In early December 2023, Alaska Airlines shocked the aviation industry by announcing a deal to acquire Hawaiian Airlines. Shakeel Adam, Managing Director of global aviation consultancy Aviado Partners, examines the pros and cons of the deal
Alaska Airlines has long shown its commitment to bridging the US mainland and Hawaii. Merging with Hawaiian brings together two airlines with complementary networks, allowing each to provide its core customers with access to a larger network.
With this deal, Alaska Airlines extends its commitment to Hawaii, while growing into the North Asia and South Pacific markets through acquisition and bypassing the pains of organic growth.
In return, Hawaiian gains significantly more source and destination markets to connect to the Hawaiian Islands and across the Pacific. The two airlines also provide a natural seasonality hedge for each other by strengthening Hawaiian’s access to northern markets and Alaska’s access to southern regions.
Fleet mix
Much can be said about the lack of fleet commonality. However, Alaska Airlines has proved, with the absorption of Virgin America, that it can rationally and quickly address fleet mix issues. In addition, the current market constraints on fleet make this an ideal time to offload aircraft.
Alaska Airlines has already placed a large order for additional Boeing 737 Max jets (notwithstanding the January 2024 incident, this aircraft type will presumably also form the future backbone of the HA fleet).
Hawaiian also operates a mix of Airbus A330s and Boeing 787s. The A330 leases are expiring soon, and HA intends to add more 787s. The path to a fleet of Boeing 737 and 787 aircraft, combined with retaining the HA A321neo for both larger short-haul and thin long-haul routes, is an ideal fleet mix that many airlines would dream of.
By absorbing Hawaiian’s experience with widebody aircraft operations, AS bypasses the growth pains of learning widebody operations, gains the flexibility to deploy widebody aircraft on peak-demand transcontinental US routes, and could consider future expansion across the Atlantic or to parts of Latin America.
With a mix of these three aircraft, AS-HA significantly increases its market flexibility beyond what either airline could achieve alone.
Market and competition implications
The implications of an AS-HA merger, from a competition and alliance share perspective, were considered across multiple markets by looking at the share of capacity of all airlines, as measured in Available Seat Kilometres (ASKs).
Many opinions have been published raising concerns about potential consolidation and market power across the US domestic market, from the US to North Asia, and from the US mainland to Hawaii.
With a maximum of 4% share between the US and Australia or New Zealand, Hawaiian is not a major player. A merger with AS – which does not operate to either market – has no material relevance for competition at a carrier or alliance level on this market flow.
US mainland and Hawaii to Japan
Concerns related to the competition risks from the merger centre around Hawaiian joining oneworld and the increase in alliance market share between the US and Japan.
Are these concerns warranted? Routeing from the US west coast over Hawaii to Japan is less than a 20% detour, which is within the limits of what customers are typically willing to accept (at lower fares). Although Fiji Airways also theoretically connects the US and Japan, it requires an 80% detour and is therefore not rational and is removed from the analysis.
Star Alliance member United Airlines controls up to 24% of capacity between the US and Japan. Hawaiian is the sixth-largest player at only 6% of capacity and Alaska Airlines does not operate between the US and Japan.
Should Hawaiian join Alaska in oneworld, the alliance share increases from 30% to 35%, still lagging the Star Alliance share of up to 49% capacity.
An AS-HA merger presents no material competitive threat between the US and Japan. An argument could be made that it actually enhances consumer benefits by creating a more competitive offering to the stronger Star Alliance partnership.
Comparatively, between the US and Korea, oneworld carriers operate only 3% of ASKs. Hawaiian’s membership in the alliance would increase the oneworld share to just 5%, leaving the alliance lagging far behind Star Alliance at 27% and SkyTeam at 60% capacity share.
Domestic US
Focusing on the whole US domestic market, including flights within Hawaii and between the mainland and Hawaii, Alaska Airlines capacity ranks fifth while Hawaiian stands at 10th. Their combined market share would be under 9% – still half of fourth-place Southwest. Should the combination of JetBlue and Spirit be approved, it would create the fifth-largest carrier in the US and drop AS-HA to sixth place.
An AS-HA merger increases the oneworld market share on the US domestic market by less than 2% to 29%, with Skyteam at 19% and oneworld at 18%.
On a macro level, an AS-HA merger does not appear to materially threaten market competition within the United States.
US mainland to Hawaii
A closer look at flights between the US mainland and Hawaii shows a different picture, where Hawaiian is the second-largest operator, and Alaska is fourth.
Combined, the two carriers would capture the leadership position with 38% capacity share, assuming no consolidation of services. Notable is that neither JetBlue nor Spirit operates in this market.
As the second-largest operator, Hawaiian joining the oneworld alliance moves the needle on alliance share. Where pre-merger oneworld carriers operate about the same ASKs as Star Alliance carriers, an AS-HA merger increases the oneworld share to almost 50%, with Star Alliance and SkyTeam trailing at 25% and 14% respectively.
Implications for competition
An AS-HA merger appears to have no materially relevant implications for competition on any international routes, nor on a macro level within the US domestic scene. However, the market between the US mainland and Hawaiian Islands warrants a closer look by regulators, especially given the concerns raised regarding other domestic tie-ups.
Regulators will surely consider the impact of the Alaska-Hawaiian merger at a route level. There are 70 routes being operated between the US mainland and Hawaii. Alaska flies 10 of the top 20 routes between the mainland and Hawaii, while Hawaiian flies 15 routes. At least one of them operates on 15 of the top 20 routes. The two carriers are both present on only nine of the top 20 routes.
A total of 22 of the top 50 routes are operated by a single carrier, with Hawaiian or Alaska being the sole carrier on only three of the top 50. American is the sole carrier on the tenth-largest route, while United enjoys no direct competition on eight of the top 30 routes.
