Is Southwest's Hawaii Plan Working?
COO Andrew Watterson makes the case for why the airline is happy with its results. And no: it's not just about credit cards.
Dear readers,
Is Southwest's six-years-deep expansion to the Hawaiian islands a money-losing folly that the airline should abort immediately? Or is it a work-in-progress that is worth the investment, though it might not be as profitable as it could be?
Despite what Elliott Investment Management (the activist firm that took an 11 percent stake in Southwest in June), may allege about Hawaii (particularly its inter-island routes), I suspect it's the latter. I agree with Elliott that Southwest as a whole lost its way by failing to change and match the premium trends Delta first identified more than 15 years ago. Southwest was probably going to add assigned seating and an extra-legroom section anyway, but I credit Elliott for giving management the push it might have needed. I see Hawaii differently: I think it’s a worthwhile strategic initiative.
Yes, Southwest's fares and load factors on inter-island routes are crummy. And yes, Southwest has misread demand on some longer-haul routes, forcing it to cut some routes and tweak others. But perhaps because I live on the West Coast, where Hawaii is enticing as a vacation destination, I understand the premise — that the nation's top domestic airline and No. 1 leisure carrier needs to fly to beaches where its customers want to go. Hawaii expansion might be the most logical thing Southwest has done in years — even if, as Elliott notes, the airline captured a $38 average fare last year on inter-island routes, which is 47 percent lower than Hawaiian's average fare in 2018, before Southwest entered the market.
I like Southwest COO Andrew Watterson, the architect of the Hawaii strategy — a no-b.s. kind of guy, who doesn't hide behind talking points or statements issued by corporate communications. Whenever I see Watterson, either for an interview or an informal conversation, he tells me the same thing: Hawaii is part of a long-term plan, and he remains bullish. I'll also point out that my readers love to talk shit about another airline's wacky network ideas (as in: Brian, do you know how money American will lose flying from DFW to Brisbane? or: what makes JetBlue think Los Angeles-to-Nassau is a bright idea?) But readers aren’t doing that about Southwest in Hawaii. Outsiders may be skeptical, but most insiders get it.
Still, let’s not blame the uninformed too much. The skeptics have a right to wonder because Southwest hasn't done a great job communicating its goals and strategy. It hasn't told investors or the public the truth — that routes and new markets can take a long time to spool up, or that Southwest needs an inter-island market to feed jets flying to the mainland because Southwest doesn't interline with other carriers. Southwest also hasn’t been great at sharing the strategic rationale behind the expansion.
Read on for Watterson’s explanation on why Hawaii is so important to Southwest, as well as some discussion about why the original approach didn’t go according to plan. And no, he’s not mad at you for asking questions about his methods.
"People love to look at the inter-island load factors and extrapolate stuff," Watterson told me. "If I was on the outside, I would be asking questions too. I don't begrudge people throwing darts.”