Stealth Fare Sale?
If you check the website of Hawaii's interisland airlines, you'll see little mention of a $29 fare sale, yet there's one presently underway. Visit the websites of Aloha, go!, and Hawaiian, and you'll discover that most interisland tickets are priced at $29.

So what's going on? This is probably a case of one carrier (take a guess!) trying to slip under the radar screen with lower prices. The other airlines aren't asleep at the switch, though, and they've matched prices.

The significance here is that ticket prices are now routinely going for less than half the cost of providing the service. Mesa Airlines surely does not expect Aloha or Hawaiian to allow go! to gain a price advantage. Allowing go! to sell cheaper tickets would be suicidal for both of Hawaii's traditional interisland airlines. What we're seeing is a continued cash bleedfest in this market as Mesa tries to force Aloha closer to a cash crisis, and to inspire the traditional interisland airlines into settling their legal actions with Mesa. Ironically, the harder Mesa pushes, the larger the company's potential legal liabilities become, and the more likely it is that Mesa will be found guilty of illegal behavior.

There are times when offering tickets at below cost makes economic sense for airlines. Unfortunately, such a blatant and consistent dumping of seats onto a market at far below cost might inspire laws which could clip the wings of legitimate fare sales. Go!'s behavior here is not in the long-term best interests of consumers.

Note: By Wednesday, Nov. 29, the $29 fares had disappeared again. Who knows when the stealth fare war will strike again?
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Go! vs. H.E.R.O.

If there’s one lesson to learn from the interaction between go! airlines and a Hawaii airline employee group known as HERO, it is that hatred is a bad ingredient in most any enterprise.

HERO came on the scene with legitimate concerns. Evidence strongly suggests that MESA Air Group (Mesa:Nasdaq) created their go! airlines unit with the specific purpose of putting Aloha Airlines out of business and replacing them. Because of the seniority system used in so many airline jobs, the loss of an employee’s airline is pretty much the end of his or her dream career. Evidence also indicates that MESA is using unethical and illegal tactics to achieve its goal. Any wonder why these employees feel strong negative emotions toward the architects of this invasion?

With such inspiration, HERO managed to become a major thorn in the side of CEO Ornstein, because so much of HERO’s efforts were directed specifically at the man. Ornstein cooperated by contradicting himself constantly, and HERO’s www.dontflygo.com website listed these contradictions with embarrassing regularity.

What really irks HERO members, though, is that the story Ornstein is selling to Hawaii’s traveling public, the reason for go!’s existence, is basically untrue. “They'd rather continue to gouge Hawaii,” said Ornstein of go!’s competitors recently in Pacific Business News, “but they'll have to get used to us providing affordable fares." The problem here is that by lowering prices from around $80 to $39 and sometimes even $29, go! is reinforcing in the consumer’s mind that the original interisland fares must have been gouging. Yet what go! is not telling consumers is that it is losing a considerable amount of money with every $29 and $39 fare it sells. Ornstein’s argument appears convincing if you just look at past and present fares, but if one examines the cost of providing interisland flying, the myth becomes apparent. Many travelers want to believe that myth, though, and go! capitalizes on this phenomenon.

HERO’s efforts culminated in a rally beside the state capital. Over a hundred employees showed up during the event, waving their banners and calling out “Don’t Fly Go!” and other slogans. Judging from the response by motorists, many passersby supported the group’s actions. Then someone began passing around a T-shirt and many attendees signed it. Unfortunately, one of the signers used the adjective “Jewish” in his comment. An even bigger mistake, though, came when organizers of the event failed to properly scrutinize the T-shirt for over-the-top comments before it was sent to Ornstein. The hatred many of these people feel towards the recipient of the shirt likely clouded their judgment. Those ill feelings certainly weren’t based on anti-Semitism, though, because a large portion of HERO’s leaders are Jewish themselves.

Nonetheless, HERO made a mistake, they gave Ornstein a tool to use, and he ran with the opportunity. His lawyers managed to intimidate the new www.dontflygo.comwebsite operator to shut the site down at a critical time. The future of HERO is now questionable, which is a shame because they have an important perspective to deliver. If this employee group is to pull itself back together, it must control its negative emotions and reinvent itself with a more positive emphasis.

Hatred is a two-edged sword, though. Those who inspire hatred are seldom successful for long. Frank Lorenzo wins the prize as the most hated airline executive of the past fifty years, and he left behind a financial crater to the tune of billions when he finally went down in flames. Richard Ferris and Stephen Wolf also generated feelings of hatred among their employee groups later in their careers, and both leaders fell short of achieving commendable results during these periods. Powerful negative feelings toward Mesa’s CEO largely stem from the perception that he uses unethical means to achieve his goals and that his goals are brutally self-serving.

