Airlines of Hawaii

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 .

Tuesday, May 29, 2007

$9 Fares Anyone?

Have you ever seen a fare war where the winner is the company that sells THE LEAST number of tickets? Hawaii's inter-island travelers are witnessing just such a sale over the Memorial Day weekend.

Go! Airlines, a division of Mesa Air Group (Nasdaq:MESA), has once again shaken up Hawaii's inter-island airfares with a $9 ticket, but this time it is during peak summer months. The airline cannot possibly make money with these fares, and the big question for this sale is Why?

The only way that the sale could have proven financially advantageous on its own merits is if the number of tickets sold was severely restricted and the sale drove consumers to go!'s website, where they might buy higher-priced tickets. Such looked like the case on Monday, when I took a look and could not find a single $9 ticket available. But wait, on Tuesday a new batch of $9 fares resurfaced on the website.

In theory, an airline can make money with a $9 fare if it sells these tickets only to customers traveling on flights which would have had empty seats anyway. The airline also steals customers from its rivals and inflicts financial pain. Unfortunately, the airline selling $9 tickets is stealing customers from itself, as well. Those who normally travel on go! will opt for a $9 fare instead of the $39 fare they planned to purchase in the near future. The net result? A loss in revenue even though more tickets are sold.

This fare war was a test of sorts for Hawaiian and Aloha Airlines, to see if they'd be sucked into the lunacy of selling $9 fares during the busy summer months. From what I can see, Hawaiian and Aloha only offered a limited number of tickets.

Why then is go! offering this sale? The sales team at go! has recently seen changes, and no doubt the new team wants to prove that they have something new to offer. Another incentive is that Mesa's attempt to break into the Hawaii inter-island market has not been going well. The airline has only been able to sell less than two-thirds of their seats at prices which would require more than a full load just to break even. By selling these $9 tickets, go! will likely experience an upward bump in traffic. Mesa's CEO can then go to his board of directors and say, “See, the numbers are picking up, Hawaii loves us!”. Never mind that the fare makes no financial sense whatsoever, these are non-standard business tactics we're witnessing. And of course there's the most obvious reason: Mesa is playing the spoiler, trying to weaken Aloha and Hawaiian Airlines by poisoning the fare structure of the year's most profitable months.

Friday, May 04, 2007

Aloha's United Connection

The big news this week is that United Airlines has acquired a minority share in Aloha Airlines. United will receive a seat on Aloha's board and says it may increase it's holdings in Aloha at a later date. This development has huge implications for the interisland fare war.

Back in 2005 when Aloha Airlines struggled with bankruptcy and a small number of Hawaii families owned the company, Aloha was vulnerable. Mesa Air Group's entrance into the Hawaii market would likely have toppled Aloha within months, given the startup's far-below-cost pricing strategy and the financial resources of Aloha's owners. But oh, how things change. The new owners of Aloha Airlines, the Yucaipa Group, included billionaire Ron Burkle. Burkle has been around the block many times in the business world, and he wasn't likely to let an aggressive mainland airline sink his investment in Aloha. Sure enough, Aloha managed to come up with the funds to keep its operation aloft while Aloha and Hawaii's other interisland airlines experienced financial carnage as Mesa's go! Airlines punished the market with ridiculously low fares for months on end. Now Aloha has attracted another partner, United Airlines. The message could not be stated more clearly to Mesa Air Group: You are not going to displace Aloha Airlines from the interisland market by spoiling the market with far-below-cost tickets.

So, where does this leave Mesa Air Group and its go! subsidiary? Go! may be forced to actually try making a profit in a market that includes two large competitors. In a free market, there are two legitimate ways to attract customers: offer a better product, or lower your cost structure to the point where you can offer the same product profitably at a lower price than the competition. As long as Go! operates 50 passenger regional jets, its costs will not allow it to legitimately underprice carriers operating Boeing 717s and 737s. Go is unlikely to introduce larger aircraft, because it is having a tough enough time already filling two thirds of the seats of its smaller jets.

Could go! offer a better product than its competitors? In the minds of at least some consumers, it could. There will always be a portion of the market that is disgruntled at the longtime competitors and seeks an alternative. Then, too, there's the issue of the small terminal go! operates from at Honolulu International Airport. Many travelers find it more convenient than the large interisland terminal. Theoretically, go! could operate a small boutique airline in Hawaii. To be profitable, though, Go! would need to revise its ridiculously low fare structure. Do I believe a boutique airline is a long-term solution? No, Mesa was out gunning for bigger game. They won't be happy with such an arrangement, and it's highly questionable whether go! will ever be profitable.

So, why did United link up with Aloha? The two airlines have shared a frequent-flyer program since the 1980s when former United executive Joseph O'Gorman took the helm at Aloha and hammered out a deal. United's investment in Aloha, even with the financial pummeling from Mesa, signals that United finds significant value in Aloha, primarily because of its market position. An equity position in Aloha gives United a tool for retaining its competitive position in the mainland-to-Hawaii market. Although United still carries more mainland passengers to the 50th state than anyone else, number two competitor Hawaiian Airlines has been gaining ground. United likely believes that a close connection with Aloha will allow it to better link the routes of the two carriers and combat Hawaiian Airlines more effectively. Make no mistake about it: the rivalry between Hawaiian and Aloha is still a lively battle and will likely remain so.

As for Mesa's change of course, it may well take place this fall when Hawaiian's legal action is decided in court. Until then, United's investment in Aloha allows all the players of this competition to remain aloft. We'll likely see this drama play out to a just conclusion. United's investment removes “money in the bank” as the primary determinant of who wins this dogfight. The battle now revolves around competitive prowess and matters of law. Don't miss it.