MIAMI — Virgin America will be facing a ton of competition to Hawaii, and because it doesn’t have a huge connecting complex at San Francisco, it cannot count on demand from across the United States to fill its flights. As I mentioned in Part 1, the passenger mix on Hawaii routes is primarily leisure, and that will be an asset to Hawaiian as it attempts to find its way in the market.

Virgin America’s product is a larger relative advantage

Virgin America has an unquestionably excellent on board product and a reasonably competitive cost base (at least relative to the legacies and Southwest), but on most domestic routes out of San Francisco and LA, these advantages mean little as much of the highest yielding traffic (business travelers) is locked away from them, leaving Virgin to compete for domestic traffic with JetBlue and the ULCCs to fill a significant portion of its planes. Hawaii is less constrained in this manner.

Because most travelers between the mainland and Hawaii are vacationers looking for the cheapest or most convenient flight, Virgin America’s strong product is a bigger competitive advantage. In this market customers consider fewer non-service variables in their purchase decision than in others, and that will be to Virgin America’s advantage. And the gap will be most pronounced in the premium cabin. While Virgin’s First Class seats are woefully uncompetitive on the transcontinental routes between New York and Los Angeles / San Francisco, they are undoubtedly competitive with most legacy carrier flights from the West Coast to Hawaii (the East Coast and Chicago/Dallas flights tend to have flat beds), which have standard First Class cabins. And because these are long flights (blocked at 5 hours +), Virgin should have a decent shot at filling its First Class cabin with relatively strong yields. And in the back, there’s more than enough demand to go around for everyone in the market, especially in a growing region like the Bay Area.

Virgin has limited scope for expansion

Despite a decent shot at making things work in Hawaii, Virgin doesn’t have a lot of avenues for expansion in the Hawaiian market. Lihue and Kona won’t work from San Francisco without connecting volume (which Virgin can’t yet build), though seasonal less-than-daily flights to each destination might *eventually* be on the cards (though its unclear if the expense of opening and operating the station would be worth it given the number of flights). Honolulu could handle another daily flight once Virgin establishes itself, and Kahului could maybe take another 3-4 weekly frequencies in the peak season. LA is simply too competitive, and it will continue to be for the foreseeable future until something substantial changes (United drawing down its “hub?”). So at peak, Virgin might end up with something like 20-30 weekly flights to Hawaii; not inconsequential but a pretty small presence nonetheless.

Southwest and Hawaiian’s narrow-body gambit are the next major shifts in the market

Virgin America’s entrance into the Hawaiian market broke a long period of relative stasis in the Hawaiian market, which has been pretty stable since Alaska’s major buildup in 2007-2011. Alaska’s success on p2p routes has signaled to competitors that there are profits to be found in bypassing LA and San Francisco on Hawaiian flights. And as domestic behemoth Southwest Airlines begins to stretch its overwater and international legs, cutting in on Alaska’s territory between Hawaii and the West Coast seems a natural extension of strategy. Alaska currently flies to Hawaii from Anchorage, Bellingham, Oakland, Portland, Sacramento, San Diego, San Jose, and Seattle. Southwest is stronger than Alaska in Oakland, Sacramento, San Diego, and San Jose. And it has hubs at Phoenix, Las Vegas, and even Denver that would be natural bases for a Hawaiian gateway with more of a connections orientation. The major question for Southwest is aircraft. The four California cities (and LA) can be served with the 737-700s or 737-800s in Southwest’s fleet, but Phoenix, Vegas, and Denver would likely require the more capable 737 MAX 8 for range and performance reasons. And those three would be optimal cities to launch service from given Southwest’s local strength.

If Southwest dallies too long from entering the latter markets (or Hawaii entirely), Hawaiian Airlines is sure to swoop in and steal some of Southwest’s thunder using its yet to be delivered sub-fleet of Airbus A321neos. Hawaiian has 16 of the re-engined A321s on order (and 9 purchase options) and with an effective range of more than 3,200 nautical miles; Hawaiian can be expected to expand p2p operations and secondary destinations from Honolulu. Salt Lake City, Denver, and Phoenix are absolute no-brainers, as are secondary California cities from Kahului. With 3-4 more years of economic and population growth, Boise, Albuquerque, and even Tucson could make some sense on a less than daily basis, not to mention Canadian destinations like Vancouver, Calgary, or Edmonton. A more unrealistic, though technically feasible potential market for Hawaiian is Texas, particularly Dallas Fort Worth and Austin, which are both accessible with a weight penalty. Austin in particular is an affluent and fast growing technological hub with no nonstop access to Hawaii. Dallas has competition from American but is a large market in its own right with a huge population base to draw from. If Southwest dallies too long before entering Hawaii, it could conceivably have to deal with nonstop service from Hawaiian in its own backyard. But Southwest will unquestionably enter the market

Once Southwest enters the fray, the only US carriers not in the Mainland-Hawaii market will be JetBlue, the ULCCs (Allegiant will probably leave the market soon enough), and Sun Country (for as long as it survives). JetBlue could probably find some success flying to Hawaii from Long Beach since the Mexico beach markets work from the secondary LA airports, and there’s no reason to think that the Hawaiian market would be radically different. But JetBlue’s priorities are on the East Coast growing Boston and Fort Lauderdale right now, and it is still probably at least 4-5 years away from thinking seriously about Hawaii (it could very well fly trans-Atlantic from Boston before doing so). Hawaii is too competitive and reasonably priced of a market to be attractive for the ULCCs, who can still worm their way into hundreds of monopoly markets in the continental US. Regardless, even though Virgin is a new entrant to Hawaii, it’s twice daily flights from San Francisco are merely the calm before the storm (Southwest and Hawaiian network shift).