Unfortunately for Ornstein, the negative feelings aren’t restricted to employees of his competitors. He is dealing with a revolution at home as 90% of Mesa’s pilots recently gave a vote of “No Confidence” to his management team. The Mesa pilots cited poor operational performance, but the problem is wider than that. These pilots see that the promises made to them are unlikely to be realized. They agreed to work for less because of promises of growth and future prosperity, but growth is slowing and prosperity looks questionable as the airline fails to provide the pilots with the resources they need to take pride in their work and keep the customers satisfied. Moreover, the dreams of many pilots to use a regional airline such as Mesa as a stepping stone to reach a a major airline job have become hollow, as price competition from regionals chip away at both the quantity and quality of jobs with the majors. Most airlines begin with a honeymoon period in which employees are optimistic and hope can be substituted for larger paychecks. Once that hope diminishes, the employees want more pay if they are to be enticed to stick around. Mesa’s honeymoon is over, and rising labor costs will become a significant issue before long.

A most disturbing event took place on November 20, as one of go!’s most outspoken critics lost the front wheel to his truck due to the loosening/removal of that wheel’s lug nuts. If the failure took place 5 minutes later, he would have been on Oahu’s H-3 freeway, cruising at highway speeds, and the truck sat so high on its enormous wheels that it would almost certainly have rolled. That critic of go! is lucky to be alive tonight. I traveled to the scene of the accident and spent an hour speaking with the individual. He convinced me that he had recently tested the lug nut security. We discussed the possibility that a wheel theft was interrupted, and it is not as plausible an explanation as a sabotage theory for a variety of reasons. There is no way that such a single occurrence can be pinned upon go! or one of its sympathizers, but let’s hope this is not the beginning of a series of “accidents” which befall those who speak poorly of go!. That would be a form of hatred far worse than the mailing of a T-shirt with disagreeable names upon it.

Why $29 Fares Again?

Mesa Air Group’s (Mesa:Nasdaq) go! Airlines has once again announced a $29 fare sale for interisland tickets in the state of Hawaii. The big question is why?

According to Mesa’s CEO, the fare war is to honor veterans as the Veteran’s Day observance approaches. If Mesa truly wanted to thank these people, it could have extended a special price for the active military, veterans, and their families. Instead, it offered reduced fares to everyone, suggesting a different motivation and indicating that this tribute was disingenuous. Shame on you, Mesa, veterans deserve more respect than that.

One explanation for this new fare war? Months ago, go! extended a special price on tickets when an employee group known as HERO launched its inflammatory www.dontflygo.com website. This week HERO’s website resurfaced after an absence of several weeks, HERO members held a rally on the steps of the state capitol in Honolulu, and the group formally requested that Hawaii’s Attorney General investigate go! for unfair trade practices. Go!’s timing of its new fare war suggests that it is once again trying to diminish the efforts of HERO by punishing the airlines of its members whenever the group pushes forward with its agenda.

What about the economics of offering $29 tickets? Short-duration fare sales do generate immediate income for the instigator airline, and this tactic has been used in the past by cash-strapped airlines. Mesa, though, has hundreds of millions of dollars at its disposal, and this explanation clearly doesn’t fit here. In the long run, such sales typically hurt the income of the instigator and its competitors. If the sales happen often enough, consumers learn to hold off their ticket purchasing until another short-term sale comes along. A substantial increase in ridership fails to materialize, but a drop in income per ticket sold becomes inevitable. Furthermore, previous discounts in excess of 50% have only expanded the interisland market by about 3%, making further price cuts clearly uneconomical. Seeking profits or at least minimizing its losses is not compatible with this latest fare offering by Mesa. Their actions continue to strongly suggest predatory behavior.

This latest effort to put price pressure on its competitors may in fact be aimed at forcing Hawaiian and Aloha to settle their lawsuits with Mesa. That company’s potential liability is huge now, but go!’s competitors may be so ready to see this airline leave their market that they may be persuaded to cut a deal. Another possible explanation is that Mesa is searching for an exit strategy, and a government agency or court decision could likely provide the answer. The battle to gain a footing in Hawaii’s interisland market is not going well for Mesa. Their hard-charging CEO is known for not backing down from conflicts, and to do so may injure his negotiating stance with other companies in the future. If a government agency or court clips go!’s wings, however, Mesa can claim to be the victim as it departs the interisland market. The CEO retains his tough-guy reputation, and Mesa gets itself out of this money-losing experiment. The longer that go! continues offering ticket prices which are far below its costs, the more likely this conflict will be ended in court or by a government order.

