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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 .

Wednesday, November 01, 2006






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.

4 Comments:

Blogger SJF Hawaii said...

Peter:

In the current battles between Go, Hawaiian and Aloha, I think that Mr. Orenstein is starting to see the same problems that MidPac saw when they were trying to undercut the competition in the 80's. Once the novelty of a low price wears off, with the understanding that this is going to be around for a while, the public has a tendancy to start looking at their vacation hours at work and decide that the neighbor island vacation will have to wait.
I think that is what is happening here with the in-your-face over capacty on interisland routes.
However, you already have seen some of the effects from this battle on the smaller airlines. For instance Island Air pulled it's Q400 planes from the market and will redeploy them in the Vegas market under licence. I am pretty sure that the folks at Island Air saw the landscape, realized that they were about to get slaughtered by Go! and decided to go with a Plan B. Novel idea!
As to what Hawaiian will do, they don't seem to be too worried, making about $7 million and change for the quarter. They'll be fine. It is Aloha, yet again, that needs to keep close watch as to what is happening. The next disclosure by the BTS of Aloha revenues will complete the story as to whether Go! got Aloha on the run.

3:35 PM  
Blogger Chris Haire said...

Peter,

This is Chris Haire, editor of Honolulu Weekly.For some reason, an email I sent to you bounced back. Here's the initial email.
CWH

Peter,

This is Chris Haire, editor of Honolulu Weekly. I just started reading up the allegation that go! tried to manipulate a Star Bulletin online poll and I was directed to your site. I would like to talk to you further about go! and the allegations of predatory practices. If you are interested, we can set up time for a phone interview.

Best Regards,
CWH

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7:45 PM  
Blogger Chris Haire said...

Oh, yeah, you can email me at chaire@honoluluweekly.com.

Thanks, Peter

7:46 PM  
Blogger Peter Forman said...

sjf hawaii:
One of the benefits of studying history is that you do indeed see history repeating itself. I agree with you that we tend to see an initial bump in interisland travel when a fare war first erupts. After a while, the interisland travel typically settles down somewhat. If we could make long-term travel patterns change, such as moving travelers from automobiles to airliners, then the bump in travel from low fares could be larger and more permanent. That's not going to happen here in Hawaii, though. It'll be interesting to see if the high-speed ferry (is that an oxymoron?) will increase overall interisland travel or will just steal passengers from the airlines.

When there are so many empty seats in the marketplace, the airline that does the best is usually the one which offers the premium product at the same price. Aloha wisely took this route during the Mid Pacific battle as it concentrated on on-time performance and flying its schedule with fewer cancellations than the competition. Banmiller wants to move Aloha back in this direction now, but I'd say that Hawaiian presently has the edge in providing the premium product. We'll see how things shake out in another year or so. As far as loads, Aloha took a hit during summer because they discounted less frequently than their two competitors. Now that almost all seats are going for $39 in the slow fall season, Aloha should bounce back a bit in market share. We'll see.
SJF, your analysis looks pretty good!


Chris Haire,
I have sent you an email message from another address, and I'll investigate the address with the problem.
pf

11:54 PM  

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