Name:
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 .

Monday, September 25, 2006





The Dogfight Rages

The interisland air battle between Mesa’s go! Airlines and Hawaii’s longstanding air carriers heated up considerably during the past week. In court, Hawaiian’s attorney quoted emails between Mesa officials which revealed a plan to topple Aloha Airlines then raise fares afterwards. Shortly thereafter, an organization known at H.E.R.O. (Hawaii’s airline Employees Repelling Ornstein) www.dontflygo.com announced its existence. HERO is a collection of Hawaiian, Aloha, and Island Air employees who wish to see go! Airlines pack up and leave the 50th State. To further this goal, HERO announced plans to offer public rebuttals to statements made by go!’s CEO Jonathan Ornstein. For the most part, the media has not challenged the most misleading of Ornstein’s quotes, and the group wants to level the playing field. Most recently, go! announced $19 interisland fares which were quickly matched by competitors. Study the contrails in the sky as each contender maneuvers for best position, and you will discover the pattern of how all these actions are related.

First, consider the court hearing. Mesa Air Group signed a confidentiality agreement with Hawaiian Airlines after reviewing sensitive information during a time when Mesa claimed interest in purchasing that airline. Mesa then went into business against Hawaiian before the release date from the agreement. Additionally, Mesa claimed to have destroyed the documents in question, but the air group somehow managed to use wording from one of those documents at a later date. Hawaiian’s attorneys feel they have a strong case against Mesa and will seek significant damages during the upcoming April 2007 trial.

The purpose of last week’s hearing was to request a court action to prevent go! from selling tickets between now and the April court date. This is a tough challenge, because Hawaiian must show that irrecoverable harm may result if Mesa’s go! continues selling tickets. Perhaps the strongest scenario favoring an injunction against Mesa would be the potential demise of Aloha Airlines. Should go! muscle out Aloha prior to the court date, then the competitive tapestry of interisland travel would be forever changed. Mesa would then argue that to maintain competition it should not be expelled from the market, using a logic similar to the young man who murders both his parents and then asks the judge for leniency because he is an orphan.

As this piece is being written, Judge Faris is deciding which way to rule. Mesa’s chairman Jonathan Ornstein did his cause no favor by announcing the $19 fares during this critical period. The newest fare war only supports the contention of Hawaiian’s attorney that go! needs to be stopped before irrecoverable damage is done.

As for the $19 fares, how close to break even are they? Go! would need a load factor of about 205% to pay the most basic bills with these fares. To picture such a load, imagine one of go!’s 50 passenger jets with every seat full. There’d be an additional 20 passengers on the left wing, 20 passengers on the right wing, and about 11 passengers on top of the fuselage and tail in order to generate break even revenue on a typical interisland flight (using the $2000/flight cost claimed by go!). Nonetheless, Mesa’s Ornstein continues to push the argument that Hawaiian and Aloha were overcharging interisland customers and go! is here to bring fair ticket prices back. Go! named the new fares HERO fares as a slap at the employee coalition.

How are we likely to see this dogfight concluded? Quite likely legal action may be the deciding factor. Mesa’s Ornstein is crafty in working the media to best advantage, but the legal process of discovery and testimony do not allow such freewheeling tactics.

Should market forces rule this dogfight, the established airlines retain an altitude advantage associated with aircraft comfort, flight crew experience, and established records of reliability. The battle will also involve two opposing philosophies. Mesa’s Ornstein is betting that Hawaii air travelers will buy go! tickets to extend the fare war as long as possible and that the average traveler will remain unconcerned with the full scope of this conflict. Ticket prices rule. The opposing camp represented by HERO and the established airlines will benefit if Hawaii’s air travelers react negatively to predatory practices and misinformation. They gain if the consumer still has a conscience. This is a losing proposition in many parts of the country, but maybe not in Hawaii. There’s still an aloha spirit here, and you only need to look at the campaign strategies of Hawaii’s politicians compared to their mainland counterparts to realize how different Hawaii really is from the mainland culture.

Ornstein’s Mesa Air Group blasted out of the blocks in June with a rather spectacular 82% load factor. Those numbers decreased to 64.5% in August, signaling that go! was already losing some of its steam. Right now, the average Hawaii resident is not aware of the extent of go!’s predatory practices, but HERO and the established airlines are beginning to make inroads. The September 23 Star-Bulletin article by Dave Segal was a milestone of sorts in that it allowed go!’s opponents such a rich opportunity to express their concerns about the new carrier.

