Creator: Maxinomics · Published: 2024-08-01 · Length: 5:30 · Watch on YouTube

150,000 flights and $1 billion later Southwest continues to lose a lot of money trying to capture the Hawaiian market. Dominated by Hawaiian Airlines for decades Southwest's heated competition has pushed both companies into undesirable financials standings with Hawaiian having to seek a merger with Alaska Airlines to stay competitive. (video description)

1) Detailed outline

[0:00] Southwest enters Hawaii

• Honolulu's airport sees more full flights than any other airport in the US, which is part of why Southwest made a big, ongoing bet that it could muscle in and push out Hawaiian Airlines.
• Southwest has lost almost $1 billion trying to take the market since it started about five years ago.
• Its growth: 4 flights to Hawaii in 2018 (its first ever), 3,200 in 2019, and about 19,000 trips to or from the mainland last year (2023).

[0:30] The interisland strategy

• Plenty of airlines fly to Hawaii, but Southwest does something none of them do except Hawaiian: interisland flights, about 23,000 of them last year. These are short hops like Hilo to Honolulu or Kona to Lihue (the captions garble the second pair).
• Hawaiian Airlines was almost the only provider of these flights for decades. Southwest, known for doing short flights well and efficiently, is aggressively trying to take them.
• Southwest's no-frills product suits this. Nobody cares about amenities on a 45-minute flight; people just want to get there cheaply and quickly.
• But trying to become the dominant airline in and to Hawaii would be aggressive at any time, given the distance and isolation. It's not like Denver, where a plane can fly on to any of 100 cities next.
• It's especially aggressive now: Southwest reported a loss in three of the last five quarters, profits are a fraction of five years ago, and the Hawaii push adds heavy pressure to its bottom line.

[1:09] Operational constraints

• Southwest flies only one plane type, the Boeing 737, with a maximum range of about 3,500 nautical miles. The West Coast to Hawaii takes about five and a half hours.
• Because the islands are so isolated, a Southwest plane in Hawaii has just two options: fly between the islands or return to the mainland.
• No other Southwest route is that constrained. Most have dozens or hundreds of onward options, and even its southernmost international destination, Costa Rica, is about 1,000 miles closer to the US.
• So the core of the strategy is interisland flying: shuttle passengers among the six main islands for a few flights, then send the plane back to the mainland to restart the loop.

[2:01] Fierce competition

• That put Southwest in direct, fierce competition with Hawaiian Airlines, Hawaii's primary airline for about 100 years and the only other carrier running multiple daily interisland flights.
• Phil says it's hard to see how Southwest didn't make an explicit choice to try to tip Hawaiian back into bankruptcy, and that it's on the verge of working.

[2:29] Financial losses

• Southwest has run its Hawaii flights at a deep loss from the start.
• Example: Las Vegas to Honolulu, about twice a day, 2,400 nautical miles. Fuel, labor, and everything else cost about $63,000 per flight. To break even, all 175 seats would need to sell for an average of $360.
• In practice the flight averages at least 15 empty seats, and the median 2023 ticket was $295. The captions say Southwest lost "$166,000" per flight, but the video's own numbers (about 160 seats at $295 against $63,000 in cost) work out to roughly $16,000.
• Interisland routes were the same: fares cut below the cost of flying, losing $2,000 to $4,000 per flight.

[3:09] Impact on the local market

• This made it hard for Hawaiian to operate without losing money, and residents have mixed views.
• On one hand, Hawaiian employs 7,200 Hawaii residents and accounts for a substantial share of Hawaii's GDP, 11% by some measures.
• On the other hand, competition is good for consumers, and there's probably never been a better time to buy mainland-to-Hawaii or interisland tickets.
• But these prices aren't sustainable for either company, so it can't last.

[3:43] Merger and future outlook

• Hawaiian, without Southwest's bank account, blinked first. Losing money too fast against Southwest's price cuts, it looked for a merger partner, and Alaska Airlines said yes.
• Alaska gets a network it wants across the West, the transpacific, and the islands. Hawaiian gets lower costs, a bigger loyalty program, and a way to avoid potential bankruptcy.
• That makes the Department of Justice's decision on the merger critical for Southwest. If Hawaiian goes under or even cuts back, Southwest would pick up all or most interisland travel, worth about $100 million a year in profit at pre-price-war fares.
• As the only airline offering both interisland and mainland flights, Southwest would have a unique product that could soak up even more mainland-to-Hawaii traffic.
• Even in that best case, Southwest needs more than seven years to recoup the cost of entering Hawaii. If the merger goes through, the combined airline could force Southwest to keep losing money on its Hawaii routes.

