Why Alaska Buying Hawaiian Is A Good Deal For Customers, But A Bad Deal For Alaska

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.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Alaska’s management identifies 265M in “synergies,” a.k.a. fare hikes, layoffs, other growth potential or cost cuts.

    I think widebody flying is giant money pit for business/government heavy routes and worse for the leisure segment. Norwegian tried and failed. Wow tried and failed. I’m not sure how WestJet is doing. Even massive operations that have been around for ages often seem close to re-entering bankruptcy protection.

    I don’t think there is a business/premium market for HNL to the east coast beyond what the big 3 US airlines already provide. 737s can fly to the west coast and are plenty large for demand outside of maybe President’s Day Weekend.

    For the above reasons, my guess is a combined Alaska-Hawaiian sell their airport slots, sell/return their widebody jets and end their international services. Eventually replacing the 717s with some of Alaska’s older/smaller 737NGs. Codeshare and interline with AA, Qantas, Japan Airlines and other OneWorld partners.

    This way they end up with an all-737 operation that is lean, flexible and better positioned to compete with Southwest. Southwest who doesn’t interline or codeshare with anyone.

  2. The Hawaiian brand is big in Japan and South Korea. The 787s (12 but up to 8 more) are not going to fly out of Seattle. They will stay in HNL and be used for Asian flights as a330 replacements. The a330s will be used for mainland flights until they reach 20years old (starting 2027) then more 787s can be ordered on a like for like replacement. The Hawaiian brand will take over almost all the Alaskan flights to the island. Alaskan will provide feed

  3. Wall Street sees what ALK did to their finances (trashing historically very strong performance) in the years after the Virgin America acquisition. ALK just started to get back into the same tier as DL and UA which are now in the top tier of the industry in terms of margins. And ALK wants to start the process all over again.
    You are right that ALK could do better w/ any number of financial options -but that doesn’t ensure their future.
    As much as you want to believe that DAL is losing money in SEA, (and we’d to see the data to support your claims) every other airline would love to be making as much money elsewhere to be able to establish hubs in other carrier strongholds (BOS for JBLU and SEA for ALK) and still lead the industry in profits.
    Why can’t any other airline do what DL has done and, honestly, what is anybody else supposed to do if DL can and does legally cross-subsidize its hubs?
    Of maybe DL really doesn’t have the variance between the profitability of its hubs that some would like think exists.

    And the real carrier that has shaped ALK and HA’s finances is Southwest, the 800 ton gorilla on the west coast and now doing the same to and within Hawaii.
    and LUV will start to get its 737-MAX7s and start aggressively growing again long before ALK can get this merger approved.

  4. @ Tim — This will prove to be a huge win for AS and loss for DL. Get over it. Alaska is what Delta used to be — friendly, good value, good food, good elite program, good mileage program. You know, premium.

  5. Flying Blue no longer covers Kenya Airways in the way you suggest above.

    Did you really miss all the Kenya status matches that opened up when Kenya got its own program?

  6. I would have preferred JetBlue combining with Hawaiian over Alaska combining with Hawaiian.

  7. Problem you for, Gene, is that actual data, not your opinion, shows that Delta runs a better operation than Alaska.

  8. @ Tim — Problem for you, Tim, is that you have such limited actual travel experience to draw upon.

  9. “I just don’t have a chip on my shoulder like you do.”

    Nope, just an inflated ego.

  10. Geeze Gary. I understand that you don’t know a lot about airline operations (your articles like this reflect that) but if you’re going to be a “journalist” you should have a better command of the English language.

    It’s inter-island, not intra-island. Intra is within, inter is between. Intra-island would mean flights within an island. These flights are between islands (ie. Inter-island).

  11. It’s a stinker of a deal for Alaska for sure. HA’s market cap pre-merger was $250mil. AS bought for north of $2bil. Why?!? It reminds one of the Virgin America merger with extreme overpayment for no clear reason.

    I think the bottom line is AS felt growth constrained and that buying HA was really the only move that they could make to obtain some growth and more importantly stave off the prospect of being bought out by one of the big boys. We’ll see how the move plays out.

  12. We just returned from international travel on HA. Food and service was superb, as expected from our previous experiences. This merger has the potential to ruin what is arguably the best run airline left in the US.
    Baggage claim at HNL is a disaster for all airlines as the airport has needed renovation for decades. Walking a mile or so to baggage claim is a throwback from the 50’s. Could care less about HAs mileage program, and it’s not worth trashing a great airline for ‘dynamic pricing’ of miles use now practiced by AA, DL, and UA. Here’s hoping this merger fails.

  13. There’s a lot to unpack here, but I’m not quite sure how the “Hawaiian isn’t profitable so this just won’t work” logic applies. There is a rich history of successful airlines buying less successful airlines and making it work.
    I also don’t buy the argument that all airlines should do with their excess cash is buy bonds and engage in stock buybacks. That’s like saying that automakers should just stick with the status quo. We see that a plethora of auto brands have been retired through a series of mergers. Why? Because the business is hyper competitive and a company either grows and remains competitive or they die. The same goes for the airline industry.
    The reality is Alaska has been NEEDING to expand for sometime now. The figures I’ve seen say, if they can make it work, they’ve basically bought an airline including their heavies for $.70 on the dollar.
    We can sit here all day and explain why this is bad for the consumer, bad for tax payers, and bad for the industry. You know what’s worse? A bankruptcy, which is where Hawaiian was headed.

  14. I think you meant to write Alaska not American in the below:

    Alaska needs international because Delta. Delta can offer international customers to corporate customers in Seattle, and American can’t.

  15. @A humble airline guy “There is a rich history of successful airlines buying less successful airlines and making it work.”

    But what is the strategy that would make this one work, given the assets?

    There are far more airlines that have bought less successful ones where they did not make it work than where they did.

    “The reality is Alaska has been NEEDING to expand for sometime now. ” You’re doing what I cautioned against – thinking like an airline – instead of thinking like an investor with $2 billion.

  16. @ Gary — “Fastest way to become a millionaire” definitely applies here (and to most airline investments), but I do think long-term $2 billion will prove to be a rather small price for AS to pay to become larger while keeping their competitors from becoming larger. It’s all about expanding their relative sphere of influence and access to government handouts.

  17. Honestly, I think AS is not thinking about broad form “international” offering. Sure they will most likely keep HA’s current international routes because they are profitable and could compliment good with PNW’s domestic network. But I tend to believe AS want to grow its transcon offering. They are not making money on these traditionally highly profitable routes because their subpar hardware offering. Buying HA is the easiest way to get some widebody fleet and lieflat hardware in quickly. There’s literally no chance for them to buy anything else financially, and avoid anti-trust blockage, except for getting some very old aircraft from charter airlines.

  18. You’re exactly right. Airlines shouldn’t think like airlines but that’s what they do. While the Alaska CEO seems like a smart guy he’s basically an airline lifer so it’s what he knows. It’s also hard (maybe even impossible) for a capital intensive business like an airline to invest the balance sheet outside of year (short term vs. long term). No airlines that I’m aware of have any more than a small percent of capital in “long term” investments. Most have zero. While airlines do buyback stock from time to time it’s always held in treasury so it can be resold to raise capital as needed; I’m not aware of any airline that retire shares. In short Alaska is probably doing what they fell is the right move, they know airlines are poor investment so at least try and grow the biz, have some fun and create a few jobs. They’ve even created an arbitrage opportunity as Hawaiian is about 30% below the buyout price if you’re the educated betting type.

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