultimately integrating the airlines if indeed they manage to get the deal done.
Alaska Should Stop Thinking Like An Airline
Hawaiian is cheap relative to other airline deals but that’s for a reason. It’s a money loser. Alaska may ‘need to grow’ but the mistake is to engage in airline thinking rather than economic thinking. Sure, there isn’t much left to buy in the U.S. and certainly that stands a chance of passing muster with the current administration, which seems bent on making sure small airlines stay small to prevent competition with Delta. Watch Senator Amy Klobuchar (D-Delta Air Lines) make noise about this deal to a Biden DOJ.
Just because there aren’t a lot of airlines, and an airline wants to grow, doesn’t mean this is a good investment. Alaska could have bought 10-year treasuries when they started talking to Hawaiian and they’d have done far better with their $2 billion than what they’ll get out of this deal.
Airlines trade at low earnings multiples because they aren’t going to grow profitably. They are capital-intensive, heavily unionized industries without any real competitive moat. They’re highly cyclical, and heavily regulated. Pouring investments into airlines just isn’t a great use of capital.
That’s why dividends and stock buybacks are what airlines should do with excess cash, assuming they don’t have investments they can make that can outperform the median S&P 500 company. Just pouring the cash into SPDRs would almost always do better than investing in an airline. Yet somehow growing an airline is what the airline always thinks they’re ‘supposed to do’ but it isn’t. They’re supposed to maximize shareholder value and you don’t do that by paying a multiple of current share price for another money-losing airline.