Change in Flight Plan

Have you noticed a lack of verbal dogfights in the interisland air war lately? No truce is in order; instead we’re witnessing the next stage of this battle.

The cause for this change? Looming legal battles that lay ahead. Although Hawaiian Airlines fell short of grounding go! with an injunction, evidence revealed in the courtroom indicates that go! may well be found in violation of the law and face significant damage payments ahead. More recently, Aloha has filed suit after learning that emails between a Mesa adviser and a top official revealed a plan to force Aloha out of business. The parent company of go!, Mesa Air Group, has become more aware of its potential liability. What we are seeing right now are changes in market strategies which are byproducts of upcoming legal strategies.

In a recent Wall Street Journal article, “Mesa says that the email reflected a plan to go into the island markets with 10 airplanes; it decided that wouldn't work and instead launched in June with only five planes -- a plan it thought would work without killing Aloha.” Unfortunately for Mesa, their go! subsidiary has made multiple announcements of a planned expansion of 8-10 larger jets after the beginning of service, and the process of reselling itself as a non-predatory airline will be difficult if not impossible to pull off. There also remains the rather sticky point about go! being unable to turn a profit as long as Hawaiian and Aloha remain in the market. If the legal challenges of Hawaiian and Aloha have at least temporarily scuttled go!’s expansion plans, this is good news for the two long-time interisland airlines.

The Wall Street Journal article also mentioned negotiations between Mesa and Aloha in which Mesa would provide some interisland service for Aloha with its smaller jets. In other words, Mesa offered Aloha a chance to buy services from Mesa or face a bloodbath of losses as Mesa aggressively competes against Aloha. What’s particularly interesting about this revelation is that Mesa was originally looking to introduce their usual business model into Hawaii: providing aircraft and crews to an established airline. Only when this option failed did Mesa press ahead with plans to create a competing airline. The significance here is that Mesa likely remains keen on the idea of following the business model which presently accounts for over 90% of its operations. Should go! succeed in replacing one of Hawaii’s present carriers and profitably establish itself in the market, we should not rule out the possibility that Mesa may offer the go! operation to a larger airline. You would then see the surviving legacy interisland carrier competing against a United Express, Delta Express, or airline with a similar flavor. Such an arrangement would require a significant rise in airfares to support it.

Hawaii’s interisland market has now entered its fall doldrums when empty seats are plentiful. If you visit the websites of Hawaiian, Aloha, and go!, you’ll find $39 fares available on most flights. Visit national travel sites such as Orbitz.com or Travelocity.com and the $39 fares are nowhere to be seen. Instead, you find prices ranging from $72 to nearly $100. This is a significant strategy change from a few months ago.

In terms of potential legal settlements, Mesa must keep its go! unit operating in Hawaii so that it retains a bargaining chip. Hawaiian and Aloha meanwhile are unlikely to significantly draw down their schedules during these doldrums because to do so would improve Mesa’s argument that it can achieve a profit without putting either of the competitors out of business. Expect legal strategies to continue to heavily influence market strategies of all three airlines in the months ahead.

Interisland Dogfight Heading for Court

On Friday the 13^th of October, Aloha Airlines filed suit against Mesa Air Group (Nasdaq: MESA) claiming that its rival breached confidentiality agreements with the carrier. Mesa considered the purchase of Aloha during the Hawaii airline’s flight through bankruptcy court, and Aloha alleges that Mesa illegally used confidential knowledge of the carrier’s operation to compete unfairly. Aloha specifically names predatory pricing as a complaint. This lawsuit is similar to one filed by Hawaiian Airlines against Mesa Airlines for breach of a confidentiality agreement.

In early October, Bankruptcy Judge Robert Faris denied Hawaiian’s request for an injunction to ground go! Airlines in anticipation of a full trial set for April, 2007. Hawaiian needed to prove that “irreparable harm” would take place if go! was allowed to continue operations, and the judge felt that Hawaiian Airlines did not meet this test. Judge Faris’s ruling did not exonerate Mesa Air Group, however. In fact, Faris commented that Mesa “probably breached the confidentiality agreement”.

Not surprisingly, Mesa’s Chairman put his best spin on the news and called the ruling “a big win for the people of Hawaii and for low fares.” Such tactics by Jonathan Ornstein highlight the difficulties that may lay ahead for Mesa. Ornstein is a master at using the media to best advantage. He has been known to make statements that fly in the opposing direction to available evidence. A smile, a denial, and a positive spin have served his airline well so far in this battle. Such tactics don’t work in court, however. Several observers of the hearing in Judge Faris’s courtroom commented on how poorly Mesa’s defense faired when subjected to the evidence and arguments presented by Hawaiian’s attorney. Most likely, only the high standard of “irreparable harm” saved Mesa from defeat during the early October hearing. Such a standard will not need to be met in Hawaiian’s April 2007 trial or with Aloha’s trial.

So, what can we expect from the upcoming legal action? The evidence presented so far suggests that Mesa will be found guilty of at least some misconduct concerning the confidentiality agreements. Aloha and Hawaiian should have no trouble proving that the extremely low fares forced upon them by go! have resulted in millions of dollars in losses for their interisland markets. Aloha and Hawaiian will most likely seek monetary damages along with an interruption to Mesa’s interisland operations.

The game now is in settlements before the trials begin. The potential downside for Mesa is enormous: adding damages realized by Hawaiian and Aloha to its already expensive venture into the interisland market. Aloha’s lawsuit makes the whole bargaining process just that much tougher now that two plaintiffs would need to be satisfied. The stakes have been raised in this poker match and no one yet appears ready to fold. The next year should be interesting indeed.