They’re Back

For more than a week in late October and early November, the www.dontflygo.com website has been stripped of content. Had the sun finally set on this anti-go! airlines website? All that remained visible was a link for donations and a message that the site was in the process of being sold. Apparently that transition is now complete because the website is active again and fully engaged in its previous task of making life difficult for go! airlines and the CEO of its parent company, Mesa Air Group.

Along with new content, the website also announced that HERO, a group of Aloha, Hawaiian, and Island Air employees, has sent a letter to Hawaii’s Attorney General, requesting an investigation of go! airlines for activities which allegedly violate state law. Specifically, the letter cites go!’s continued sale of below-cost air tickets and statements by Mesa Air officials which back up HERO’s contention that go! came to Hawaii with the specific purpose of putting Aloha Airlines out of business.

To publicize HERO’s request for a Hawaii State investigation of go!, the employee group held a rally in Honolulu on November 8. Employees from all three pre-go! Hawaii airlines took part in the late-afternoon rally by lining Beretania Street in front of the Capitol Building and sharing their message with passing motorists during rush-hour traffic. For photos of the rally, visit www.airlinesofhawaii.com/rally.htm. Within six hours of the event, the HERO group had produced a smart and entertaining video of their rally, which demonstrates the power of new media to get a message out.

Hero's new message is noticeably more palatable than their previous efforts. They're now saying "give us a fair fight and we'll take you on by running better airlines than you. Give us an unfair fight by selling tickets at below cost to drive us out of business and we'll take off the gloves in our response." This is one group which Mesa should not underestimate.

High Stakes Poker

Visit the websites of Hawaiian, Aloha, or go! airlines during November, you’ll discover that a traveler can snag a $39 fare for departure times throughout the day. He can lock in one of these fares the night before travel. Why pay more?

The problem for go! is that this prolonged fare war is beefing up the arguments of its competitors that go! is dumping below-cost tickets on the market in order to force one of the established airlines out of business. Go!’s parent company Mesa Air Group (Nasdaq: MESA) has more money in the bank than the other two airlines, and since the vast majority of its revenue originates on the mainland, Mesa has a reduced exposure to these losses in Hawaii.

An argument by Mesa that it is trying to find profits by expanding the market simply does not hold up under scrutiny. For the third quarter of this year, go!’s lowest prices were 50% below pre-go! ticket prices (and sometimes much deeper), yet this discounting yielded a meager 3% increase in interisland traffic. The bottom line: there’s no way that such deep discounting will generate enough extra traffic to compensate for the revenue lost by discounting. If go! wanted to minimize its losses, it could offer fewer $39 tickets, but the airline is apparently not interested in taking that approach.

In the past, Mesa has pointed out that a majority of tickets sold during the fare war have been at price points higher than the lowest advertised fare. Yet in November we see almost across-the-board $39 fares. Few travelers are paying more.

So, what does Mesa hope to gain by this pricing behavior? It certainly is causing interisland losses over at its competitors. The discounting will not likely result in Hawaiian and Aloha giving go! a price advantage, however. Both long-time interisland airlines made that mistake in 1981 with Mid Pacific Airlines, and they know enough to avoid repeating it. Perhaps Mesa is hoping that one of the airlines will draw down its number of flights. This behavior is more possible than gaining a fare advantage, but it is still unlikely. To give go! a better foothold in the market is a long-term mistake for either of the two long-time interisland airlines. Mesa spoke of inroads when Aloha moved capacity out of its Honolulu hub and into direct flights from Maui to Lihue and Kona. This move may not have been a mistake by Aloha, however. It prevented go! from entering these potentially-profitable Maui markets first. Remember, this is a chess game, and it’s necessary to think several moves ahead.

Aloha and Hawaiian are feeling serious financial pain. They do, however, possess strong legal cases which are becoming stronger with each passing month. This is a classic game of chicken as airliners are rushing down the runway at each other. Someone has to flinch and nobody wants to be that someone. One solution might be a court decision which clips go!’s wings. Another solution could be a legal settlement between the parties.

As the bets get higher, so do the consequences. A continued fare war of this intensity could well lead to the disappearance of one or both of Hawaii’s longtime airlines. As for Mesa, the airline would likely survive even the largest of monetary damages, but a damaging legal decision would mean a financial bath for Mesa stockholders and could prove to be CEO Ornstein’s Waterloo. Instead of backing down from the legal threats, he keeps turning up the pressure on his competitors and ultimately on himself. If you like suspense, keep your eyes on this battle.