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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 .

Saturday, July 22, 2006





Understanding Go!

Don’t try to figure out Hawaii’s newest interisland airline by examining that company under a microscope. To understand go!, you need to broaden your view and study its parent company, Mesa Air Group. That task completed, go!’s role becomes evident.

Mesa began as a regional airline in 1982, but at some point the business evolved into a less glamorous but considerably more profitable enterprise. It began providing regional aircraft, crews, and maintenance to large airlines such as Delta, United, and America West. The idea is that the big airlines sell the seats under their own names to take advantage of their marketing clout, but Mesa provides its services, taking advantage of a lower cost structure. The big airlines end up absorbing most of the risks: fuel price fluctuations, fare decisions, competition, etc. Mesa charges for its services by the flight-hour. Some 98% of its revenues last year came from agreements with such code-sharing partners.

What you need to realize is that Mesa Air Group provides services that it customers could perform for themselves. Accordingly, negotiations become a huge part of Mesa’s operation. It must keep aircraft leases and employee costs low enough so that it can tack on a profit and still offer these items at a price that is attractive to the big airlines. It needs to gain every advantage possible to convince big airlines to continue the agreements at suitable price points. Mesa sinks or swims according to the success of its negotiations.

Come 9/11, the U.S. airline industry went into a tailspin, losing more than $23 billion and not showing real signs of recovery until this past year. Such a dreadful business environment actually worked in Mesa’s favor. With demand for aircraft and personnel at a low, Mesa succeeded in keeping its costs comfortably below the rates it charges other airlines. As many airlines now show battle-damage from the past five years, Mesa is riding high. It has acquired several other regional airlines, expects a profit of $100 million this year, and it has access to nearly $300 million in cash.

All is not smooth flying at Mesa, however. The big airlines have extracted significant cost savings from their employees, to the tune of 30% and higher. These giants are now more capable of profitably operating 100-seat aircraft themselves. They also have laid-off employees wanting to get back to work. Mesa has a tougher job ahead when it comes to negotiating sweet deals with the big airlines. On the labor front, the Air Line Pilots Association now represents Mesa pilots, and there’s pressure to raise pay rates on Mesa’s property. While it’s new Hawaii airline go! may eventually turn a profit, in the short run go! addresses Mesa’s needs in the negotiations department.

Take its negotiations with big airlines, for instance. Mesa Air Group’s announcement to begin interisland service came within hours of Aloha’s announcement that it had chosen other partners with which to exit Chapter 11. This timing indicates that Mesa was some type of player in Aloha’s bankruptcy dealings. If Mesa could enter the Hawaii market and prevail over Aloha, this action would serve notice to other airlines that there are consequences to turning Mesa down. The ability to recover from a failed negotiation by entering that market and eventually dominating it would give Mesa an ace up its sleeve in future negotiations. Notice that Hawaii’s newest airline go! has a name which can be used anywhere in the country. Perhaps what we’re seeing here in Hawaii is Mesa’s blueprint for dealing with unsuccessful negotiations it might encounter on the mainland as well. This may be the reason why Mesa is announcing a massive increase in go!’s capacity well before it has had time to properly assess whether such an expansion will be profitable.

Go!’s arrival in Hawaii also addresses Mesa’s cost side of the equation. When negotiations for a new pilot contract begin again, Mesa will want to have as many pilots as possible in the “don’t rock the boat” frame of mind. To do this, Mesa needs to show its pilots that life is pretty good at the airline even without significant pay increases. Keep in mind that a second year copilot on a 50-seat regional jet makes only about $2300 a month. For a pilot with a 4-year college degree plus years spent gaining flight credentials and experience, this is a tough pill to swallow. Mesa wants its copilots to see plenty of expansion ahead and look beyond the dismal pay at the prospects for upgrading to captain. Captains make more than double what the copilots make, and the experience gained in the left seat of a regional jet makes a Mesa captain quite marketable with major airlines once they start hiring again. Also, many pilots like the idea of flying from Hawaii, and this is yet another reason not to rock the boat.

What happens if Mesa stops growing? There will be upward pressure on pilot wages because advancement will be greatly slowed, and the copilots become interested in making a livable wage if they’re going to spend a substantial amount of time in that position. An increase in wages decreases Mesa’s ability to cut a deal with larger airlines, and the whole business model is threatened. The “young airline growing quickly” honeymoon is a phenomenon we’ve seen before at many airlines, and once it’s over the employees demand higher wages. In the case of Mesa, higher wages present a greater than normal threat to the company’s ability to flourish.

So, if you want to understand go!, realize that it is a subsidiary of a company that’s all about cutting the deal. Mesa realizes nearly all of its revenues selling the components of airline travel to airlines. That’s a tricky business and the parent company may make decisions which are inconsistent with your expectations about a startup airline. The interactions between go!, Hawaiian, and Aloha Airlines are sure to be anything but dull.

3 Comments:

Blogger SJF Hawaii said...

Peter.

I just took notice of something regarding go's aircraft size increase. With the CRJ-900's, they don't have to buy a new set of parts for the airplane, as most of the necessary parts already fit from their CRJ-200 fleet. I checked out the CRJ-900 page on Mesa.

What this means is that they can ramp up aircraft size instantly without having to go through the teething pains associated with introduction of a new aircraft in the fleet. Not even Island Air has had a smooth ride in flipping it's fleet to newer Dash-8 type aircraft.

6:02 PM  
Blogger Peter Forman said...

Parts commonality is a huge issue with airlines, as you know. Some have suggested that it makes a great deal of sense for both Hawaiian and Aloha to fly the same aircraft type, so that they can share a common parts supplier here in the islands. But getting Hawaiian and Aloha to agree on anything? Many believe that's just wishful thinking.
pf

7:52 PM  
Blogger OGG Pilot said...

Also, you have the on-going pay issue for pilots as many regionals (such as Mesa) have the same payscale for larger aircraft as the smaller aircraft. Very frustrating to pilots.

10:58 AM  

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