Who will win this contest of wills? It’s one of the most intriguing business stories of recent years. The action will likely make the aerial scenes from FLYBOYS appear tame. Stay tuned.

13 Comments:

Blogger Delta1162 said...

Mr. Forman what do you think of the "We dream of a day when tickets for airlines are free." comment that J.O. made? Sound like he likes the color red...

On another note a good friend of mine who lives in Belgium told me that there might be some trouble brewing with the Virgin Air Group(didn't J.O work there as an Exec under Branson?)and some nasty rumors of price fixing. From what he understands there is enough merit that the courts are investigating the matter just wondering your thoughts on the matter

Thanks!

12:10 PM  
Blogger Peter Forman said...

delta1162,
Two words come to mind when I read Mr. Ornstein's words about free tickets: fantasy and diversion. His idea is fantasy because topping www.ryanair.com in generating funds from a website is like saying, "we're going to be the next ebay". Everybody flys for free? I think not.
The word diversion comes to mind because go! has been criticized for offering tickets at a price which cannot come even close to generating a profit. Rather than acknowledge the problem, Ornstein tries to pull a rabbit from his hat with this idea that the website will allow free tickets.
The free tickets idea happens to be his second major diversion in two weeks. The $19 HERO fare war also served to divert attention away from damaging information introduced in court.
After reading the free tickets idea, I ponder the wisdom of having airline management join its pilots in a mandatory drug testing program.

1:45 AM  
Blogger TooMuchOrnsteinEnvyOverHere said...

No offense, fly boys, but you guys sure seem to have a case of Jonathan envy for some reason.

There are some JetBlue and Frontier rumors today in the Rocky Mountain News:

http://www.rockymountainnews.com

Any of you fly (or maybe it's cry) boys care to comment?

JBLU and FRNT are the ticker symbols for your information.

6:55 AM  
Blogger High Flyer said...

What specific mis-leading comments do you attribute to Ornstein? It would appear that the only mis-leading comments are yours, including your claim to be unbaised. Do you disagree with Ornstein when he notes that Hawaiian and Aloha's antitrust immunity allowed them to raise ticket prices above true market levels?

9:44 AM  
Blogger TooMuchOrnsteinEnvyOverHere said...

It's my professional opinion that Hawaiian and Aloha may very well spin/crash/burn like ACAI aka FLYI did soon.

It's also my professional opinion that Jonathan Ornstein's the best airline exec to come along in this decade if not the past 20. My opinion is shared by the likes of David Bonderman (TPG) and others of his caliber.

Mr. Forman, your book sounds interesting and I probably will purchase it/read it. I would also like to hear your opinion on why you believe it's okay for Aloha and Hawaiian to violate federal anti-trust rules. Bill Gates got into quite a bit of trouble over that and the EU's still not done with MicroSoft.

10:30 AM  
Blogger no more lies said...

"It's my professional opinion that Hawaiian and Aloha may very well spin/crash/burn like ACAI aka FLYI did soon".

Well "my professional opinion" is the longer Mesa stays in Hawaii the more screwed Ornstein is!

Keep writing checks with your ego that your shareholders cant cash OJ.

66.1% load factors / your only hope is another terrorist attack you POS!

I hope we go another 5 years without a terror attack or war escalation so you can continue being humiliated out here in Hawaii.

FU JO!

1:27 PM  
Blogger High Flyer said...

Mr. Forman, I'm a little disappointed you have not responded to my earlier post. The more I read your blog, the more convinced I am of your biased opinions. You claim to be an expert on airline tactics and economics, yet you make uninformed comments regarding go!'s recent $19 fare sale. You write as if a $19 fare sale means go! will be selling all of its seats at $19. You don't honestly believe that to be the case, do you?

You note that Ornstein said each trip needs about $2,000 in revenue to breakeven. At a 75% load factor go! would only need a $53 average fare to breakeven, considerably less than the average fares before go! entered the market. Remember, we are talking about average fares, not sale fares. This is certainly a different picture than the one you painted when you said, "imagine one of go!’s 50 passenger jets with every seat full. There’d be an additional 20 passengers on the left wing, 20 passengers on the right wing, and about 11 passengers on top of the fuselage and tail in order to generate break even revenue on a typical interisland flight (using the $2000/flight cost claimed by go!)." That seems like a pretty biased characterization to me.

