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.