Smaller Airlines Strike Back

The Hawaii interisland fare war has recently expanded to include smaller islands Molokai and Lanai, served by mid-sized airline Island Air and smaller carriers such as Pacific Wings. Pacific Wings has just announced plans to create a low-fare division and offer $29 fares on all nine seats of its Cessna Caravan aircraft. And away we go with another fare war!

What would motivate Pacific Wings to cut its prices on these routes? The most likely answer is that it sees someone else preparing to offer lower fares on those routes, and it wants to be first out of the blocks with the discounted air travel. Let’s face it, the first airline to announce lower fares gets all the press coverage. Those who match fares only get a few words of newsprint. Perhaps Go! Express is the most likely airline to press for lower fares when they introduce their own nine-passenger Caravans. Your comments on this competition are welcomed since I hope to gain a better grasp of the dynamics.

Meanwhile, Island Air not only has been jostled by the go! fare war, it now must deal with a fare war on its bread-and-butter routes, as well. Island Air responded with a slightly lower fare (after taxes and fees are figured in) for nine seats of each aircraft serving those destinations. This is probably a reasonable response given that many travelers will still prefer the larger, twin-engined, two-man crew Dash-8s, even at a somewhat higher price. Island Air can use this model to gauge the market and make adjustments later, if necessary.

As for Pacific Wings, it has been a rather lively player in this invasion of Hawaiian airspace by go! and the pending arrival of go! express. Pacific Wings has announced plans to fly certain Hawaii routes to smaller communities such as Hana without a federal essential air service subsidy. This strategy removes the ability for other airlines to request subsidies for the same service. Now Pacific Wings has announced plans to provide air service to various New Mexico communities in the heart Mesa Air Group country. If Mesa is going to unleash devastating below-cost fare wars in Hawaii, then Pacific Wings sees that a little turnabout is fair play. Its nine-passenger Caravans can serve cities without the subsidies that larger aircraft require, such as Mesa’s Beech 1900s. So, Pacific Wings plans to remove a few potentially-profitable destinations from Mesa’s backyard. Stay tuned.

Just Don’t Call It Free Enterprise

For more than half a year now, a traveler need pay no more than $39 for a hop between the Hawaiian Islands, and at times fares have nosedived to half that amount. These aren’t just promotional fares, either: you can snag a cheapo fare from the airline of your choice just about any hour of the traveling day. There’s no excuse for paying more. The problem here is that the fares are well below the cost of providing the service. In a study commissioned by Aloha Airlines, “Sabre Study” researchers concluded that Aloha’s costs were $50 for providing the service, Hawaiian could fly for $55, and newcomer go! needed $67 a ticket to break even. The study assumed a 62% load factor, which is close to what go! has been carrying these past few months. Go! has disputed those figures, but the overall point of the study remains intact: go! does not have a cost structure which allows it to offer such ridiculously-low prices in the long haul.

By cutting interisland fares by 50%, and sometimes by 50% again, the new carrier has increased overall travel by a mere 3% to 8%. If the airlines actually paid customers to ride their planes we might see another 8% increase in travel, but in this market deep discounting clearly does not lead to profits. So, what’s going on here?

In most any U.S. business, a competitor cannot routinely dump its products on the market at below-cost prices. In the last century, oil-industry robber-barons used below-cost pricing to eliminate the competition, then they jacked up prices afterwards. Such behaviors inspired anti-trust laws which prevent anti-competitive mayhem. Not so in the U.S. airline industry, though. No U.S. airline has ever been found guilty of predatory pricing and received penalties for such anti-competitive behavior since airline deregulation was enacted. It’s a tough case to prove. Now we have a carrier which is pushing the envelope, seeing just how tolerant the judicial system will be of its below-cost pricing. If go!’s parent company Mesa Air Group (Nasdaq: MESA) loses its bet, it might have to pay triple damages and that is enough to plunder the parent company’s treasury. If Mesa wins in court, it earns the right to continue losing millions each month in an effort to decimate a long-time Hawaii company. Either way, it’s a nasty fight.

The travesty here is that the consumer has only a minor impact on who wins this contest. Losses are so great on interisland flying that the loser is the airline which runs out of money or blinks first. Customer preference and cost of providing the service take a back seat to cash in the bank. The dynamics of the free-enterprise system give way to financial wheeling and dealing.

So, please don’t call this conflict “free enterprise at work”. Call it testing judicial limits, call it survival of the wealthiest, or call it any of a number of things, but don’t confuse this conflict with an economic system that has produced better and lower-cost goods. This conflict is quite a different animal.