You also imply go! has a markedly worse product when you say, "the established airlines retain an altitude advantage associated with aircraft comfort, flight crew experience, and established records of reliability." Have you flown on any of go!'s aircraft? How are Aloha and Hawaiian's crews more experienced? It seems to me that the only thing that has a lot of experience are Aloha's 737's which are, I believe, the oldest jet fleet in the United States. Finally, how can you compare reliability for airlines that control their schedules to one that has it's schedule dictated to it. A better comparison would be against go!'s reliability.

I'm all for lively discourse and differing opinions. I am not, however, impressed with people who hide under the mantle of being unbaised when they clearly are just the opposite.

8:42 PM  
Blogger no more lies said...

Peter Forman knows a rat when sees one. Carl Icahn, Frank Lorenzo, real trouble...

Jonathan Ornstein, wanna be.

Mesa sucks, and cant even get the hostile takeover right!

LOSERS!

12:02 PM  
Blogger Peter Forman said...

High flyer and toomuchornsteinenvyoverhere:
I've been on the mainland and rather detached from this air battle for a few days. Here are answers to your questions.

High flyer:
Let me list two specific misleading comments I attribute to Ornstein. First, he asserts that Hawaiian and Aloha have been overcharging customers. Take a look at typical fares on the mainland charged by Mesa and other carriers for routes of similar distances, and you will see that Aloha and Hawaiian's fares have actually been less than the average mainland fares. Also, by offering $39 fares, then $29 fares, and finally $19 fares, Ornstein is implying that such fares are substainable. Yet you do not see Mesa offering such sustained fares on mainland routes. Ornstein's intention is to convince the public that they will enjoy substantially lower fares if go! succeeds, yet go!'s cost structure does not allow such radically low prices.

Secondly, go! received damaging press when communications between Mesa's advisor and a top company official revealed that go!'s entry into the interisland market "makes no sense" as long as Aloha Airlines remains in business. Further, the court evidence revealed a desire to give Aloha "the last push" and put that carrier out of business, then raise fares afterwards. For Ornstein to declare that these words were nothing more than jokes is ridiculous for two reasons: there's nothing funny about the comments, and the comments are in line with
the economic realities which go! faces.

Concerning the $19 fares, I realize that higher fare tickets are sold as well, but I wanted to illustrate just how ridiculously low a $19 fare is. What concerns me most about the $19 fare is that it works against a return to break-even operations for all three airlines. With the added capacity in the market, go! likely cannot expect much more than a 66% load factor when averaged throughout the year. Such a loadfactor requires an average of about $60 a ticket for go! to pay its most basic costs. Add $9 tax and fees, add some contribution to the company's administrative expenses, then add a reasonable profit and you arrive at fares which are not much different than those charged before go!'s arrival. I will give go! credit for one benefit to the consumer, however: a wider range of fares will pull some additional customers back into the market. The problem is that go!'s lowest fares are just too low for go! to expect to achieve a break-even performance.

Concerning the attractiveness of the product, I stick with my previous statements. A narrower fuselage is less comfortable than a wider fuselage. My neighbor complains he has to tilt his head at an angle if he gets a window seat on the regional jet. Do I believe that a 1,000 hour copilot is generally less competent than a 6,000 hour copilot? You bet. One of the characteristics of a good copilot is someone who has the experience and confidence to challenge a captain who is about to press forward with a bad decision. Hawaiian has the best on-time record in the business, and Aloha has one of the lowest complaint records. For go! to exceed these performance levels is unlikely, particularly with low-paid labor. I'm sure go! has plenty of good employees, but the effects of low pay take a toll over time (higher turnover, etc.).

Toomuchornsteinenvyoverhere...
Concerning anti-trust measures, you're likely referring to the government's decision to allow Aloha and Hawaiian to coordinate schedules after 911. I personally believe that this made sense. Remember that the government wrote some mighty big checks to help keep the airlines aloft after 911. As a taxpayer, I would rather see a coordinated reduction in capacity than more public funds going to those two companies. Both Aloha and Hawaiian wanted the other guy to cut capacity first. This would allow a market-share increase for the hold-out. Once the dismal losses following 911 diminished, the government changed back to its previous arrangement. If go! had been in the market at the time, I would have been in favor of three-way discussions with anti-trust immunity.

regards,
pf

1:00 AM  
Blogger High Flyer said...

Dear Mr. Forman,

Thank you for responding to my earlier posts, however I think your responses further illustrate your total lack of understanding of basic airline industry economics. While everyone is entitled to their opinions, you do everyone a disservice with your unsubstantiated and false proclamations.