Boston-Honolulu, the 31st-largest route between the mainland and Hawaii, is the largest operated solely by either Alaska or Hawaiian. A merged AS-HA will have a monopoly only on one top-30 and four top-40 routes. On this basis, the regulator will be hard pressed to justify imposing significant concessions on the merger.
The regulator will likely focus on the top 30 routes; most routes between rank 21 and 30 are monopoly routes and will be irrelevant to the review.
During the summer, Hawaiian is the second-largest operator on the Honolulu-Los Angeles route with 22% capacity share. During the winter it is the largest operator with 27% capacity. Combined with Alaska, its share increases to 27% in summer and 32% in winter. United leads on capacity during the summer but reduces its market offer during the winter.
The regulator may require some concessions on this route during the summer months. However, since Hawaiian operates a relatively stable schedule year-round, and the merger does not create a dominant position, and does not involve a reduction in competition through consolidation of two major players, remedies, if any, are likely to be minimal.
In contrast, although the merger reduces the number of operators on the second-largest route (Honolulu-San Francisco) from three to two, United remains dominant with 73% capacity share. Remedies on this route are unlikely to be imposed on an AS-HA merger.
The most significant route which is likely to attract the attention of the regulator is Honolulu-Seattle, which connects the main hubs of Alaska and Hawaiian Airlines. Ranked third in the summer and fourth in winter, a merger also increases Alaska Airlines’ lead on the route to 73% in winter and 75% in summer.
The regulator will most certainly seek concessions on this route given its ranking in the overall market and the reduction in customer choice.
Los Angeles-Kahului is the third-largest route in the summer and the sixth largest in the winter.
Hawaiian is the fourth-largest carrier on the route in the summer and leads the market in the winter, when the larger airlines withdraw capacity. Hawaiian and Alaska Airlines are the fourth- and sixth-largest airlines on the route, and would become the largest operator after a merger, slightly edging out American, Delta and United. Nevertheless, while there remains ample competition, it is highly unlikely the regulator will seek concessions from a merger.
So, amongst the top four routes, only one is likely to have material remedies imposed by the regulator. The other top 20 routes where the regulator may seek remedies are Kahului-Seattle (seventh – 80% merged ASKs), Honolulu-San Diego (ninth – 57% ASK), Honolulu-San Jose (14th – 50% ASK) and Kahului -San Jose (15th – 50% ASK).
The merger will consolidate the only two operators on Honolulu-Portland, Kahului-Portland and Kahului-San Diego, the 24th-, 32nd- and 34th-largest routes. However, the regulator is unlikely to enforce any remedies since none of the other four large US carriers have shown any interest in these routes.
It would be common for a regulator to seek concessions also on routes where only one of the two airlines operates. However, the US mainland to Hawaii market has the interesting characteristic that up to 22 of the top 50 routes are monopoly routes.
With all the three large US carriers having multiple routes all to themselves that rank more highly than those AS-HA would have, the regulator would be on weak ground seeking concessions from AS-HA.
Implications for alliances
There is a common misconception that alliances are joint entities and that alliance partners act as single market participants.
This is factually, practically, and legally incorrect. Without anti-trust immunity (ATI), alliance partners provide customer benefits, but gain very limited additional market power (if any) for
themselves through being on the same route as other members of the same alliance.
Without ATI, airlines can only offer customers more flight combinations (when they choose to do so) and frequent flier programme co-operation.
For this reason, the fact Hawaiian will likely join the same alliance as Alaska – oneworld – is realistically only relevant if the two carriers already both operate the same route and, more critically, if their combination represents a significant market position with few competitive alternatives. This only occurs on the Honolulu and Kahului to Seattle, and Honolulu to Portland, routes, which is where the regulator will look for concessions.
Hawaiian is partnered with fellow oneworld carrier American. However, passengers cannot earn miles in the American Airlines’ frequent flier programme on HA-operated flights between the mainland and Hawaii unless sold by American. This is a small example to confirm that alliance benefits are often overplayed in opinion pieces.
JetBlue-Spirit deal implications
The Department of Justice (DOJ) blocking of this transaction has been upheld by a Federal Court. While many opinions suggest this indicates the DOJ will also seek to block the AS-HA merger, the deals have nothing in common.
The DOJ’s complaint against the JetBlue-Spirit deal centered around the likely rise in fares from the elimination of Spirit as the largest low-cost carrier in the US market. A merger between Alaska Airlines and Hawaiian Airlines does not eliminate any leading player in any market segment.
Just looking at the top 50 routes in the US, the JetBlue-Spirit deal would have led to a 34% market share between the three New York city/Newark airports and Florida and provided the parties with a 50% market share on major routes such as Newark and Fort Lauderdale, 68% between Boston and Orlando, 66% between Fort Lauderdale and La Guardia, and 51% between La Guardia and Orlando.
In contrast, the Alaska-Hawaiian deal is not comparable as it brings together two airlines which compete far less with each other and whose merger leads to a reduction in competition only on a limited number of routes.
It is a much easier transaction to address with far fewer remedies needed. At a macro level, the AS-HA merger creates a fourth airline group to compete against the big three, which is more likely to result in lowering fares on most markets.
Author’s note
All market share analysis is based on capacity in August 2023 and February 2024, published in Cirium as of December 2023.
About the author
Shakeel Adam is the Managing Director at Aviado Partners in Germany and previously led the assignment on the compliance monitoring for the merger between LAN and TAM airline groups, resulting in the formation of LATAM Airlines.
Email: shakeel.adam@aviadopartners.com
Website: aviadopartners.com
