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Location: Kailua, Hawaii, United States

Peter Forman is the author of Wings of Paradise, Hawaii's Incomparable Airlines, a 400 page hardcover available online at www.airlinesofhawaii.com .

Friday, July 28, 2006





Flying on Thin Numbers

This week, Mesa Air Group released figures regarding go!’s performance during June. The Hawaii startup airline brought in approximately $1700 on each flight, needed about $2000 a flight to break even, and filled 82% of its seats. Go!’s competitors have been counting passengers on the new airline and claim that 75% of seats filled is a more accurate figure. In any event, we can distill some important data from these numbers. Go! brought in about $41 a seat in June and needs to bring in about $50 a seat if it fills 80% of its seats. If you believe the competitor’s figure of planes flying 75% full, the break-even ticket price rises to $53. This is an important concept to grasp, that as the planes fly less full, the break-even fare rises.

Mesa’s CEO went so far as to say that if go! can maintain the same load factors (percentage of seats filled) when it introduces larger jets next year, it will be breaking even. This is a taller order than it sounds. Let’s take a look.

Presently, go! provides about 8% of the interisland seats. Its expansion plans to larger jets would result in a nearly 300% addition to its current service, and this move would increase the total number of interisland seats by about 24%. How go! plans to keep its current load factor after flooding the market with airline seats remains a mystery.

Now, consider the effect of the high-speed ferry service which is coming next year. Let’s say the ferry captures 10% of inter-island traffic, not a particularly tough number to imagine. You therefore see a 10% drop in air passengers on inter-island routes, and a corresponding drop in percentage of seats filled. By the end of 2007, if you consider the effect of seats added to the market by go! and by the ferry, you could see inter-island jets flying with 60% load factors instead of the present 82%. This glut of seats would be devastating to all competitors.

We have witnessed a shrinking interisland market for several years now. The trend is likely to continue, but a fare war and good economic times may give us a temporary reprieve. Can we expect the same level of flying throughout this year that we’ve witnessed in June? Hardly. Summer is prime tourist season, and June was the first opportunity for islanders to take advantage of $19 and $39 fares. The $19 fares are gone now and some of the pent-up demand has dissipated with it. The rest of the year will provide more challenges for all three airlines.

Here in Hawaii, we’ve seen one other example of a startup airline introducing a large number of airline seats to the interisland market during a time of no growth. This was during the 1990s when Mahalo Airlines challenged Hawaiian and Aloha Airlines. The results were not surprising. Mahalo brought in several ATR-42 turboprops and took losses. Over a period of five years it tried high fares, low fares, and everything in between, but nothing brought profits. Eventually Mahalo folded its wings.

Hawaii’s interisland market is small enough so that additional seats provided by a new entrant become a major obstacle for that same competitor to ever achieve profitability. In other words, the seats added by the new entrant lower the load factors far enough so that the break-even fare climbs out of reach. If the airline raises fares, load-factor drops, and the break-even point remains elusive.

Go!’s expansion plans only make sense if Aloha or Hawaiian Airlines vanish from the interisland market. Otherwise, we’re looking at a market flooded with empty seats by the end of 2007 and lots of red ink to be shared by all three airlines.

1 Comments:

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