While you might like the public to believe Ornstein’s two comments you site are misleading, for any one with a modicum of basic airline economics they are far from it. You say Ornstein’s assertion that Aloha and Hawaiian have been overcharging the public is misleading and point to what Mesa charges for similar length trips as proof. This statement alone demonstrates your complete lack of airline economics and how Mesa operates. Over 98% of Mesa’s revenues come from revenue guarantee contracts where its partners (Delta, United, US Airways) set the schedules and fares. Is that something you are unaware of or purposely neglected to mention in order to mislead your readers? Only a small percentage of Mesa’s revenues are actually determined by Mesa. The few cities Mesa operates to independently are low frequency, 19-seat turboprop markets generally under the Essential Air Service subsidy program that have completely different economics than a high frequency all jet shuttle market like Hawaii. To suggest a rural market served once or twice a day using 19-seat turboprops with low load factors is the same as markets flown almost 50 times a day with jets and high load factors again demonstrates either your complete lack of understanding of airline industry economics or purposeful intention to mislead your readers. You appear to be unaware that the unit costs of a 19 seat turboprop are among the highest of any commercial aircraft and triple that of a jet. Now who’s being misleading?

Regarding fare levels, to the best of my knowledge, Ornstein has never said or implied that $29 and $19 fares are permanent in the same way go!’s $39 fare is. What he has said, on countless occasions, is that Aloha and Hawaiian have had a nice little duopoly going on in Hawaii (sometimes even under the protection of antitrust immunity) and the best way to get people to try go! is to be the price leader. This does not appear to be a bad business proposition and one that has been successful for many other companies. Being the price leader doesn’t mean go! won’t continue to offer a range of fares, but Ornstein has committed that go!’s average fares would remain substantially below Aloha and Hawaiian’s pre-go! fares.

You go on to say that Ornstein's comment is misleading because go!’s fares aren’t sustainable. What data did you use to make that determination? Do you have knowledge of go!’s yield management system? The $53 average fare I calculated earlier would certainly be both sustainable and substantially below Aloha and Hawaiian’s pre-go! fares. While you calculate a $60 breakeven average fare, you calculate this by using a 66% average load factor. You seem to imply the best go! can hope for is an average year-round load factor of only 66%. This is just one more example of an uniformed and biased opinion. go! had a 65% load factor in its 3rd month of operation and Hawaii’s seasonally worst month. You somehow interpolate that to mean go! will average only 1% better for the entire year. Are you suggesting that go! has reached its maximum market penetration in only a few months? Even Southwest has said it takes over 2 years to fully develop a market. Mesa has only been in the market a little over 4 months and is up against 2 well entrenched carriers with established brands, frequent flyer programs, etc. To think go! has reached its maximum market penetration in only 4 months is either incredibly naïve or purposely misleading.

Furthermore, Mr. Ornstein didn’t say it cost $2,000 just to cover go!’s basic costs, he said, “I can tell you that our break even is we believe, our fully allocated break even is less than $2,000 a flight. … We are, frankly, very surprised that with 50 seat aircraft, which again are not ideally suited that we're doing as well as we're doing. Again, as I suggested earlier, that if we could maintain these load factors, which given the way the market operates on peaks, we think we probably could, and with the existing fare levels, the Company would be profitable with larger regional jets today.” As $2,000/flight cost was a fully allocated cost it clearly included all of the taxes, overhead, etc you claim was missing. As such, under your own calculations, even an average fare of $60 given 66% average load factors is below those charged by Aloha and Hawaiian before go!'s arrival.

Your whole premise that this is a misleading comment is your belief that “go!’s cost structure does not allow such radically low prices.” Given Mr. Ornstein’s publicly stated comments to the contrary, I don’t know how you can draw that conclusion. What analysis have you done to back up your misleading comments? I reviewed the DOT’s Form 41 financial information for Aloha, Hawaiian and Mesa’s inter-island fleet types and, making some generalized assumptions for each carriers indirect operating costs, it appears that at a 75% load factor both Aloha and go! would breakeven with an average ticket price of approximately $48.00, yet Hawaiian would need an average fare of over $60.00. And these calculations are based on historically high fuel prices. Contrary to your assertions, it appears the facts bear out Mr. Ornstein’s comment and you are the one who either hasn’t done the proper analysis or is again being purposely misleading.

