The China Factor

The big news this week in the Hawaii interisland air war is that Mesa Air Group, parent of go!, will begin a cooperative air service in China within the next twelve months. This new service will require an investment by Mesa of over $30 million, but the upside potential of the new service is huge. Congratulations to Mesa for this achievement.

Ironically, the U.S. airline that has worked the hardest to begin air service within China is none other than competitor Aloha Airlines. Aloha was founded in 1946 with the purpose of connecting China with the mainland U.S. Aloha (then known as Trans Pacific Airlines) failed to secure needed rights in China, but in the 1980s Aloha’s guiding light, Hung Wo Ching, nearly secured an intra-China air service. Alas, timing is critical in this business, and Mesa scored the China connection.

The China deal will have a significant impact on Mesa’s go! Airlines for several reasons. On the cost side of the equation, we can expect the lease fees for 50-passenger regional jets to increase as this type is introduced in China. Mesa gained its jets for go! at exceptionally low lease rates due to a glut of this aircraft type in the market, but the upcoming China service may eliminate much of that glut. Labor costs should also be heading northward for Mesa as the China service begins. The airline has had difficulties filling some pilot positions already, and pay requirements will have to go up if Mesa expects to attract qualified pilots for a base in China. Such upward pressure on pilot wages would have a spillover effect for Mesa’s Hawaii operation.

The China flying will also require considerable attention and brainpower. This challenge comes at a time when Mesa will be negotiating a difficult new contract with its pilots. The complications of go!’s struggles in Hawaii will be most unwelcomed, particularly when legal action begins.

The contrast between Mesa’s Hawaii flying and its upcoming China flying could not be greater in terms of risk versus potential reward. Hawaii’s go! operation has consumed more than $30 million of Mesa’s funds and the small airline is likely losing a million to two million dollars a month at present. Competitors Hawaiian Airlines and Aloha Airlines have given no indication that they’ll succumb to go!’s below-cost pricing. The potential legal liabilities are enormous, and if Aloha can prove violations of anti-trust laws, the penalties could deplete Mesa of cash at a most inopportune time. The upside potential of replacing one of Hawaii’s interisland airlines is quite limited, since the market has been shrinking for the past decade. A new competitor, the high-speed ferry, is set to enter the Hawaii market this summer and it will likely inflict even greater losses on the airlines. On the other hand, China offers enormous potential for growth and profits just as Mesa’s abilities to sustain profits on the mainland U.S. are floundering.

If Mesa could shed some of its legal liability in a deal which includes leaving the Hawaii market, it would be wise to choose this option. Mesa stands to enjoy a bright future if it can properly leverage this introduction to flying in China. On the other hand, Mesa’s go! subsidiary is an anchor restraining Mesa’s potential and could carry the company to the bottom if things go poorly in court. In terms of risk vs. rewards, it’s clear that a prolonged battle in Hawaii for Mesa makes little sense as its China options open. Mesa’s CEO is most unpredictable in his actions, however, so there’s no telling what to expect in the coming months. Stay tuned.

The Cause of Cuts at Island Air

A year ago, Island Air was flying high. Now the fast, sleek Q400s are gone and 65 employees are hitting the street. How much is new airline go! responsible for these reductions?

Few will argue that go!’s below-cost fares have hurt Island Air’s operation on routes where the two compete directly. But there’s more to the story. Remember that Aloha Airlines jumped into two traditional Island Air Routes, Kahului to Lihue and Kahului to Kona, as a means of escaping the financial bleedfest on routes served by go!.

Go!’s Joe Bock suggests that his airline isn’t the culprit since three of the five routes that Island Air is dropping involve Kapalua, which isn’t even served by go!. I’m not buying that argument. West Maui’s Kapalua Airport is a rather short drive from Kahului Airport, where $39 and often $29 fares are available. Would you take a short drive to fly at less than half the price? Many travelers to Maui apparently did, and that’s the reason why flights into Kapalua are coming up short on passenger counts. This is the second time we’ve seen this effect on Maui. More than two decades ago when Mid Pacific offered $25 interisland fares, Royal Hawaiian Air Service saw a reduction of travelers at its Kaanapali Airport on West Maui. History repeats itself.

One issue which cannot be directly linked to go! is the acquisition of the Q400 planes. Would they have been successful if go! hadn’t entered the market? Frankly, I haven’t studied the situation closely enough to know the answer.

With the exception of the employees losing their jobs, why is trouble at Island Air such a big deal? For thinner routes throughout the state, Island Air is the premier carrier. The new breed of competitors for Island Air, including go! express, will use single-engine, single-pilot planes in an effort to minimize costs. Personally, if I’m flying over the playground of the tiger sharks, I prefer two engines, thank you very much. I want to have this choice in the future, and I suspect many other travelers do too.