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Why Hawaiian Holdings Stock Just Dropped 10%

Rich Smith, The Motley Fool

What happened

It's been four days since the news first dropped: The Federal Aviation Administration has officially cleared Southwest Airlines (NYSE: LUV) to begin serving the Hawaiian market.

Investors in rival Hawaiian Holdings (NASDAQ: HA) -- which (surprise!) serves the same market with its carrier Hawaiian Airlines -- took the news with equanimity last week, shaving only a few pennies off Hawaiian's stock price. Today, however, the second shoe dropped: Southwest has begun selling tickets to Hawaii for just $49.

Southwest Airlines airplane

Southwest Airlines is challenging Hawaiian Airlines with $49 fares. Image source: Southwest Airlines.

So what

Southwest announced the fare in a press release this morning: "Flights between both Oakland and San Jose, Calif., and the Islands, now available for purchase through March 5 for as low as $49 one-way." And inter-island service, to begin April 28 between Honolulu and Kahului (Maui), and May 12 between Honolulu and Kona, is now available for purchase through March 5 for as low as $29 one way, Southwest added.

To see what this means for Hawaiian Airlines, I just priced a one-way trip from Oakland to Honolulu on the first Friday of May, and the lowest-cost Hawaiian fare available was $207.80 -- about four times what Southwest is charging.

Now what

Granted, Southwest is trying to make a big splash. It's unlikely Hawaiian's new rival will consistently underprice it by 75%. At the very least, though, Southwest's move is likely to pressure Hawaiian to match fares in the second quarter of 2019. Farther out, competition from Southwest might be a bit less cutthroat, but it will certainly exist.

Seems to me like this is a good reason to give Hawaiian stock a 10% haircut. Investors are making the right call today.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Southwest Airlines. The Motley Fool recommends Hawaiian Holdings. The Motley Fool has a disclosure policy.