In September 2017 Hawaiian Airlines and JAL announced partnership plans. The first stage of that cooperation took effect in March 2018. Today the pair applied to deepen the partnership to its greatest potential, seeking anti trust immunity to launch a joint venture (JV), coordinating their schedules and fares for flights between Hawaii, Japan and deeper into Asia (full application here). The deal represents Hawaiian’s first JV and the first JV in the United States that does not include one of the “Big 3” legacy airlines. The pair hope to begin immunized operations in Q2 2019.
The JV is necessary to deliver additional destinations for Hawaiian passengers and to ease the inbound flow for Japanese tourists. Among other challenges, many regional airports in Japan only serve Haneda on JAL metal while the Hawaii flights operate from Narita. By adding a metal-neutral JV these passengers can connect to one of the twice-daily flights Hawaiian operates from Haneda. When initially applying for the Haneda slots Hawaiian played up the economic value of bringing these inbound tourists to its islands; the carrier is doubling down on that argument in this filing. The two may also trade slots at Haneda, allowing Hawaiian an earlier arrival from Honolulu to open nearly 30 new onward connections, mostly within Japan. At Narita the carriers expect that Hawaiian’s flight from Honolulu could similarly move earlier in the day to facilitate connecting passengers onward into Asia at NRT while freeing up a higher demand slot for local traffic.
The JV also helps Hawaiian and JAL to weather a significant boost in competition between Asia and Hawaii. All three major alliances now have JVs that cover the US-Asia market, with SkyTeam and Star Alliance operating JVs that serve the Asia-Hawaii routes directly. ANA is poised to up-gauge to double daily A380 service to Hawaii in 2019, more than doubling the total number of seats it operates into the market. Further competition now operates in the form of LCCs Scoot and AirAsiaX, both of which fly to Honolulu from Southeast Asia via Osaka, carrying local passengers on the fifth freedom route. Hawaiian and JAL describe their proposed alliance as “a proportionate competitive response” to these challenges.
The carriers cite a number of statistics in support of the application, including expectations of thousands of jobs created, millions of additional tourism dollars spent in Hawaii and an 8.4% drop in fares compared to the current codeshare itinerary approach.
Recent economic analysis shows that metal-neutral, revenue-sharing JVs like the one contemplated in the JVA achieve these benefits. Economists at Compass Lexecon examined the empirical evidence and found that JVs are strongly pro-competitive because, among other things, JVs reduce fares on connecting routes involving both carriers. To support its fare-reduction finding, Compass Lexecon studied the effect of different forms of international airline cooperation, including JVs, on connecting fares (the “CEI Study”), based on worldwide quarterly data from the lengthy period of 1998 through 2015. The CEI Study found that:
- “[A]s the degree of airline cooperation intensifies, fares incrementally decrease. In particular, alliances reduce fares by about 4.5 percent, with ATIs reducing fares by an additional one percent on top of alliances without ATIs (that is, a total effect of about 5.6 percent).”
- “JVs have a stronger impact on fares, reducing fares by about eight percent relative to simple interline/codeshare, which is nearly as much as the reduction associated with online itineraries. Hence, it appears that, while ATIs, absent a JV, do not allow realization of the full benefits of airline cooperation, JVs allow carriers to internalize the externalities that each carrier’s decisions have on its partner, such that they approximately replicate the fare benefits of online service.”
Somewhat bizarrely the application shows mainland China as included in the JV application. Destinations in China are not currently permitted in JV operations owing to the limited bilateral air services agreement between the two countries. Flights to Hong Kong and Taiwan are included, however, suggesting that the application may be bowing to current pressure from China on naming of certain disputed territory destinations.
The two carriers enjoy a tight relationship today, with reciprocal frequent flyer benefits, lounge access, and deep codesharing on each others’ networks. The joint venture is an obvious next step and, if the economists are to be believed, could significantly benefit passengers. The significant increase in capacity coming over then next 12 months will also likely depress fares in the market, though it is also possible that high demand will counter that pressure. If the schedule adjustments come to fruition as suggested in the application that would deliver a significant increase in competition for many one-stop markets, even if the direct services are not impacted. That sounds like a lot of good news for travelers.
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