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.