Hawaiian Airlines' stock plummets as Wall Street fears the new competition from Southwest

• Deutsche Bank downgraded Hawaiian Holdings on Monday, sending the stock down more than 10%.
• The bank's analyst says Southwest's impending launch of flights to the state pose a "direct competitive threat."
• Researchers have found statistical evidence of a "Southwest effect" when the low-cost carrier launches in a new market.

Shares of Hawaiian Airlines' parent company fell more than 10% on Monday as Southwest Airlines began to sell tickets for its inaugural flights to the island state.

The new Southwest route, which will launch March 17, is a "direct competitive threat" to Hawaiian Airlines' business, Michael Linenberg, an analyst at Deutsche Bank, wrote in a note to clients Monday.

"This is a more direct competitive threat to Hawaiian's inter-island business (which we estimate is the company's most profitable segment) than we had envisioned," the bank said, according to Bloomberg.

The bank downgraded Hawaiian Holdings to "sell," while also slashing its price target for the stock from $33 down to $27.

"HA's margins likely to be under pressure with a new inter-island competitor," Linenberg wrote. "Hawaii's inter-island market has been a challenging place to succeed when there has been more than one major operator."

Southwest isn't the first airline to add capacity to its Hawaii routes and spook investors. In 2017, United sent HA shares down more than 10% after announcing 11 new daily flights between the US mainland and Hawaii.

New competition could mean cheaper flights, too

Morgan Stanley told clients earlier this month that Southwest's entrance into the Hawaiian market could mean big price cuts as airlines vie for travelers' fares.

"What we found is that a likely 10%+ capacity addition on North American routes at introductory fares from a low-cost carrier may lead to fares that are 30%+ lower versus today," analyst Rajeev Lalwani said in the note.

Southwest Airlines has a history of shaking up the market for air travel, so much so that there's a term for it: The Southwest Effect.

In 2017, researchers at the University of Virginia's Darden School of Business published a study that found that when Southwest Airlines enters a market with nonstop flights, fare prices fall an average of 15%. At the same time, the number of people flying increases by 28% to 30%.

Benjamin Zhang contributed to this report.

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