[4:28] Pressure on Southwest

• Cost cutting is coming to a head. Southwest's stock has lost 10 years of gains.
• Activist investor Elliott Management (the captions say "Elliot" and "OT management") has bought about 11% of Southwest's shares and is pushing for a turnaround, specifically citing out-of-control costs.
• Southwest adopted a poison pill shareholder rights plan to stop Elliott from buying more stock and pushing through a hostile takeover.
• Five years in, this isn't where Southwest wanted to be. It's a long time to run routes that lose that much money, and the market is noticing.
• The video closes with a short clip of someone asking about a drink ("is it just like… pineapple?") and getting the answer "fresh as hell."

2) Things mentioned

Economics and route math

• Southwest's Hawaii losses: close to $1 billion over about five years.
• Flight growth: 4 Hawaii flights in 2018, 3,200 in 2019, about 19,000 mainland trips and 23,000 interisland flights in 2023.
• Las Vegas–Honolulu economics: about $63,000 per flight, 175 seats, a $360 break-even average fare, at least 15 empty seats on average, and a $295 median fare in 2023.
• Interisland losses: $2,000 to $4,000 per flight.
• Hawaiian Airlines' local weight: 7,200 Hawaii employees and about 11% of state GDP by some measures.
• Prize if Hawaiian retreats: about $100 million a year in interisland profit at pre-war prices, with a payback of more than seven years on Southwest's entry cost.
• Southwest's recent results: a loss in three of the last five quarters and profits a fraction of five years earlier, with the stock back to where it was a decade ago.

Companies and organizations

• Southwest Airlines: the video's subject, a low-cost carrier built on short, efficient point-to-point flights.
• Hawaiian Airlines: Hawaii's main airline and Southwest's target.
• Alaska Airlines: agreed to merge with Hawaiian.
• Elliott Management: activist hedge fund holding about 11% of Southwest.
• US Department of Justice: reviewing the Alaska–Hawaiian merger.
• Boeing: maker of the 737, Southwest's only aircraft type.

Markets and competition

• Interisland air travel: short hops among Hawaii's six main islands, long dominated by Hawaiian.
• Mainland-to-Hawaii travel: served by many airlines.
• Price war: Southwest priced below cost to win share, which Phil reads as a deliberate attempt to push Hawaiian toward bankruptcy.
• Network flexibility: most airports, like Denver, offer many onward routes, while Hawaii offers Southwest only two.

Products and operations

• Boeing 737: about 3,500 nautical miles of range and about five and a half hours from the West Coast to Hawaii.
• No-frills service: Southwest's model, which suits 45-minute interisland hops.
• Loyalty programs: a bigger one is part of Hawaiian's benefit from the merger.

Policy and corporate governance

• Merger review: the DOJ's call on Alaska–Hawaiian decides how long the price war lasts.
• Poison pill: a shareholder rights plan that Southwest adopted to block Elliott from building a bigger stake.
• Hostile takeover and activist campaigns: Elliott is pressing Southwest on costs.

Places

• Honolulu: the US airport with the most full flights.
• Hilo, Kona, Lihue: interisland route examples.
• Las Vegas: origin of the route-economics example.
• Denver: contrast as a hub with about 100 onward destinations.
• Costa Rica: Southwest's southernmost international destination, still about 1,000 miles closer to the US.

3) Biographies

Phil Andrews (presenter)

Phil Andrews is the producer and on-camera host of Maxinomics, Morning Brew's YouTube channel that explains economics, business, and geopolitics through stories. Here he walks through Southwest's Hawaii route economics and the airline's corporate fight with Elliott.

Southwest Airlines (subject company)

A Dallas-based airline founded in 1967 by Herb Kelleher and Rollin King. It built the low-cost, point-to-point model on an all-Boeing 737 fleet and started Hawaii service in March 2019. Elliott's campaign in 2024 led to board changes and a broader overhaul of the airline's model. That last part is context, not something the video says.

Hawaiian Airlines (subject company)

Hawaii's largest airline, founded in 1929 as Inter-Island Airways and based in Honolulu. It went through bankruptcy in 2003 to 2005, which is the earlier bankruptcy Phil alludes to. The Alaska Air Group deal was announced in December 2023 and closed in September 2024, after this video. That's context, not something the video says.

Alaska Airlines (merger partner)

A Seattle-based carrier owned by Alaska Air Group, which agreed to buy Hawaiian to expand its West Coast, Hawaii, and transpacific network.

Elliott Management (activist investor)

An activist hedge fund founded by Paul Singer in 1977. It took a large stake in Southwest in 2024 and pushed for leadership and cost changes, which prompted Southwest's poison pill.