Selling The Myth

Here we go! again with another $29 fare war on Hawaii interisland routes. This time it’s different, because we better understand the story.

When go! entered the interisland market in June of 2006, this division of Mesa Air Group offered introductory $39 fares, claiming that Aloha and Hawaiian Airlines had been overcharging the good people of Hawaii. To prove its point, go! dropped the fare even lower and vowed that it would always offer a $39 price tag on at least some of its tickets. The airline sought to convince consumers that long-term savings awaited them if they embraced the new airline, and this enormous discrepancy in before and after fares would drive home their point. Nonetheless, a series of revelations soured customers to go!’s claims.

First came the veracity issues. The airline operates many routes on the mainland, but it has never been known as a low-fare airline. Further, during court actions, emails between a top Mesa official and their advisor spoke of not being able to turn a profit unless Aloha Airlines was eliminated and that Mesa should enter the market and give Aloha the final push. After that, fares would be elevated. Mesa no longer looked like the benevolent airline they made themselves out to be.

Economics became an issue as well. Most consumers realized early on that the $19, $29, and $39 fares were below cost. What really raised eyebrows was a report by Sabre Airline Solutions (commissioned by Aloha Airlines) reporting that with 62% of seats full, the cost of providing a typical interisland ticket were $50 for Aloha, $55 for Hawaiian, and $67 for go!. Here was go! not only selling tickets below cost, but trying to eliminate Aloha, the lowest-cost provider in the market.

Other issues also began to dog go!. For years, Hawaiian Airlines held the spot of honor as this country’s most on-time airline. In the past two months, Aloha not only displaced Hawaiian from the top spot, but also won accolades for having the lowest rate of consumer complaints. So, if go! eliminated Aloha, it would be taking out not only the lowest-cost carrier in Hawaii but also the airline offering the most reliable service in the United States. It didn’t make sense. Other airlines such as Island Air began laying off workers and the extent of the damage to Hawaii’s air carriers began to sink in.

There is another reason for Aloha’s resilience, and it is something which Mesa Air Group officials likely never anticipated. When Aloha began service in 1946 as Trans Pacific Airlines, it was a big player in a social revolution. Most businesses in the early 1940s treated Hawaii’s Japanese, Chinese, and Filipino residents as second-class citizens. Aloha was founded by a local businessman of Chinese descent who offered an airline where every customer was treated as an equal. Aloha’s success played a crucial role in reshaping Hawaii’s social fabric, and many older residents of this state have never forgotten Aloha’s place in history. Consequently, when Aloha and Hawaiian match fares with go!, each of the two established carriers can outsell this newcomer by a factor of about four to one. Go! could lower its costs by introducing larger jets, but right now that move makes no sense because go! cannot even fill its smaller jets.

When it came on the scene in 2006, go! boasted enormous staying power. Much has changed there as well. At the time, Mesa expected an annual profit of some $100 million dollars. Profits are now a pale fraction of that amount, owing to losses in Hawaii and, more importantly, to reduced profits on the mainland operation. Mesa makes the vast majority of its money by contracting with large airlines to provide regional aircraft and crews to operate them. The turmoil in the airline industry following 9/11 worked in Mesa’s favor, because aircraft and crews could be obtained at less expense than during good times. The airline industry in the U.S. has finally pulled itself together at a time when many Mesa crews are jumping ship to fly for higher-paying airlines or abandoning the airline business altogether. The net result is that Mesa’s core business has serious issues to deal with in the coming years, Mesa will see upward pressure on its costs, and the company no longer has the luxury of funding its losses in Hawaii indefinitely.

Go! has once again lowered ticket prices to $29. Since it has offered this price before, the company already knows that demand will not increase sufficiently to offset the price cut. At this point, the cut is mostly a means of sliding bamboo under its competitors’ fingernails. Will Aloha pack up and give go! the opening it’s looking for? Not likely. Go! will continue to sell the myth of long-term, ridiculously-low fares to a small number of Hawaii residents, but the majority aren’t biting. Hawaii residents are a more akamai group of consumers than Mesa Air Group anticipated. Ultimately, the facts outweigh the hype.