The Change
A restrictive, long-term contract signed by Hawaiian Airlines during the COVID-19 pandemic has created ongoing operational and financial challenges that Alaska Airlines, its successor, is now grappling with. This agreement, reportedly unfavorable for the long haul, dictates terms of service and potentially limits flexibility in route planning and resource allocation for flights serving Hawaii. Alaska Airlines has indicated it cannot easily divest from this agreement, meaning its effects will likely persist and potentially worsen over the next 6-12 months as the market evolves.
Who's Affected
- Tourism Operators: Businesses such as hotels, tour operators, and vacation rental agencies catering to visitors arriving by air may see fluctuating visitor numbers. The current contract could lead to less competitive pricing or reduced flight frequency on certain routes, impacting overall visitor arrivals and revenue. Inefficient operations could also spill over into less reliable flight schedules, disrupting vacation plans and tour bookings.
- Investors: Portfolio managers and real estate investors with stakes in Hawaii's tourism-dependent economy should be aware of the potential for sustained financial pressure on airlines serving the state. This could translate to a less robust tourism market, affecting the profitability of hospitality real estate and other related investments. The ongoing financial strain on airlines might also deter new investment in aviation infrastructure or supporting businesses.
- Small Business Operators: Local businesses, including restaurants, retail shops, and service providers, rely on consistent visitor spending. If air travel becomes less accessible or more expensive due to the airline contract, it could result in fewer tourists and thus reduced local consumer demand. Furthermore, any increase in the cost of goods or essential supplies transported via air cargo could also impact operating margins.
- Remote Workers: Individuals choosing Hawaii as a remote work destination or businesses employing remote workers in the state may find their cost of living affected. If flight costs increase due to operational inefficiencies tied to the contract, both the cost of visiting Hawaii for friends and family and the cost of essential goods could rise, impacting the overall affordability of living in the islands.
Second-Order Effects
Alaska Airlines' constrained ability to optimize routes and pricing due to the inherited contract could lead to reduced airlift capacity on key routes. This, in turn, could decrease overall visitor arrivals. Lower visitor numbers would reduce demand for accommodations and activities, potentially leading to price wars among hotels and tour operators. Simultaneously, decreased demand at local businesses could stunt wage growth or even lead to layoffs, impacting the local employment market and overall economic activity.
What to Do
This situation requires a 'watch' approach, as the direct impacts are not immediate but could evolve over the next 6-12 months. Businesses should focus on monitoring key indicators and preparing for potential shifts.
For Tourism Operators: Monitor airfare trends and seat availability on major routes serving your target markets. If prices substantially increase or capacity decreases by more than 10% over two consecutive quarters, consider adjusting marketing spend to target more price-resilient demographics or exploring partnerships that offer bundled travel incentives.
For Investors: Track the quarterly earnings reports of Alaska Airlines and other carriers serving Hawaii. Pay close attention to commentary regarding route profitability and operational efficiency in the Hawaii market. If an airline signals significant long-term challenges or a strategic retreat from certain Hawaii routes, reassess the risk profile of hospitality-focused assets.
For Small Business Operators: Keep an eye on overall visitor traffic data and local consumer spending trends. If reports indicate a sustained downturn in tourism impacting local businesses, begin contingency planning by reviewing operating expenses, exploring cost-saving measures, and potentially diversifying revenue streams away from sole reliance on tourist foot traffic.
For Remote Workers: Monitor the cost of inter-island and mainland flights. If round-trip airfare to the mainland consistently exceeds $700 or inter-island flights increase by more than 20% over a six-month period, re-evaluate the long-term cost-effectiveness of living in Hawaii and explore potential adjustments to budgets or housing choices.
