Year One Interisland Air War Victors: The Incumbents

That's right, Aloha and Hawaiian Airlines get my nod at the 12 month mark in their lively dogfight with newcomer go! Airlines. It's been one wild contest so far, but the incumbents have shown serious strength in repelling the invasion by newcomer go! Airlines. How objective is this conclusion? Take a look.

When go! entered interisland service in June of 2006, the startup carrier brought a fleet of 50-passenger regional jets to Hawaii and challenged the established carriers on routes from Honolulu to Kauai, Maui, and the Big Island. Go!'s plan was to win favor with Hawaii air travelers by offering low fares and sell itself as a lower-cost alternative to Hawaii's traditional carriers. Go!'s 50 passenger RJs would establish a beachhead in the islands, and once loads increased to a certain level, phase two would begin. That phase included the introduction of 90-110 seat jets prior to the summer of 2007. The larger jets are more comfortable and offer lower seat-mile costs than the 50-passenger RJs. If go! could bring in the larger jets and fill them up, Hawaiian and Aloha Airlines would have much to worry about. Well, we're less than a week away from the official beginning of Summer 2007, and no larger jets are in sight.

Here's a summary of what went wrong for go!

1. Go! management didn't understand the price elasticity of the market. If interisland ticket prices go down 20%, does the amount of traffic increase at least 20%? Nope, not even close. Startup carriers such as Southwest could actually generate more traffic than they took away from other carriers when they entered a market. Why can't that be done here in Hawaii? Because nobody is driving between the islands. That's a pool of potential travelers that's simply not available to win over. Furthermore, with hotel rooms running $200 a night, chopping $30 off the cost of an airline ticket doesn't make a neighbor-island trip a bargain. The net result is that with ticket price cuts well in excess of 50%, the market produced an extra 8% increase in passengers, at best.

2. Aloha and Hawaiian increased capacity, instead of decreasing it. Hawaiian Airlines has been flying with systemwide load factors approaching 90%. If an interisland fare war increased the number of travelers, Hawaiian would be turning away passengers on many flights unless it upped its capacity. Increased capacity meant that go! must earn its passengers, rather than receiving them by default because the competition was full. By turning the financial screws to the incumbents, management at go! expected Aloha Airlines in particular to cut capacity in order to slow the drain of cash. Aloha knew better than to reward such behavior.

3. The public reacted negatively to go!'s predatory practices. In a September 2006 legal action, an attorney for Hawaiian Airlines introduced emails between a Mesa Airlines executive and a consultant for Mesa. The consultant said that Mesa's Hawaii project didn't make sense as long as Aloha was still in the picture, and the Mesa executive replied that Mesa should enter the market so that no one else does and give Aloha “the last push”. Further, a document sent to Mesa investors showed that Mesa planned to raise prices at its go! unit once Aloha was out of the way. Mesa's CEO defended the email as just being a joke. Hawaii residents didn't buy that argument nor a number of other ludicrous claims, and the credibility of the airline's management plummeted. A year of $39 and below tickets has only confirmed the predatory nature of go! Airlines.

4. Aloha released the Sabre Study. This study, paid for by Aloha but conducted by a third party, concluded that with 62% of seats filled, Aloha needed $50 per ticket sold to break even, Hawaiian needed $55 per ticket, and go! needed a whopping $67 per ticket just to break even. The results of this study contrasted greatly with go!'s attempt to sell itself as the low-fare airline because it was the low-cost airline.

5. Profits at go!'s parent company have recently turned into losses. Mesa's market value has dropped 25% during the past year. Cash on hand has dropped significantly in the past year and Mesa may be experiencing a serious, long-term shift in its profitability. The parent company can no long afford a long-term experiment in trying to displace an established carrier from the Hawaii interisland market.

And what did the incumbent carriers do right?

1. Aloha and Hawaiian didn't cut capacity when threatened, and they matched fares. These were two critical moves to prevent go! from establish a beachhead here in the islands. If go! had succeeded in introducing 100-passenger jets and filling them up, the losses for Aloha and Hawaiian would become unbearable at some point.

2. The incumbent airlines took top national honors for on-time performance and customer satisfaction. In other words, both Hawaiian and Aloha ran dependable and passenger-friendly operations.

3. Neither Aloha nor Hawaiian have made any serious mistakes so far. Neither airline over-reacted to $9 or $1 fares. They've provided enough seats to match the competition, but they've shown restraint when prices were so low they were silly. Both incumbent airlines show that they are well managed and able to change course quickly to adjust to the market.

4. Hawaiian has racked up the highest load factors in the industry. High load-factors are an indication of either excessive discounting or significant popularity with the traveling public. In Hawaiian's case, it's the latter.

5. Aloha has shorn up its credibility as a survivor. Aloha's largest shareholder is now a savvy billionaire, airline legend Gordon Bethune has come aboard as Chairman, and United Airlines will be taking an equity position in the Hawaii carrier.

When Will the Fat Lady Sing?

There will be no peaceful coexistence in this battle. Go! came into the fight with a desire and need to sink at least one of the competitors, and its actions have consistently supported this aim. Losses are enormous at all three interisland operations, but seldom will an airline pull the plug on its operation during the summer months. These are the months with the greatest potential for profits. Lately go! has been trying creative ways to shake the competition, such as $1 fares and fare specials not released to the media. So far, Aloha and Hawaiian have been able to respond quickly and intelligently.

This autumn will be a critical time in this battle. In September, Hawaiian Airlines gets its day in court against Mesa. Most observers believe that Hawaiian has an excellent chance of proving that Mesa breached a confidentiality agreement with Hawaiian. Such an agreement should have prevented Mesa from using certain information against Hawaiian until an agreed upon number of years had passed. One remedy would be to require Mesa to cease their go! operation for a prescribed period of time. Large damage awards are possible as well. Aloha stands ready to have its similar claims heard in a future court hearing. Court action could well be the method for ending this bitter fight. Hawaiian and Aloha have prevented go! from bringing in the big jets, and both airlines will survive to see their day in court. This is a huge victory for the incumbents.