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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 www.airlinesofhawaii.com .

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.

10 Comments:

Blogger SJF Hawaii said...

Peter:

I would like to make an alternative analysis to yours in regard to United's buy in for Aloha.

For the last 20 or so years, United has been making great strides into the Hawaii market. I think the best example of this was when United put monies into expanding Lihue Airport on Kauai in the 1980's to take mainland sized aircraft (DC-8's). In fact, at one time, a person could go up to the United ticket desk at Honolulu and for $25, fly on a DC-10 to Maui. In 1990/1991, the airline made some great noises about entering the interisland market. Although that plan faded quickly, the idea I believe has not quite left United's long-term plan.

United's investment into Aloha presents to me the idea that United is making it's inroads to the interisland market finally known. This time though, they are not the interlocker, who is looking to displace a hometown airline, instead they are now seen as white knights coming to the rescue and fending off the challenge from Mesa. Hometown acceptance of an outsiders help will assist United greatly if and when the long-term plan calls for it to buy a larger financial stake in the airline.

And trust me, if United feels that they can make a buck of Aloha's unique routing to the mainland and Hawaiian branding, then you can expect to hear more news about this hookup in the months and years to come.

My theory.

5:04 PM  
Blogger no more lies said...

At one time Mesa was intensely courting United for Aloha's code share in Hawaii.

I bet Aloha's executives and legal team would love to see what those documents say.

One thing is certain Ornstein shoveled his own grave.

Good riddance to the shyster!

From here on out I only look forward to his arrest and conviction.

Aloha.

11:23 PM  
Blogger Peter Forman said...

SJF Hawaii,
You make good points here. United indeed tried to enter the interisland market years ago. Now, Aloha's shootout with Mesa Air Group has allowed United to get its foot in the door as a white knight.

From the standpoint of an historian, I am happy to see that Aloha is most likely to survive its battle with Mesa. Colorful Aloha has been a force in the social growth of these islands as well as a spirited competitor. Nor do I wish to see Aloha swallowed in an outright acquisition by United. That type of action would preserve good jobs, but the unique character of this feisty airline would be lost. The Aloha brand name carries much weight with local travlers, and my hope is that United recognizes the benefits of an independent Aloha.

7:26 PM  
Blogger Peter Forman said...

No more lies,
I too want to see all the parties of this interisland competition survive so that upcoming court actions hold open the option of damage awards to an airline that is still in operation. The court of public opinion is a messy place, especially when one party is spending a small fortune on full-page newspaper ads. The truth surfaces much better in a court of law.

7:35 PM  
Blogger joshua said...

Here's yet another theory. What if this investment by UA is merely a setting up of selling AQ to UA in the near future. If you look at Yucaipa's track record, they buy a company, hold for a few years, then sell for a profit. So in this case, Yucaipa is priming AQ, raising morale and value, while UA is getting the stepping stone it wants. Because honestly, the deal doesn't look like any major breakthrough. Closer code sharing and mileage programs could have been done without a need to offer a seat on one's board. UA did not put any cash up for this deal. The benefits of getting better deals with fuel, parts, services via UA's connection will help AQ but I don't see it saving AQ's interisland bleeding. Let's also remember, UA isn't that hot either, having emerging from bankruptcy itself not too long ago and still reporting quarterly losses.

10:45 PM  
Blogger Peter Forman said...

Joshua,
We'll just have to see. The scenario you paint is quite believable.

Since United paid no cash for their position in Aloha, one must wonder what Aloha gets in return. Benefits from United's purchasing power is probably less important than the effect upon Hawaii's ongoing fare war. Fares of $19 and $29 have recently disappeared from go!'s website, so we might be seeing some effect of United's influence already. Aloha may have been tipping its hand to show Mesa a possible future for Aloha and the reason why Aloha has too much value to fall prey to an attack from a severe discounter. As with any war, the outcome is often heavily influenced by perceptions of the likely outcome.

1:59 AM  
Blogger J. said...

Could the rumors of Aloha getting UA aircraft to replace it's ancient 737-200 fleet be true? There's apparently movement to hire more crews at Aloha recently. They desperately need to replace their gas-guzzling fleet and UA may be interested in handing down some 737-400s or A319s for that seat on the Aloha board.

11:42 PM  
Blogger Peter Forman said...

One of the Honolulu newspapers mentioned that the cooperation between Aloha and United could lead to some former UA 737s coming to Aloha. We'll have to see. When fuel prices head up, Aloha takes a worse hit than its competitors because of high fuel consumption in its current fleet.

Changing to another version of the 737 isn't so easy, however. The benefit of Aloha's 200 series 737s (besides low lease rates) is that the engines are well-suited to the short-distance, high-cycle interisland flying. Many 737s, such as Aloha's long-distance 700 series are not good choices for short flights.

11:38 AM  
Blogger Traveling Guy said...

Agree with Peter. The 737 Classics and Next Generation aircraft are NOT ideal for short island to island hops.

The UA fleet does include the 737-500 but weight issues could come into play.

The 737-400 is not operated by UA (Only US Airways/Alaska) as a major carrier in the USA operate them

The 737-300 could work as well.

I think the 717-200s operated by Hawaiian are ideally suited for Hawaii. If someone wanted to compete then possibly the EMB-195 for a pure jet or the Dash 8 operated by Island Air offer better economics.

Downside to the Dash 8 is that everyone wants a "JET"

The EMB-195 (and family 170/175/190) are ideal. Most comfortable seating in class and great short hop economics. (It does have weight and balance issues however)

Also rememeber that UA does NOT operate the 737 NGs (600/700/800/900 series) only the classics (300/400/500 series) and of the classics UA only operated the 300/500 series.

UA actually has no overlap with the 200/700 series AQ operates.

There are some common parts on all series but there are a huge amount of differences.

The UA deal offers some things that we cannot see from afar and will likely remain that way for some time.

If Island Air was properly capitalized it would make the best low cost carrier as the key to a low cost carrier is the operating costs. An area where they would be better suited then Go!, Hawaiian, and Aloha!

9:07 AM  
Blogger Traveling Guy said...

One more thought. The use of the Classics and NG series has failed before on interisland flying. Aloha tried it many years ago.

The GE-CFM 56 engines do not like short hops and the maintenance costs go up up up. The cycles also require a lot of addl maint on the types and that also raises costs.

I doubt Aloha would make the same mistake twice.

Lastly, Fuel is always an issue and unless the cost of oil goes back down to $34-40 a barrel then do not look for these models to be sustaining.

Oil is the largest item on many airlines expense sheet.

9:10 AM  

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