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 .

Saturday, December 23, 2006

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.


Blogger funbird2006 said...

The Mesa pilots leaving comments on The Mesa Hub seem to think of China as nothing but a way to threaten the pilots during contract negotiations that open up in 2007.

"give up the contract or we will shift the flying to China"

This was what Mesa did with Freedom back in 2002. As contract negotiations wore down, more and more flying was shifted to Freedom.
ALPA fought for Freedom and eventually won the flying back and stopped Ornstein from destroying whatever hard earned rights the pilots at Mesa had. Jonathan Ornstein has been seeking his revenge ever since.

This is probably it.

12:25 PM  
Blogger Peter Forman said...

This comment has been removed by the author.

9:14 PM  
Blogger Peter Forman said...

This is an interesting perspective, and the timing of the announcement certainly fits into the scenario you describe, but I think the theory is overblown. No doubt Mr. Ornstein has considered the negotiating angle with this expansion, but I have difficulty believing that the pilot's contract is the primary reason for the move. China flying is just too huge to tie it directly to these negotiations.

In some ways, the China flying will make contract negotiations more difficult for Mesa. Would you fly from a China base for the same money that you'd fly from HNL or another attractive U.S. base? I wouldn't. I believe that the China flying will require some type of cash incentive to attract the pilots, and of course ALPA can argue that Mesa's U.S. pilots should make the same amount. The worldwide supply of pilots is tight enough right now so that U.S. pilots are being contracted to fly in Asia at better rates than those paid by U.S. low-cost carriers. Then there's the issue of pilot experience. China is a much-less forgiving environment for low-time pilots. Skimp on experience for these pilots and there will be accidents. Finally, China flying will require additional hiring, and with Mesa's wages already resulting in some hiring difficulties, the new operation will only add to the need for Mesa to make its compensation package more attractive.

Keep in mind that the China connection will require cash investments but may not result in profits for some years. For this reason Mesa will be in no hurry to shift its flying from the rather dependable profits of selling services to other U.S. airlines.

My primary focus with the China flying is that I believe it will speed up Mesa's reassessment of its so-far unsuccessful attempt to profitably penetrate the Hawaii interisland market. In terms of risk vs. potential upside, China wins over Hawaii any day.

Thanks for the contribution, Funbird.

9:23 PM  

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