Your characterization of Ornstein’s other comment is also misleading. I read in several publications on more than one occasion that the email comments quoted by Hawaiian’s lawyers were taken out of context and described a business plan that was subsequently revised for the very reason referred to in the email. In fact, in a recent PBN article Ornstein specifically said these comments were made in response to an initial business plan that included go! operating 10 aircraft in Hawaii. "I concluded in that e-mail that it wouldn't work unless one of the existing carriers went out of business, and they're using it as evidence of predatory practices. It's taken out of context. When we refined that model down to five planes, we concluded that we could make money with all the current carriers in business. If we'd thought we'd put them out of business, we wouldn't have come." An other article also stated that Ornstein said “he hoped to make so much money from commissions on Web site travel bookings referrals that he could continue to fly the airline at a loss, citing the Irish discount carrier Ryanair, which he said gives more than a third of its tickets away.” Without a better knowledge of the hows and whys of that particular email exchange, all you’re doing is perpetuating a view based on a comment taken out of context. Now who is making misleading statements?

Concerning your $19 fare illustration, you leave your readers with the mistaken impression that all of go!’s seats were sold for $19. There isn’t an airline in the world that doesn’t sell some of their seats below cost and other seats above cost. It’s called revenue management, something you appear not to understand. So for you to say, “the problem is that go!'s lowest fares are just too low for go! to expect to achieve a break-even performance” is not only misleading it’s also uninformed and again contrary to basic airline economics. The real question is, can go! make money selling tickets at an average fare that is substantially less than Aloha and Hawaiian’s pre-go! fares? When you take a look at the facts dispassionately and perform the least bit of analysis, the answer is clearly yes.

I appreciate your clarifications regarding the attractiveness of go!’s product, but again they are uniformed and misleading. Study after study by the majors have proven there is no differentiation by customers on short haul flights between regional and narrow body jets. You either didn’t know this or were, once again, purposely misleading. Regarding safety, while an uninformed observer might think your characterizations regarding pilot seniority and safety make sense, the facts actually show just the opposite. Statistical studies have in fact proven there is no correlation between an airline’s safety record and its pilot seniority. In fact, the airline with the highest pilot seniority, US Airways, has the worst safety record of all the majors while the airline with the lowest seniority, Southwest, has had the best safety record. Finally, if you’re going to compare operational performance you have to compare Aloha and Hawaiian’s performance with go!’s interisland performance (as opposed to Mesa's mainland operation which includes a high proportion of flying in the highly congested and weather impacted East Coast cities). And for you to suggest that performance is a function of how much an employee is paid is incredibly simple-minded. High pay has certainly not helped the employees of United, Delta, Northwest or US Airways. There is a lot to be said to ensuring job security – something Mesa has done far better than it’s competitors in Hawaii.

While a lot has been said about go! being predatory, I think everyone should take a closer look at Aloha and Hawaiian’s actions. Over the years it has been these two carriers who have engaged in predatory practices and driven many smaller competitors out of business. Since go! came to Hawaii, Aloha and Hawaiian have added more capacity than go! and no one forced them to match go!’s fares. If you assume only 25% of go!’s seats are offered at the $19 or $29 levels then less than 2% of the total inter-island market was effected by go!’s fares before Aloha and Hawaiian decided to match and increase capacity. Either these two carriers are engaging in their own predatory practices or Ornstein has outsmarted them getting to match fares representing less than 2% of the total market. If correct, that would appear to give new meaning to the phrase “rope a dope.” I guess Ornstein’s early comment, “I can't save them from themselves,” is proving to be quite prescient.

9:45 AM  
Blogger no more lies said...

"high flyer", Peter Forman isn't the one who has been caught lying to a Federal Judge, stuffing an on-line poll, being banned from trading stock, trying to bust a union or cratering an entire hull with 21 fatalities in Charlotte NC.

To accuse him of being "purposely misleading" is indeed the pot calling the kettle black.

Whichever Mesa executive you are "high flyer", I wonder if you are aware the Mesa BOD and company officers are also liable under the charges in Aloha Airlines 11 seperate counts?

The best advice I could give you is find the same door Fogelman exited and RUN don't walk.

Unless of course "high flyer" is just another Ornstein psuedonym.

2:36 AM  
Blogger no more lies said...

yeah, thats you isn't it OJ?

2:38 AM  
Blogger Peter Forman said...

High Flyer,
As you might imagine, I could write quite a lengthy response to your post. Unfortunately, this thread is so old that it wouldn't be seen by enough eyes to be worth the effort. Perhaps we'll get a chance to explore these issues in a more current post.
Peter Forman

8:22 PM  

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