Build It and They Will Come?

Go!, the Hawaii subsidiary of Mesa Airlines, plans to introduce up to a dozen large jets into the interisland market next year. The ten million dollar question is where will passengers come to fill the jets and allow a profit?

A CEO or marketing expert needs to know the relationship between the price of his product and consumer demand for it. In some cases, there’s not much change in demand as prices fluctuate. For example, ticket prices on the last flight off an island before a hurricane strikes are not likely to have much an effect upon the demand for that service. On the opposite extreme, if one airline offers tickets at a lower price than its competitors, that airline is likely to see a very significant increase in demand for its product.

Now, let’s look specifically at air travel. Underpricing your competition is not a realistic strategy because the competition is almost certain to match fares. Therefore, we need to instead look at the overall increase in demand for air travel on a route as fares decrease. The low-fare airline is counting on two mechanisms to increase available customers: generating more total travel on that route, and pulling traffic away from other forms of transportation. Southwest Airlines is renowned for increasing demand when it enters a market. Unfortunately, an airline is heading for trouble if its decision-makers expect a similar response to low prices here in Hawaii.

The answer to this disparity in consumer response is quite simple: nobody is currently driving their car from Honolulu to Maui. An interisland carrier cannot use the same strategy that works for Southwest on the mainland because there are no drivers to convert to air passengers. In fact, we’re likely to see just the opposite effect next summer as the high-speed ferry converts some flyers to travelers who bring their Dodge Neon along on the Maui trip.

Thus, an airline must generate more total travel on a route to fill up more of its seats, and this strategy has severe limitations. Hotel rooms priced at $200 a night put a damper on travel even if the interisland fares were $1 a ticket, and your auntie on Kauai will lose enthusiasm if you show up at her dinner table too often.

Go!’s CEO Jonathan Ornstein is quoted in news articles as saying that his airline could be profitable if its load factors and fares remain constant once it introduces its new jets. Unfortunately, the arrival of the new planes will increase the number of interisland seats by some 24%, and we can expect load factors to plunge accordingly. Can we realistically expect to see the fares and load factors of June throughout the year once a massive number of seats have been added to the interisland market? No way, not even close. Losses on interisland routes will be huge if this massive addition of seats ever takes place.